Specializationand Trade

Is it beneficial to trade

Why is it beneficial for countries to trade

It reduces scarcity
we can't make any and everything we need
He need to develop friendships
we need to gain foreign exchange

Should countries block imports that destroy domestic industries

NO Industries that are uncompetitive resist trade liberalization

Outline
1 Specialization t Exchange The Benefit of cooperation

2 Production possibilities frontier

3 Consumption possibilities

1 Specialization and Exchange

picture man has more manpower
Comparative Advantage
ordless
whatever
you are more better worse at doingthansomeone
else
the basis for specialization 1 trade1exchange
Applies to households firmsregions countries etc

The theory of comparative advantage was developed by

19thcentury

British economist David Ricardo

Example Jamaica poor apples t oranges

Germany rich

NoteJamaica is not a poor country We were denied debt

forgiveness because of how many SUV's are here
Tat
Initial Resource 3 units of labour
Resources different levels of productivity

Germany Jamaica LEVEL OF PRODUCTIVITY

Level of Activity The amount you produce

The rich country Germany has an absolute advantage since it is

more productive at producing bothThe poor country cannot compete
withthe rich people country in producing anything
But what is the basis for trade
COMPARATIVE ADVANTAGE

Corproduction

poor country productivitylevel times more productive

rich country productivity level

Germany's productivity relativeto Jamaica's productivity

Germany is better at both but it is more better at apple

production so it has a comparative advantage If you'resurethis

is correct the othercountry automatically has the comparative

advantage in the other production1inthiscaseorange Jamaica is
less worse at producing oranges
2 is closer to 3 than 1 is to 4

In order to realize gainsfromtrade the country needs to specializein

its comparative advantage ieShift apple production workersto the

orange production industry

Aftertrade GDP remains the samebut the composition changes sinceyou

have more variety

Trade therefore is beneficial to both rich and poorcountries

The restructuring of productive capacity is essential torealizingthegains fromtrade

Jamaica Gleaner August 31,2014 Trade Board revamps car import policy
Motor Car Should not exceed 5 years
Standard Change your car
every 6 years BUT Jamaicans don't change
cars often enough for this to make sense

Japan surplus of cars

Why Tokyo densest city in the world
Land Space VERY expensive
To park your car 100US per day
If they drive a cheap car
Value of car Value of parking the car
i They have mostly luxury cars
This is why if they have a shopthey live upstairs
Japan is willing to get rid of the cheap car at littleto no cost

Jamaica has comparative

advantage in 2 agricultural products i yarn
and also in a dancehall and artiste

Specialize then trade

Since recently there has been an assurgence of Notes

Yaris
Tiidas
Fits
Why Jamaicans are looking for cars that are more economical

Why do professionals use assistants

Delegation

Delegate less technical aspect of hisjob

More better at doingthe more technical aspectthanthe non technical
than his assistant

2 Production Possibilities Frontier

Unlimited uses BUT limited resources

Because resources are scarce and all wantsfuses can'tbe achieved

what are feasible options

Cost of producing apples lose and vice versa OPPORTUNITY

oranges
COST

Feasibility
PLOT GRAPH plotted Points Feasibility set set

teatime
but inefficient
Points on the line maximumtecticient use of resource

Points outside the boundary Unattainable and inefficient at least inthe

 Short run BUT may become attainable after
a while with growth of a country

The slope of the Production Possibilities Frontier or Feasibility Set is the

OPPORTUNITY COST OPPORTUNITY
COST

Straight Line constant all along the line

OPPORTUNITY COST
It
not change
does

Gain 1 applebut lose 2 oranges

Feasibility set for

Countries Regions Companies Firms PB
For individualHousehold budget constraint household makes
decisions to allocate resources based on their

income budget

In determining how individuals

and entire economies make allocation
knowing the feasible set is one ingredient
decisions

Any situation with finite resources with alternative uses can be modelled
in the same way Eg budget

comparative Advantage Theability to produce a commodity at a lower

 opportunity cost than others

Opportunity cost of an orange in JA Ya an apple in Germany If

Germany chooses to produce oranges it hasto give up 1 bapples

Jamaica has a comparative advantage of oranges since it has a lower

opportunity cost

Jamaica gives
up more in makingthe decision to produceapplesso

Germany has the comparative advantage

THE GAINS FROM TRADE

There are two ways to

get a resource
Produce it locally self sufficiency
Trade and
get it
Specialization
Trade
trade expands the Feasibility Set
self sucticiency

Resources are cheaper by trade than production How

By H Sufficiency Give up 2 oranges to get one apple
By trade Give up 1 apple for an orange

No Diminishing Returns Straight Line PPF

ChhyrhainghretationshipT
we

Grow what we eat and eat what we

grow
SELF SUFFICIENCY POINT

However trade expands our feasibility set

DEmotional policy trying to protect inefficient localfarmers

Instead Grow what you are good at and eat what you like

Price local goods international goods

Health local goods international goods

Rising Food Prices Increase Squeeze On Poor BBCNews 31May2011

consumption Possibility

Reduce
Reduce
Feasibility Set welfare

Orange 1 Shirt i shirt perspective reduce F S

Orange perspective expand F S

In the case of a price rise

 If you produce resources benefit
you
consume resources hurt you

Determinants of welfare
welfare standard of living in a country

Resources ant
of each resource
Productivity
Terms of trade has to be 1 1

Unless anything happens to change one of these determinants of

welfarethen our standard of living will forever remain the same

Oil Prices Soar September 11 2000

terms oftradeworsened
Rise in oil Petrojam cut back on ant they buy
internalizecost PJ reduce markup on oil to protect consumers

profit price what you got it for

retail
Petrojam less profitable reduced profits
Owner of Petnjam Government

Government less profitable

If prices dont risetheir customers wont know that there's a

shortage of oil and eventuallythe resources will bedepleted
Government cant bearcost
 Petrojam laid of 1005 of workers
Government raisetaxes

Not every policy put in place to protect the poor is actually

protecting the poor

Allthe policy did was redistribute the cost of thisIn oneway

Canbe a mixture of
goods
services
goods
services

mutually beneficial trading relationship

Real Life Example

SUGAR INDUSTRY
sold to private investors

gave backtheir shares

private investors
one of the most uncompetitive and inefficientindustries inJamaica
I
destroyed with trade liberation
Employment Ww
Reelection n take
up sugar industry to create jobs
He cannot always protect our local producers

weshould restructure so we can indulge in a specializing 1trading

relationship

PPF with Diminishing Returns

Productivity levels change less and less profitable

our PPF with Diminishing Returns is concave

to the Origin or just concave
y

Diminishing return generate a concave production possibility

frontier

Slope of PPF opportunity cost constant

Slope of PPF with Diminishing Returns

Changes at every point

Opportunity cost changes at every point
Review
1 Your comparative advantage is what you're more better or
less worse at doing

2 Trade is beneficial to both rich and poor countries

3 Factor redeployment is essential to realizing thegains from

trade

living welfare is the product of capacity

4 Standard of
productivity and terms of trade