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Chapter 3

SDA

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1 views15 pages

Chapter 3

SDA

Uploaded by

Mark Yu
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© All Rights Reserved
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Interdependence _and the Gains from Trade der a typical day. You wake up and pour juice from in Brazil. Over breakfast, you read a news report edited in New York on a tablet made in China. You get dressed in clothes made of cotton grown in Georgia and sewn in factories in Thailand. You ride to class on a bicycle made of parts manu- factured in half a dozen countries around the world. Then you open your economics textbook written by an author living in Massachusetts, published by a company located in Ohio, and printed on paper made from trees grown in Oregon. Every day, you rely on many people, most of whom you have never met, to provide you with goods and services. Such interde- pendence is possible because people trade with one another. The people providing these things to you are not acting out of generos- ity, nor is some government agency directing them to satisfy your desires. Instead, people provide you and other consumers with the goods and services they produce because they get something in return. Cree eC acemuny e 46 Part} Introduction In later chapters, we examine how an economy coordinates eee wii, ota. tions of people with varying tastes and abilities. AS a g point, this r considers the reasons fo economic interdependence. One ofthe Ten Principles of Economics in Chapter 1 is that trade can make everyone better off. We now examine this principle more closely. What exactly do people gain when they trade with one another? Why do people become interdependent? The answers to these questions are key to understanding the global economy. Most countries today import from abroad many of the goods and services they consume, and they export to foreign customers much of what they produce. The analysis in this chapter explains interdependence not only among individuals but also among nations. As we will see, the gains from trade are much the same whether youre buying a haircut from your local barber or a T-shirt made on the other side of the globe. 3-1 A Parable for the Modern Economy To understand how people benefit when they rely on one another for goods and services, let’s examine a simple economy. Imagine that there are only two goods in the world: meat and potatoes. And there are only two people: a cattle rancher named Ruby and a potato farmer named Frank. Both Ruby and Frank would like to eat a diet of both meat and potatoes. The gains from trade are clearest if Ruby can produce only meat and Frank can Produce only potatoes. In one scenario, Frank and Ruby could choose to have nothing to do with each other. But after several months of eating beef roasted, broiled, seared, and grilled, Ruby might decide that self-sufficiency is not all it’s cracked up to be. Frank, who has been eating potatoes mashed, fried, baked, and scalloped, would likely agree. It is easy to see that trade would allow both of them to enjoy greater variety: Each could then have a steak with a baked potato or a burger with fries. Although this scene shows most simply how everyone can benefit from trade, the gains would be similar if Frank and Ruby were each capable of producing the other good, but only at great cost. Suppose, for example, that Ruby can grow pota- toes, but her land is not well suited for it. Similarly, suppose that Frank can raise cattle and produce meat but is not good at it. In this case, Frank and Ruby benefit by specializing in what they do best and then trading with each other The gains are less obvious, however, when one person is better at producing everything, For example, imagine that Ruby is better at raising cattle andl at grow- ing potatoes. In this case, should Ruby remain self-sufficient? Or is there till 9 reason for her to trade with Frank? Let’s look more closely at the factors that affect ‘such a decision. 3-1a Production Possibilities Suppose that Frank and Ruby each work 8 hours per day and ean use this time to grow potatoes, raise catle or engage in a combination of theweoc aie uble in Figure 1 shows the amount of ime each person requires to produce ] ounce of each good. Frank produces an ounce of potatoes in 15 minutes snd an ‘ounce of meat in 60 minutes. Ruby, who is better in both activities, can producean anne at potatoes in 10 minutes and an ounce of meat in 20 minutes. The last two columns skew HOw much they can each produce if they devote all § hours to prnducne only et OF potatoes } Chapter 3. Interdependence and the Gains from Trade Figure igure eae = (2) shows the production opportunities available to Frank the farmer and Ruby te Proton Pai the rancher. Pane! (b) shows the combinations of meat and potatoes that Frank can Frontier Produce, Panel (c) shows the combinations of meat and potatoes that Ruby can Produce, Both production possibilities frontiers assume that Frank and Ruby each work 8 hours per day. If there is no trade, their production possibilities frontiers are also their consumption possibilities frontiers a) Production Opportunities Minutes Needed to. ‘Amount Make 1 Ounce of: Produced in 8 Hours Meat Potatoes: Meat Potatoes. Frank the farmer 60 min/oz | 15 minioz Boz 320z Ruby the rancher 20 minioz | 10minoz | 2402 48 oz (b) Frank's Production Possibiltes Frontier {c) Ruby's Production Possibilities Frontier ‘Meat (ounces) ‘Meat (ounces) a 8 2 fe 4 HK ° 6 2 0 a Potatoes (ounces) Panel (b) of Figure 1 illustrates the amounts of meat and potatoes that Frank can produce. If he spends all 8 hours growing potatoes, Frank produces 32 ounces of potatoes (measured on the horizontal axis) and no meat. If he spends al of his time raising cattle, he produces 8 ounces of meat (measured on the vertical axis) and no potatoes. If Frank divides his time equally between the two activities, spending 4 hours on each, he produces 16 ounces of potatoes and 4 ounces of meat. The figure shows these three outcomes and all others in between. This graph is Frank’s production possibilities frontier. As we discussed in Chapter 2, a production possibilities frontier shows the mixes of output that an economy can produce. It illustrates one of the Ten Principles of Economics in Chapter 1: People face trade-offs. Here, Frank faces a trade-off between producing, meat and producing potatoes. ‘You may recall that the production possibilities frontier in Chapter 2 was drawn bowed out. In that case, the rate at which society could trade one good for the other depended on the amounts that were being produced. Here, however, Frank can switch between the production of meat and potatoes (summarized in a7 48 Part 1 Introduction Figure 1) at a constant rate. When Frank cuts | hour from producing meat and adds 1 hour to producing potatoes, he reduces his meat output by I ounce and raises his potato output by 4 ounces, and this is true regardless of how much he is already producing, As a result, the production possibilities frontier is a straight line Pee (©) of Figure 1 shows Ruby's production possibilities frontier. If she only grows potatoes, Ruby produces 48 ounces of them and no meat. If she only raises, cattle, she produces 24 ounces of meat and no potatoes. If Ruby divides her time equally, spending 4 hours on each activity, she produces 24 ounces of potatoes and 12 ounces of meat. Once again, the production possibilities frontier shows all pos- sible outcomes. “ If Frank and Ruby remain self-sufficient instead of trading with each other, each ‘consumes exactly what he or she produces. In this case, the production possibilities frontier is also the consumption possibilities frontier. That is, without trade, Figure 1 shows the possible combinations of meat and potatoes that Frank and Ruby can each produce and then consume. ‘These production possibilities frontiers are useful in showing the trade-offs that Frank and Ruby face, but they do not tell us what each will choose to do. For that, we need to know something about their dietary preferences. Suppose that Frank and Ruby choose the combinations identified by points A and B in Figure 1. Based ‘on his opportunities and tastes, Frank decides to produce and consume 16 ounces of potatoes and 4 ounces of meat, while Ruby decides to produce and consume 24 ounces of potatoes and 12 ounces of meat. 3-1b Specialization and Trade After several years of eating combination B, Ruby gets an idea and visits Frank: Ruby: Frank, my friend, have I got a deal for you! We can improve life for both of us. You should stop producing meat altogether and just grow potatoes. According to my calculations, if you do that for 8 hours a day, you'll produce 32 ounces of potatoes. You can then give me 15 of those 32 ounces, and I'll give you 5 ounces of meat in return. It’s great! You'll eat 17 ounces of potatoes and S ounces of meat every day instead of the 16 ounces of potatoes and 4 ounces of meat you eat now. With my plan, you'll have more of both foods. [To illustrate her point, Ruby shows Frank panel (a) of Figure 2,] Frank: (sounding skeptical): That seems like a good deal for me. But I don't understand why you are offering it. If the deal is so good for me, it can’t be good for you too, Ruby: Oh, but itis! Suppose I spend 6 hours a day raising cattle and 2 hours growing potatoes. Then I can produce 18 ounces of meat and 12 ounces of potatoes. After I give you 5 ounces of my meat in exchange for 15 ounces of your potatoes, I'll end up with 13 ounces of meat and 27 ounces of potatoes instead of the 12 ounces of meat and 24 ounces of potatoes that I have now. $0! will also consume more of both foods than I do now. (She points out panel (b) of Figure 2.] Frank: I don’t know. ... This sounds too good to be true Chapter 3. Interdependence and the Gains from Trade 49 Figure2 The proposed trade offers Frank and Ruby a combination of meat and potatoes that Wow Trade Expands the Set of ‘would be impossible without trade. In panel (a), Frank consumes at point A rather Consumption Opportunities than point A. in panel (b), Ruby consumes at point B* rather than point B. Trade allows each to consume more meat and more potatoes. (2) Frank's Production and Consumption Meat ounces) (0) Rubys Production an eat (ounces) 2 Potatoes ounces) (c) The Gains from Trade: A Summary Frank Ruby Meat Potatoes, Meat Potatoes Without Trade: Production and Consumption 4oz 16 cz 120 2402 With Trade: Production Ooz 3202 18 02 120 Trade Gets 5oz_| Gives 1502 | GivesSoz | Gets 1502 Consumption Son io Boz 2 GAINS FROM TRADE: Increase in Consumption +1oz loz tle +302 Ruby: It's really not complicated. Here—I've summarized my proposal for you in a simple table. [Ruby shows Frank a copy ofthe table at the bottom of Figure 2.] Frank: (after pausing to study the table): These calculations seem correct, but I am puzzled. How can this deal make us both better off? Ruby: Trade allows each of us to do what we do best. You spend more time ‘growing potatoes and less raising cattle. spend more time raising cattle and less growing potatoes. Thanks to specialization and trade, each of us can consume more meat and more potatoes without working more hours. 50 Part Introduction 1. Before Frank and Ruby engage in trade, each 2. After Frank and Ruby trade, each of them consumes consumes 1. at a point inside his or her production possibilities a. at a point inside his or her production possibilities frontier. Srontier b. at a point on his or her production possibilities, », at a point on his or her production possibilities frontier frontier. c. at a point outside his or her production possibili- . at point outside his or her production possibili- ties frontier. ties frontier 4d, the same amounts of meat and potatoes as the 4, the same amounts of meat and potatoes as the other, other. ‘Answers are at the end of the chapter. 3-2 Comparative Advantage: The Driving Force of Specialization Ruby’s explanation of the gains from trade, though correct, poses a puzzle: If Ruby is better at both raising cattle and growing potatoes, how can Frank ever specialize in doing what he does best? Frank doesn’t seem to do anything best. To solve this puzzle, we need to look at the principle of comparative advantage. ‘Asa first step, consider the following question: In our example, who can produce potatoes at a lower cost—Frank or Ruby? There are two possible answers, and in them lies the key to understanding the gains from trade. 3-2a Absolute Advantage ‘One way to answer the question about the cost of producing potatoes is to compare ‘absolute advantage —_the inputs each producer requires. Economists use the term absolute advantage the ability to produce @ when comparing the productivity of one person, firm, or nation to that of another. good using fewer inputs The producer that requires a smaller quantity of inputs to produce a good is said than another producer. to have an absolute advantage in producing that good. Inour simple example, time is the only input, soit is all we need to examine to determine absolute advantage. Ruby has an absolute advantage in produc- ing both meat and potatoes because she requires less time than Frank to pro- duce a unit of either good. She needs only 20 minutes to produce an ounce of meat, while Frank needs 60 minutes. Similarly, it takes Ruby only 10 minutes to produce an ounce of potatoes, while it takes Frank 15 minutes. Thus, if cost is measured in terms of the quantity of inputs, Ruby produces potatoes at a lower cost. 3-2b Opportunity Cost and Comparative Advantage There is another way to look at the cost of producing potatoes. Rather than focusing on the inputs required, we can examine the opportunity costs. Recall opportunity cost from Chapter 1 that the opportunity cost of an item is what you give up to whatever must be given _get that item, We have assumed that Frank and Ruby each work 8 hours a day. Lup to obtain some item _Time spent producing potatoes takes away from time available for producing meat. When reallocating time between the two goods, Ruby and Frank give up ‘Chapter 3 Interdependence and the Gains from Trade $1 units of one good to produce units of the other, moving along the production possibilities frontier. The opportunity cost measures the trade-off that each producer faces. First, consider Ruby’s opportunity cost. According to the table in panel (a) of Figure 1, it takes her 10 minutes to grow 1 ounce of potatoes, time that she isn’t using to produce meat. Because Ruby needs 20 minutes to produce 1 ounce of ‘meat, 10 minutes would yield % ounce of meat. Hence, Ruby’s opportunity cost of producing 1 ounce of potatoes is % ounce of meat. Next, consider Frank's situation. Producing 1 ounce of potatoes takes him 15 minutes. Because he needs 60 minutes to produce 1 ounce of meat, 15 minutes would yield 4 ounce of meat, Hence, Frank's opportunity cost of producing 1 ounce of potatoes is % ounce of meat. Table 1 shows the opportunity costs of meat and potatoes for each of them. Notice that the opportunity cost of meat is the inverse of the opportunity cost of Potatoes. Because 1 ounce of potatoes costs Ruby % ounce of meat, it is also true that 1 ounce of meat costs her 2 ounces of potatoes. Similarly, because 1 ounce of potatoes costs Frank 4 ounce of meat, 1 ounce of meat costs him 4 ounces of potatoes, Economists use the term comparative advantage when describing the oppor-_ comparative advantage tunity costs faced by two producers. The producer who gives up less of the other the ability to produce ‘g00d to produce Good X has the smaller opportunity cost of producing Good X and —_ good at @ lower is said to have a comparative advantage in producing it. In our example, Frank has opportunity cost than a lower opportunity cost of producing potatoes than Ruby: An ounce of potatoes another producer costs Frank only ounce of meat but costs Ruby ¥ ounce of meat. Conversely, Ruby has a lower opportunity cost of producing meat than Frank: An ounce of meat costs Ruby 2 ounces of potatoes but costs Frank 4 ounces of potatoes. Thus, Frank has a comparative advantage in growing potatoes, and Ruby has a comparative advantage in producing meat. Although it is possible for a person to have an absolute advantage in both goods (as Ruby does in our example), it is impossible for a person to have a comparative advantage in both goods. Because the opportunity cost of one good is the inverse of the opportunity cost of the other, if a person's opportunity cost of one good is relatively high, his or her opportunity cost of the other good must be relatively low. Unless two people have the same opportunity cost, one person will have a comparative advantage in one good, and the other person will have a comparative advantage in the other good. ‘The Opportunity Cost of Meat and Potatoes: Opportunity Cost of: Tozof Meat | 1 orf Potatoes Frank the farmer 4 02 potatoes Y4 oz meat | _TRuby the rancher 2 0 potatoes 1 oz meat 82 Part 1 Introduction 3-2¢ Comparative Advantage and Trade oa ‘The gains from specialization and trade are based on comparative a ta er ae people produce goods in which they have a comparative advantage, total prosucton i ‘on how this , Fises, The economic pie grows larger. Depending on how this bounty is divi everyone can be better off. ‘Once they start to trade, Frank spends more time growing potatoes, and Ruby works more on producing meat. Total potato production increases from 40 to 44 ounces, and total meat production increases from 16 to 18 ounces. Frank and Ruby share the benefits of the greater production. : The gains are reflected in the implicit prices that the trading partners pay each other. Because Frank and Ruby have different opportunity costs, they both get a bargain. That is, each of them benefits from trade by obtaining a good at a price that is lower than his or her opportunity cost of that good. ; Consider the deal from Frank’s viewpoint. He receives 5 ounces of meat in exchange for 15 ounces of potatoes. In other words, Frank buys each ounce of meat for a price of 3 ounces of potatoes. This price of meat is lower than his opportunity cost of an ounce of meat, which is 4 ounces of potatoes. Frank benefits from the deal because he gets to buy meat at a good price. Now consider Ruby’s viewpoint. She gets 15 ounces of potatoes in exchange for ounces of meat. That is, the price of an ounce of potatoes is Ys ounce of meat. This price of potatoes is lower than her opportunity cost of an ounce of potatoes, which is ¥ ounce of meat. Ruby benefits because she gets to buy potatoes at a good price. The story of Ruby the rancher and Frank the farmer has a simple moral: Trade can benefit everyone because it allows people to specialize in the activities in which they have a comparative advantage. 3-2d_ The Price of the Trade ‘The principle of comparative advantage helps to explain the gains from specializa- tion and trade, but it raises a couple of related questions: What determines the price at which trade takes place? How are the gains shared between the trading parties? ‘The precise answers to these questions are beyond the scope of this chapter, but here is a general rule: For both parties to gain from trade, the price at which they trade must lie between their opportunity costs. In our example, Frank and Ruby agreed to trade at a rate of 3 ounces of pota- toes per ounce of meat. This price is between Ruby's opportunity cost (2 ounces ‘of potatoes per ounce of meat) and Frank's opportunity cost (4 ounces of potatoes per ounce of meat). The price need not be exactly in the middle for both parties to but it must be somewhere between 2 and 4. Consider what would happen at prices outside this range. If below 2 ounces of potatoes, both Frank and Ruby would want to buy ntbeane it would cost less than each oftheir opportunity costs. Similarly if meat was priced above 4 ounces of potatoes, both would want to sell meat because the price would be above their opportunity costs. But they cannot both be buyers of meat, nor can they both be sellers. Someone must take the other side of the deal, Trade doesn’t work at these prices. aes A mutually advantageous trade can be struck at prices between 2 and 4. In this range, Ruby wants to sell meat to buy potatoes, and Frank wants to sell potatoes to buy meat. They both get to buy a good ata price below their opportunity cost of that good. In the end, they specialize in the good in which they have a comparative advantage, and, as a result, both of them are better off. Chapter 3. Interdependence and the Gains from Trade $3 ees how the grat economist Adam Smith pu the argument forthe This quotation i fom Smith's 1776 bok The Wealth of Nations, which ins tom trade was landmark in the ana ol rade and ecanoic interdependence itis a maxim of frown ‘Smith’ book inspired Davi Ricardo, a milionairestocKbroker, to tempt te re athe cat rater a foi nee © secon an scat In is 1817 beok On the Principles of Political than to buy. The tailor doesnot attempt to make his own Ecoany and Taration, Ricardo developed te principle of comparative shoes, but buys them ofthe soeaker. The shoemaker cows advantage asm now il today. He considered an example wit tw ends rotate toma hs own clothes bt employ tail. The (wie and cath and two counties (England and Portugal He showed farmer attempts to make nei-- that beth counties cul ain by pening trade and speciaing ther the one norte cer, but Wil Read’ thay the starting point of modem international ‘employs those different artifi- ‘economics, his defense of free trade was not merely an academic exercise, p cer, Alleftem insite ther He pifdins owe a member of he Bits Paranent, whee og etre emote the whcle opp te Ca Las, wich sted np ; have some advantage over theie The conclusions of Smith and Ricardo on the gains from trade have eee ecinay ed unwell tine. eg ecronits often sare on uestns saeeicmrodacc anette, Bi, they a nay uted inthe supa of te trade. Maer, the same thing, withthe price the central argument has not changed much in the past two centuries. of part of it, whatever else they ‘Even though the field of economics has broadened its scope and refined ‘nave occasion for. its theories, economists’ opposition to trade restrictions is still based David Ricardo ‘largely on the principle of comparative advantage, i 3. Inan hour, Mateo can wash 2 cars or mow 2 lawn, c. Mateo in washing, neither in mowing and Sophia can wash 3 cars or mow 1 lawn. Who has d, Sophia in washing, neither in mowing the absolute advantage in car washing, and who h3s 5, When Mateo and Sophia produce efficiently and it in lawn mowing? make a mutually beneficial trade based on compara- ‘a. Mateo in washing, Sophia in mowing tive advantage, b. Sophia in washing, Mateo in mowing a. Mateo mows more, and Sophia washes more. c. Mateo in washing, neither in mowing . Mateo washes more, and Sophia mows more. d. Sophia in washing, neither in mowing c. Mateo and Sophia both wash more. 4. Between Mateo and Sophia, who has the compara- d, Mateo and Sophia both mow more. tive advantage in car washing, and who has it in lawn mowing? ‘a. Mateo in washing, Sophia in mowing b, Sophia in washing, Mateo in mowing Answers are at the end of the chapter. 3-3 Applications of Comparative Advantage ‘The principle of comparative advantage explains interdependence and the gains from trade. Because interdependence is so prevalent, the principle of comparative advantage has many applications. Here are two examples, one fanciful and one of great practical importance. 54 Part Introduction i i z - Naomi Osaka may be good at pushing a lawn- mower, but it’s not her comparative advantage. imports ‘goods produced abroad and sold domestically exports goods produced domest- cally and sold abroad 3-3a Should Naomi Osaka Mow Her Own Lawn? Naomi Osaka is a gr players of the current era, eat athlete. One of the best tennis ‘she can run faster and hit a ball 2. Most likely, she is talented harder than most other people. Most likely, ste alitted at other physical activities as wel S ine that Osaka can mow her lawn faster than anyone else But just because she ean mow her lawn quickly, does this mean she should? If she enjoys mowing as a favorite form Of relaxation, then of course she should. Otherwise, she can reach a better outcome by applying the concepts of opportunity cost and comparative advantage. Frets say that Osaka can mow her lawn in 2 hours. In those same 2 hours, she could film a television commercial and earn $30,000. By contrast, Hari, the boy next door, can mow Osaka’s lawn in 4 hours. In those same 4 hours, Hari could work at McDonald’s and earn $50. Osaka has an absolute advantage in mowing lawns because she can do the work in less time. Yet because her opportunity cost of mowing the lawn is $30,000 and Hari’s is only $50, Hari has a comparative advantage in mowing lawns. The gains from trade here are tremendous. Rather than mowing her own lawn, (Osaka should film the commercial and hire Hari to mow the lawn. As long as Osaka pays Hari more than $50 and less than $30,000, both are better off. 3-3b Should the United States Trade with Other Countries? Just as individuals can benefit from specialization and trade with one another, so can countries. Many of the goods that Americans enjoy are produced abroad, and ‘many of the goods produced in the United States are sold abroad. Goods produced abroad and sold domestically are imports. Those produced domestically and sold abroad are exports. Let's focus on the United States and Japan, both of which produce food and cars. Imagine that they produce cars equally well: An American worker and a Japanese worker can each produce one car per month. By contrast, because the United States has more fertile land, it is better at producing food: A'US. worker can produce 2 tons of food per month, while a Japanese worker can produce only 1 ton of food per month. The principle of comparative advantage states that each good should be pro- duced by the country with the lower opportunity cost of oducite tat god Because the opportunity cost of a car is 2 tons of food in the United States but only 1 ton of food in Japan, Japan has a comparative advantage in producing cars. Japan should produce more cars than it wants for its own use and export some of them to the United States. Similarly, because the opportunity cost of a ton of food is 1 car in Japan but only % car in the United States, the United States has a comparative advaniagein producing food. The United States should produce more food than wants to consume and export some to Ja gh speci both countescan ave moe food and morecar Sh Pesalzation and tae To be sure, the issues involved in trade a i x than this simple example suggests. Mos importantly, each courtey hes nen) people, and trade affects them in different ways. When the United States exports food and imports cars, the impact on an American farmer is not the same ce same as the impact on an American autoworker, As a result, interna tional trade can make some individuals worse off, even as it makes the country as a whole better off, Yet this example teaches an important lesson: Contrary to the opinions sometimes voiced by politicians and pundits, international trade is not like war, in which some coun: tries win and others lose, Trade allows all countries to achieve greater prosperity. 3-4 Conclusion The benefits of living in an interdependent economy are enormous. When Americans buy tube socks from China, when residents of Maine drink orange juice from Florida, and when homeowners hire local kids to mow their lawns, the same economic forces are at work. The prin- ciple of comparative advantage shows that trade can make everyone better off. Having seen why interdependence is desirable, you might ask how it is possible. How do free societies coor- dinate the diverse activities of all the people involved in their economies? What ensures that goods and services will get from those who should be producing them to those who should be consuming them? In a world with only two people, such as Ruby and Frank, the answer is, simple: They can bargain and allocate resources directly. In the real world, with billions of people, the task is far more complex. As we will see in the next chapter, most economies allocate resources using the market forces of supply and demand. Chapter 3. Interdependence and the Gains from Trade 55, a> Ask the ) Wearrus “Trade with China makes most Americans better of because, among ter advantages, they can buy gods that are made or assembled more cheaply in Cina.” What do economists say? 0% aiagree (% meer Some Americans who work inthe production of competing foods, such a clothing and furniture, are made worse off by trade wth China.” What do economists say? “oO See a Eco apes Pre, 2012 6. A nation will typically import those goods in which 2, the nation has an absolute advantage. b. the nation has a comparative advantage. 8 Cc. other nations have an absolute advantage. d. other nations have a comparative advantage. 7. Suppose that in the United States, producing an reratt takes 10,000 hours of labor, and producing ‘a shirt takes 2 hours of labor. In China, producing an aircraft takes 40,000 hours of labor, and producing a shirt takes 4 hours of labor. What will these nations, trade? 8. China will export aircraft, and the United States will export shirts. b. China will export shirts, and the United States will export oircratt cc. Both nations will export shirts. 4. There are no gains from trade in this situation, Kayla can cook dinner in 30 minutes and wash the laundry in 20 minutes. Her roommate takes twice {a long to do each task. How should the roommates allocate the work? Kayla should do more of the cooking based on her comparative advantage, b. Kayla should do more of the washing based on her Comparative advantage, ©. Kayla should do more of the washing based on her absolute advantage. d. There are no gains from trade in this situation. Answors aro at tho ond of the chapter s6 than passive aggression. And some basic take tan much bn. and honesty wast eter canomie principles provided the answer We at beth than my busband. Hs ching reer An economist argpes that you Cetended ony ees and nk and wen et needed to divide the chores because itis simply shouldnt abwayy lod the dwar im in charge ofthe swash 14 often find not int forthe Dest cook and dshwaster Just ecamse you're beter atcha had an RRA whee pt nd et rts _f0 do all the cooking nd dishwashing he your partes ‘fer we had 2d, we had more to do and economic principle at play her is increasing fess met tin seemed ie it was time marginal est Basically, peopl et wese when You're Dividing he Chores frsonemassinmets Bef, mas theyre, When ech my tens th stil beter a ing both things Di that mean principle |eaplain it inthe cont of manag shoul do them both? ing their employees Imagine you havea good ould have appealed tothe principle of employe anda nt-s0-good ane. Should you chores. In happiness —faress. We should each hal. could have make the god employe do tral evertvng? surveys, housework (ranked down there appealed to feminism—sureys show that Usually, the answer iso, Why not? Its with commuting as activites that people jy women mare oten than ot gt the shat end ily hat te na-so-g0od employes ett at ‘he least. Maybe thats why figuring out whoo the chore stick Intme-se data, women do 9..m. after a ullnight ol sleep than the god ‘does which chores wvsly proms, at Dest, about 4 minutes more housework than men employe is at 2am, after a 17-hour workday env discussion ina tevsehold ad, at wrt, (2 hours and L1 minutes versus Inout and So you want to give at least afew tasks to cori fghting 27 minutes) Men outwork women ony inthe your worse guy. The same principe applies it Weveryne is goed at something diferent, areas of “lawn” and “exterior maintenance.” your housthld Yes, you (or your spouse) might assigning chaves easy Hy: partes great— | could have suggested Ne do more chores tobe better at eventhing. But anyone ding the ‘at grocery shopping and you are great tthe — rect this imbalance to show our daughter, laundry at 4 a.m. ihely to put the red owes Anundey yor se But tis sn abey—areve in the Free fo Be You and Me style that Mom in withthe white T-shirts. Some ask spitting aly—-the cau. Ofien one eran beter at and Dod are ua ed that housework isan 1.2 oud idea. How much depends on ow ast eveything (Ad les be honest cen that person we doit togeterIcauld have spy smashed people's sis decay. {ste woman ) Bf atthe Laundry, the prcery around the pans inthe dishwasher while sigh- To “optimize yout family efficiency (every shaopig the chaning the coking But does ing loudly in the hopes he would netic and economist’ ultimate goal—and yours, to, thot mean she shelé Rave ta do vething? ote to doit himself you want to equalize effectiveness on the Before my daughter was broth cmhed Bt luckily or me and my husband, I'm _ final task each person is doing, Your partner ‘and ithe Ges wast a big del #6 an economist. so have moe effective to's does the dishes, mows the lawn, and makes Chapter in a Nutshell T Each person consumes goods and services produced advantage. The gains from trade are based on com by many other people both in the Uni Sats ant parative advantage, not absolute advantage. around the world and trade are * Trade makes everyone better off because it allow» vie because they allow everyone 1 enpy 4 people to specialize in those activities in which they ‘and variety of goods and services. have a comparative advantage. | BONED no wan compare the abies of tro + The principle of compuratve advantage apis Ap prod a good. The person who can pr ‘countries as well as to people. Economists use the P= Fe the good with the smaller quanbly of Inputs & ple of comparative advantage to advocate tree ta Seer have an abwalute advantage i prodacng the among countries. A ee perscn ieho has the lower opportunity cost S gon is said o have a comparative Rpm OF the grocery lst. You do the cooking, laundry, shopping, cleaning, and paying the bills, This ‘may seem imbalanced, but when you ook at it, you see that by the time your partner gets tothe grocer-ist tas, hes wearing thin and starting to nod off.’ alle can da to figure ‘ut how much milk you need. Infact, eis just about a good at that as you ae when you get ‘around to paying the bills, even though that's you ith task, You then made your partner also do the Cleaning —so it was an even four and four— the house would be a disaster, since he is ‘ready exhausted by his third chore while you ae stil doing fine This system may welled up ‘meaning one person does more, butts uniely to result in one person doing eventing (Once you've decided you need to divide up the chores inthis way, how shoud you decide who does what? One option would be randomly assigning tass; another would behaving each person do some of eventing. One spousal: advice website | read suggested you should divide tasks based on which ones you like the best. None ofthese are quite right (nthe lst case, how would anyone eve end up with the {ob of cleaning the bathroom?) To decide who does what, we need more economics, Specifically, the principle of comparative advantage. Economists usu ally talk about this inthe context of trade. Imagine Finland is better than Sweden at Source Ste Nove’ 21,2012 Chapter 3 Emily Oster making both reindeer hats and snowshoes But they are much, much better atthe hats ‘and ony alti beter at the snowshoes, The overall world production is maximized when Finland makes hats and Sweden makes snowshoes. We say that Finland has an absolute advantage in bth things but a comparative ‘advantage only in hats. This principles part ‘othe eason economists value tee trade but that’ for another column (and probably another author) Butts aso a guideline for how to trade tasksin our house You want to assign each person the tasks on which he or she has a comparative advantage It doesn't mater that you have an absolute advantage im eventing you are much, much better at the laundry and only a ite better at clean- ing the tile, you should do the laundry and have your spouse get out the scrub brush Just explain that its efficient! Interdependence and the Gains from Trade In urcase, it was easy. Other than using he gillwhich rely adit isthe husband omain—'m much, much beter a cooking. And | was only moderately better at the dishes. So e got the jb of cleaning up after meals, even though his dishwasher loading habits had already come under scrutiny. The good ren is another economic principle | hadn't even counted on was soan in play: learning by doing. As people doa task, they improve ati. Eighteen months int this new arrange ‘ment te dishwashers almost a work of at neat rows af dishes and everthing care fully screened for “top-ack ony” status. | ‘meanwhile, am forbidden from getting near the dishwasher. Apparently, there isa risk that tin? m Questions to Discuss 1. Inyour family, o you tink tasks are vided among family members accrd- ing to comparative advantage? I 0, how? not, how might the allocation of tasks be improved? 2. Doyouthink being marie to an econ ‘mist would facitate family harmony or just the opposite? Ms. Oster isa professor of economics at Brown University. Key Concepts absolute advantage, p. 50 opportunity cost, p.50 Questions for Review 1. Under what conditions is the production posi frontier linear rather than bowed out? comparative advantage, p. 51 imports, p54 exports, p54 2. Explain how absolute advantage and comparative advantage differ, 37 58 Part | Introduction 3. Givean example in which one person has an absolute advantage in doing something, but another person has a comparative advantage. 4, Is absolute advantage or comparative advantage ‘more important for trade? Explain your reasoning, using the example in your answer to question 3 Problems and Applications 1. Maria can read 20 pages of economics in an hour. She can also read 50 pages of sociology in an hour. She spends 5 hours per day studying, a Draw Maria's production possibilities frontier for reading economics and sociology. 'b. What is Maria’s opportunity cost of reading 100 pages of sociology? 2, American and Japanese workers can each produce 44 cars per year. An American worker can produce 10 tons of grain per year, while a Japanese worker ‘can produce 5 tons of grain per year. To keep things simple, assume that each country has 100 million. workers. 2. For this situation, construct a table analogous to the table in Figure 1. b. Graph the production possibilities frontiers forthe ‘American and Japanese economies. . For the United States, what is the opportunity cost of a car? Of grain? For Japan, what is the ‘opportunity cost ofa car? Of grain? Put this information ina table analogous to Table 1

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