INTRODUCTION TO MACROECONOMICS. Graphs and Tables Part #3

Transcription

1 INTRODUCTION TO MACROECONOMICS Graphs and Tables Part #3

2 Table III-A-1.1: Illustrating the Idea of Absolute Advantage The Output from 1 Unit of Labor in England The Output from 1 Unit of Labor in Portugal Cloth (C) 10 Units of C 12 Units of C Wine (W) 1 Unit of W 6 Units of W NOTE: In this example Portugal is absolutely more efficient at producing both goods (Portugal can produce more goods with the same resources). So according to absolute advantage there would seem to be no basis for trade.

3 Table III-A-1.2: Illustrating the Idea of Comparative Advantage The Opportunity Cost of Producing 1 More Unit of a Good in England The Opportunity Cost of Producing 1 More Unit of a Good in Portugal Cloth (C) 1/10 W per unit of C ½ W per unit of C Wine (W) 10 C per unit of W 2 C per unit of W NOTE: The producer with the lower opportunity cost will be relatively more efficient at producing that good. Thus, England will have a comparative advantage in producing C and Portugal will have a comparative advantage in producing W.

4 Table III-A-1.3: The PPF Tables for England and Portugal ENGLAND Cloth (C) Wine (W) PORTUGAL Cloth (C) Wine (W) NOTE: These numbers are derived from the numbers in Table 1.1 by multiplying them by 6 units of Labor. For example, if all 6 units of Labor were devoted to producing Cloth in England that would be 6 times 10 Units of C.

5 Figure III-A-1.1: PPF Graphs for England and Portugal C C PPF E PPF P W W ENGLAND PORTUGAL

6 Figure III-A-1.2: PPF Graphs for England and Portugal C 60 Specialize C 72 Start Start Specialize 4 6 W W ENGLAND PORTUGAL

7 Table III-A-1.4: Summary Table for Specialization and Trade 1. Before Trade and Specialization 2. Before Trade and After Specialization 3. After Trade and Specialization ENGLAND PORTUGAL (20C, 4W) (20C, 26W) (60C, 0W) (0C, 36W) (20C, ) (, )

8 How to Fill in the Rest of the Table 1. If England produces 60C but wants to consume only 20C then it has C to trade. 2. If the TOT are 4C/W then England can get W for C. 3. If Portugal produces 36W and trades W then it has W to consume. 4. Portugal gets C for its W. 5. After trade and specialization England has (20C, W) and Portugal ( C, W).

9 Figure III-A-1.3: CPF and PPF Graphs for England and Portugal C Start Specialize PPF E Trade CPF E C PPF P Start CPF P Specialize Trade W ENGLAND Slope PPF = 10C/W Slope CPF = 4C/W W PORTUGAL Slope PPF = 2C/W Slope CPF = 4C/W

10 Figure III-A-1.4: CPF and PPF Graphs for England and Portugal: No Trade Case C Start Specialize PPF E Trade ENGLAND Slope PPF = 10C/W Slope CPF = 1C/W CPF E W C PPF P CPF P No Trade Start Specialize W PORTUGAL Slope PPF = 2C/W Slope CPF = 1C/W

11 Figure III-A-2.1: The World Market for Autos P A S P A W = $4,500 Q A W D Q A = Autos

12 Table III-A-2.2a: The US Auto Market P Q D Q S $2,000 2, $3,000 1, $4,000 1, P W = $4,500 Q 2 = 1,500 Q 1 = 500 $5,000 1, $6,000 1, P 0 = $7,000 Q 0 = 1,000 1,000 $8, ,200 $9, ,400 $10, ,600 $11, ,800 $12, ,000 See Figure III-A-2.2

13 Table III-A-2.2b: The Japanese Auto Market P Q D Q S $500 3, $1,000 2, $1,500 2, $2,000 2, $2,500 2,000 1,000 $3,000 1,750 1,250 P 3 = $3,500 Q 3 = 1,500 1,500 $4,000 1,250 1,750 P W = $4,500 Q 4 = 1,000 Q 5 = 2,000 $5, ,250 $5, ,500 $6, ,750 $6, ,000 See Figure III-A-2.2

14 Figure III-A-2.2: US and Japanese Markets for Autos P S US P $7.0K $4.5K M $4.5K $3.5K X S J D US 0.5K 1.0K 1.5K Q D J 1.0K1.5K 2.0K Q US Market for Autos Japanese Market for Autos M = Imports = Q 2 - Q 1 = X = Exports = Q 5 - Q 4 =

15 Explanation of Figure III-A Before trade, the US consumers paid $7,000 for autos. After trade, US consumers pay $4,500 for autos. 2. Before trade, US producers produced 1,000 autos. After trade, US producers produce autos. 3. After trade, Q 2 - Q 1 = autos are imported. 4. Before trade, the Japanese consumers paid $3,500 for autos. After trade, Japanese consumers pay $4,500 for autos. 5. Before trade, Japanese producers produced 1,500 autos. After trade, Japanese producers produce autos. 6. After trade, Q 5 - Q 4 = autos are exported.

16 Figure III-A-2.3: Consumer s and Producer s Gain from Trade for 500 th Unit P $12,000 $9,500 $7,000 $4,500 $2, Consumer Gain from Trade (CGT) 1,000 D S Producer Gain From Trade (PGT) Q

17 Figure III-A-2.4: Total Consumer and Producer Gains from Trade P $12,000 a Total CGT abc S $7,000 b c $2,000 e 1000 Total PGT bce D Q

18 Figure III-A-2.5: US Auto Market P $12,000 S $7,000 (1) P W = $4,500 $2,000 (3) (2) 500 (4) (5) 1,000 1,500 D Q

19 Explanation of Figure III-A Before trade, CGT = Area (1) 2. Before trade, PGT= Area (2) + Area (3) 3. After trade, CGT= Area (1) + Area (2) + Area (4) + Area (5) 4. After trade, PGT= Area (3) 5. Summary Producers lose Area (2) Consumers gain Area (2) + Area (4) + Area (5) Net gain of Areas (4) and (5).

20 Table III-A-3.1: The US Auto Market with a Tariff P Q D Q S $2,000 2, $3,000 1, $4,000 1, $5,000 1, P T = $5,500 1, $6,000 1, P 0 = $7,000 Q 0 = 1,000 1,000 $8, ,200 $9, ,400 $10, ,600 $11, ,800 $12, ,000 See Figure III-A-3.1 Tariff is $1,000 so price rises to $5,500.

21 Figure III-A-3.1: Reduction in the Gains from Trade from a Tariff P $12,000 S $7,000 P W+T = $5,500 P W = $4,500 $2,000 (1) (2) (3) (4) 0.5K 0.7K 1K 1.3K 1.5K Area (1) = PGT Area (3) Tariff Revenue Areas (1) + (2) + (3) + (4) = Loss of CGT Areas (2) and (4) = Welfare Losses = WL D Q

22 Explanation of Figure III-A-3.2 (a) CGT Lost from the Tariff is equal to the sum of areas (1), (2), (3), and (4). Consumers are thus the main losers from the tariff. (b) PGT Gained is equal to area (1). Producers are one of the main beneficiaries of the tariff. (c) Tariffs Collected by Government is equal to area (3). Government is the other beneficiary of a tariff. (d) Welfare Losses from the Tariff are equal to the sum of areas (2) and (4).

23 Table III-A-3.2: The US Auto Market with a Quota P Q D Q S $2,000 2, $3,000 1, $4,000 1, $5,000 1, P Q = $5,500 1, $6,000 1, P 0 = $7,000 Q 0 = 1,000 1,000 $8, ,200 $9, ,400 $10, ,600 $11, ,800 $12, ,000 See Figure III-A-3.1 Quota equals 600 units so price rises to $5,500.

24 1. ROW USES DOLLARS FROM OUR M TO PURCHASE OUR X, SO TRADE BALANCES 2. JOBS ARE CREATED IN US EXPORT SECTOR AND WORKERS IN LOWER PAYING JOBS IN NON-TRADE SECTOR MOVE INTO THESE JOBS. WORKERS WHO LOSE JOBS IN IMPORT SECTOR MOVE TO HIGHER PAYING JOBS VACATED IN NON- TRADE SECTOR (FILTERING UP EFFECT). NO NET LOSS OR GAIN IN JOBS BUT IMPROVEMENT IN AVERAGE WAGE PAID. TRADE BALANCE MODEL REST OF WORLD (ROW) GOODS (X) $s $s GOODS (M) US EXPORT SECTOR US NON-TRADE SECTOR US IMPORT COMPETING SECTOR JOB GAINS NO GAINS OR LOSSES IN JOBS JOB LOSSES

25 Figure III-B-2.1: The Demand Curve for $s e($) $4B $5B D (US Exports) $

26 Figure III-B-2.2: The Supply Curve of $s e($) S (US Imports) $7B $8B $

27 Figure III-B-2.3: Equilibrium in the Market for $s e($) S (US Imports) 60 $6B D (US Exports) $

28 Figure III-B-2.4: Excess Supply in Market for $s e($) NX < 0 ES S (US Imports) $5B $6B $7B D (US Exports) $

29 Figure III-B-2.5: Excess Demand in Market for $s e($) NX > 0 S (US Imports) ED $5B $6B $7B D (US Exports) $

30 Figure III-B-2.6: Increase in US Income e($) S (US Imports) S (US Imports) $6B $6.5B D (US Exports) $

31 Figure III-B-2.7: Inflation Increases in the US (relative to Japan) e($) S 0 S D 0 $80B D 1 $

32 PURCHASING POWER PARITY EXAMPLE 1. The real exchange rate e*($) = [CPI(us)/CPI(jpn)]e($) 2. Initial conditions: CPI(us) = 100; CPI(jpn) = 100 and e($) = 100 /$ 3. Suppose US price level doubles and CPI(us) = The real exchange rate rises in the SR: e*($) = [200/100]100 /$ = 200 /$

33 PURCHASING POWER PARITY EXAMPLE 5. This SR situation will not last because it violates the law of one price. a. Consider an item which costs 100 in Japan and $1 in the US. b. With inflation in the US, this item now costs $2 in the US but $1 (100 ) in Japan. c. What will buyers in US do; what will buyers in Japan do?

34 PURCHASING POWER PARITY EXAMPLE 6. In the LR, the dollar will depreciate because of the relatively higher inflation rate in the US. The nominal exchange rate e($) will fall to 50 /$, so that the real exchange rate will be: e*($) = [200/100]50 /$ = 100 /$ 7. In the LR, PPP has been restored.

35 Figure III-B-5.1: Fixed Exchange Rates in the Market for $s e($) S (US Imports) $5B $6B $7B D (US Exports) $

36 Figure III-B-5.2: Fixed Exchange Rates and Devaluation e($) S (US Imports) S D D TOTAL $4B $5B $6B $7B $8B $