1. Carbon Emissions and Income (Graph from Homework 5) 2. Tariffs and Import Quotas with Perfect Competition in the World Economy

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1 Lectre 7(ii) Annoncements Ptting in another plg for the Economic Stdent Association Ttoring Sessions (See link at top of Moodle) Managing expectations abot ftre bons points on exams: o Normal bons is 4 points inclding points for correct NAME/ID o Accidentally more generos than sal this time becase of an error. :) Lectre 1. Carbon Emissions and Income (Graph from Homework 5) 2. Tariffs and Import Qotas with Perfect Competition in the World Economy 3. New graph: Prodction Possibility Frontier 4. A Gain from Trade: Comparative Advantage 5. A Gain from Trade: Increasing Retrns

2 CO2 tons per capita Graph from Homework Carbon Emissions and Income USA Astralia Canada We have a special place on the graph along with or close cosins Astralia and Canada. Or more distant cosins in Erope look a lot different. Something to think abot for the Global Isse 1 Platform Debate this week GDP per capita 2007 ($1,000)

3 Review: Economic Impact of Tariff in Econland (Perfect Competition in the World Economy) Q$DSPworldPEconImportswithtarifImportsfreetradetarifPEcon=PWorld+tarifEffects of the Tariff ΔCS (mins) ΔPS (pls) ΔGS (pls) (tariff revene) ΔTotal Econland Srpls (mins) Breakdown Q con too small Q prod too big

4 Consider a qota instead of a tariff? It is a limit on how many imports can come in. (Jst like the qota limited milk prodction in Canada). For example, there are sgar qotas limiting the import of sgar into the U.S.

5 Economic Impact of Qotaf in Econland Q$DSPworldPEconQotaImportsfreetradewhatqotawoldPEcon=PWorld+tarifEffects of the Qota,same as tariff except green box goes abroad ΔCS (mins) ΔPS (pls) ΔGS zero ΔTotal Econland Srpls (mins) Breakdown Q con too small Q prod too big transfer to foreigners

6 Bottom Line Econland competing in a perfectly competitive global economy is better off overall from free trade in widgets. Not a Pareto improvement Consmers (D people) are better off with free trade Bt the S people (the sppliers) are worse off. What is the example of a real world market where this analysis captre the main isses? Sgar Becase of qotas Price in US twice what it is in rest of the world So consme less (e.g., don t se it to sweeten soft drinks like the rest of the world. Sppose open p to free trade. Analysis shows on net U.S. ahead. Workers in sgar indstry will lose jobs. So are worse off if get rid of qotas and do nothing else. Bt with a bigger pie, it is possible to compensate them. o Can help them ot by paying for retraining for another job. o Trade Adjstment Assistance (Federal program to ease pain.)

7 And if yo want to talk abot jobs? What abot the jobs in indstries like candy which se sgar as in inpt? With free trade in candy from the North American Free Trade Agreement (NAFTA), it makes sense to sht down candy factories here, bild them in Mexico or Canada where sgar is cheap, then import the candy in to the U.S. from there, tariff free. (Sgar has a different deal in NAFTA than candy). Fair Trade? Note the word fair has not showed p in the analysis. If other contries were to give away widgets for free, P world = 0, overall in Econland there shold be no complaining that this trade is nfair. Instead, the overall benefit is even bigger! Maybe yo are starting to note a disconnect between what we are talking abot here and what politicians here are saying abot China. The complaint is that, in effect, China is giving s widgets for free or something like that and the trade is nfair. Bt let s pt China aside for a bit and learn a learn a new graph. Old graph, one good (widgets) and money. New graph: two goods.

8 Prodction Possibility Frontier Shows different prodction combinations available to society. Do a simple example. Robinson Crsoe. (Classic novel by Daniel Defoe, 1719) Works 8 hors a day. In an hor, can catch 3 fish or pick1 cocont. If work all day on fish, catch 24. If work all day picking coconts, pick 8.

9 Prodction Possibilities Prodction Possibility Frontier for Robinson Crsoe Hors Fish Hors Cocont Q Fish Q Cocont C o c n t s Fish Slope: =1/3 Opportnity Cost of one more fish (in terms of coconts)

10 Can think abot this for prodction possibilities for society as a whole. Gns and Btter (330,000 google hits) (Stadims and K12 Edcation, etc, etc.) Back to Robinson Crsoe. Sppose atarky (no trade, on his own). We will talk abot choice on Friday. Bt let s say he decides to work half on each. Prodction point and consmption point prodce, consme 12 fish prodce, consme 4 coconts

11 3. Comparative Advantage and International Trade Sppose another person named Friday lives on a neighboring island Friday works only 2 hors a day. In one hor, can collect 12 coconts or 4 fish. Remember: Crsoe can catch 3 fish or pick one cocont in an hor. So Friday has an absolte advantage at both jobs compared to Robinson Crsoe in terms of prodctivity per hor. Friday s PPF C o c n t s Fish Slope = 3. Opportnity cost of fish in terms of coconts

12 Opportnity cost of fish: for Robinson: 1/3 coconts for Friday: 3 Robinson has a lower opportnity cost. Robinson has a comparative advantage in fish. Friday has a comparative advantage in coconts.

13 Sppose can go to the market and trade. Sppose market price is one cocont for one fish. What do these gys do? Specialize according to comparative advantage. Example how both can be better off Robinson Prodces fish coconts Friday Prodces fish coconts Robinson gives Friday Friday gives Robinson Robinson consmes : fish coconts Friday consmes : fish coconts Pareto improvement compared to atarky! Let s see the a famos pictre.

14 C o c n t s Atarky 2 0 Comparative Advantage Robinson PPF Trade Consme Trade Prodce Fish Op. Cost 1 Fish = 1/3 Coconts Prodce Consme Atarky 12 F, 4 C 12F, 4 C Trade 24F, 0 C 12F, 12 C as a Basis for Trade Friday PPF C o c n t s Atarky Trade Prodce Trade Consme Fish Op. Cost 1 Fish = 3 Coconts Prodce Consme Atarky 4 F, 12C 4 F, 12 C Trade 0 F, 24 C 12F, 12C

15 Idea of comparative advantage as the basis for trade: David Ricardo: Trade based on comparative advantage: Low skill contry: specialize in labor intensive,assemble sneakers High skill, high capital contry: do design, marketing, engineering 4. Increasing Retrns and Gains from Trade Sppose ppf looks like: C o c n t s PPF Fish Opportnity cost one more fish falls as fish prodction increases (One reason: learning by doing)

16 Can specialize and make: 24 fish, 0 coconts or 0 fish 24 coconts Or try to do both and make 7 fish and 7 coconts Jack of all trades bt master of none With atarky might still might do both even if not particlarly good at either task withot specialization. Robinson in atarky Perhaps prodce and consme 7 coconts and 7 fish. Now sppose Robinson can trade with clones of himself? What do we expect to happen? Specialization! Robinson 1: Prodces Fish Coconts Robinson Clone: Prodces Fish Coconts Each consmers Fish Coconts

17 Bottom line: Economists most basic argments for how free trade benefits contries are the same argments for how trade benefits individals. Specialize to exploit comparative advantage Specialize to enjoy increasing retrns (or eqivalently, to enjoy scale economies) Trade in cars, planes, compters, movies (both directions) We can enjoy increasing retrns and more prodct variety. U.S. bys sneakers and clothes from abroad (becase low skill sewing not or comparative advantage) Sells movies and airplanes and ipad technology.