ECON 101 Lecture Notes - Lecture 8: Glossary Of Partner Dance Terms, Absolute Advantage, Comparative Advantage
1 May 2018
School
Department
Course
Professor
Economics 101
Lori Leachman
Part 8 • Lecture
• Examples of PPP and IRP combinations - show double shifts
o Changes in inflation
o Changes in innovation
o Changes in productivity
• Business Cycle changes (not PPP or IRP)
o M (import demand) = f(Y)
o M = m (base line) + MPM * Y where MPM is marginal propensity to import
o For U.S., MPM > 1 (around 1.2) while other countries around 0.8
o So if Economic Expansion in U.S. (and our MPM is beyond 1 a.k.a. we import a ton)
▪ Income rises, imports rise, demand rises, e rises
▪ Productivity can also rise, so multiple shifts possible
• Trade - international exchange of goods & services
o People trade because they have surpluses in goods and/or they can earn more on the world
market than on domestic market
o History
▪ Feudalism
• Aristocrat owned land, peasants farmed land and gave a portion for tax - leaving
nothing left to trade - very subsistence
▪ Mercantilism
• Innovation in agriculture (irrigation/fertilization) - larger yields so people
traded the surpluses
• Three concepts:
o Export more than import
o Accumulate wealth
o Use wealth to support military
• Current irrelevance
o Based on siphoning off other countries wealth - one winner & one
loser
▪ No long term trade - implosion of trade - diminishing markets
of trading partners
o Military power is no longer a nation’s wealth - more so economic
power
▪ Absolute Advantage (Adam Smith)
• Countries produce for export what they produce absolutely more of
• Issues
o Each country needs to be best at producing something
o All other countries must want the goods
o Some countries produced most of everything
▪ Comparative Advantage (David Ricardo)
• Countries produce for export what they produce at lowest domestic
opportunity costs (what you are internally most efficient at producing)
• Creates opportunity for all countries to engage in trade
▪ **Practice these problems (Absolute/Comparative advantage)
• Range of terms of trade
• Production/consumption gains (Pw / Pa) & world price
o Exploring gains will be > 1 b/c earn more for exports
o Consumption gains < 1 b/c you pay less for imports
o “Importance of being unimportant”
▪ Small countries have less impact on global supply and
demand, capture foreign - domestic price difference
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