[eng.economics] lecture #3

7/23/2019 [Eng.economics] Lecture #3

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Thai Nguyen University

Thai Nguyen University of Technology

Faculty of International Training

(ECEN 4503)

Engineering Economics

Lecture #3:

Interdependence and The Gains

rom TradeThu! "th "0$5

Lecturer: Ngu%en &inh ' h!*!



+e,ie-ing

1/1/16Department of Electrical Engineering taught in English2

Ten principles

of economics- How peoplemake decision

- How theyinteract

- How theyorganized

Think likeaneconomist

- Scientists- Policy-makers

Interdepende

nce and thegains fromtrade



.hat is interdependence/


our every!ay life"#a$ing up in the morning

#ashing tooth %y the %rush an! toothpaste ma!e %y &olgate'

Drin$ing coffee gro(n in Dac )ac province'

Eating %rea$fast (ith *cecoo$ noo!le'+oing to school %y car ma!e in U,*'

Etc'

Every!ay (e rely on many people from aroun! the (orl!'



$! ara12e or the &odern Economics

1/1/16Department of Electrical Engineering taught in English-

*ssume the (orl! consists of only t(o people"* cattle rancher

* potato farmer

pro!ucing only t(o $in!s of foo!s"

.eatsotatoes

&ase 1" Each person can pro!uce only one $in! of foo!s'Tra!e allo(s them to en0oy greater variety" meat an! potatoes'

&ase 2" Each person can pro!uce %oth meat an! potatoes %ut agreater cost' It is o%vious that they can %enefit %y specialiing an! tra!ing'



ara12e or the &odern Economics

1/1/16Department of Electrical Engineering taught in English

&ase 3" 4ne person is %etter at pro!ucing every goo!s'This person should stay in self-sufficient? What is reason for

specializing and trading?

ro!uction possi%ility 5a combination of goods that an economy may

produce,uppose that each person (or$s -7 hours a (ee$

Hours needed tomake 1 pound of:

Amountproduced in 4

hoursMeat Potatoes Meat Potatoes

!armer 20hours/lb

10hours/lb

2 lb 4 lb

"ancher 1 hour/lb 8 hour/lb 40 lb lb





ro!uction possi%ility frontier

The farmer!s and "ancher!s productionpossibilities frontiers





,pecialiation an! tra!e"*fter several year one might fin! that they can %e %etter %y

specialiing an! tra!ing'

eore specia2iing: ter specia2iing and trading# pounds meat $ 1

pound potatoes

.eat otatoes .eat otatoes

armer 1l% 527 hour 2 l% 527 hour 7 l% 57 hour 3 l%

- l% 5-7 hour 3 l%

+ancher 27 l% 527 hour 2' l% 527 hour 2- l% 52- hour

21 l%

2 l% 516 hour

3 l%





,pecialiation an! tra!e"&hange after tra!ing




1/1/16Department of Electrical Engineering taught in English:

ule" If the rancher is better in producing both goods, how the farmer

ever specialize in doing what he is doing best?

*%solute a!vantage

The comparison among producers of a good according to their productivity.


Amountproduced in 4

hoursMeats Potatoes Meats Potatoes

!armer 20hours/lb

10hours/lb

2 lb 4 lb

"ancher 1 hour/lb 8 hour/lb 40 lb lb



"! The rincip2e o Comparati,e d,antage


4pportunity cost an! comparative a!vantageOpportunity cost of some item is what we must give up to get that

item.


%pportunity cost of:

Meat Potatoes 1 lb of meat 1 lb ofpotatoes

!armer 20

hours/lb

10 hours/lb 2 lbs

potatoes

1/2 lb meat

"ancher 1 hour/lb 8 hour/lb 1/8 lbpotatoes

8 lbs meat



The rincip2e o Comparati,e d,antage


4pportunity cost an! comparative a!vantageComparative advantage the comparison among producers of a

good according to their opportunity cost.


%pportunity cost of:

Meat Potatoes 1 lb of meat 1 lb ofpotatoes

!armer 20hours/lb 10 hours/lb 2 lbs ofpotatoes 1/2 lb ofmeat

"ancher 1 hour/lb 8 hour/lb 1/8 lb ofpotatoes

8 lbs ofmeat



The rincip2e o Comparati,e d,antage


&omparative a!vantage an! tra!eTrade can benefit everyone in society because it allows people to

specialize in activities in which they have a comparative

advantage.

3 l% of meats ; 1 l% of potatoes



6hou2d Tiger .ood mo- his o-n 2a-n/


Tiger #oo!s < +olf star .o(ing la(n2 hour

.a$ing a!vertising vi!eo

=7777/hr

Forest +um < The %oy ne>t !oor .o(ing la(n

- hour #or$ing at .c Donal!=27/hr



6hou2d Tiger .ood mo- his o-n 2a-n/

1/1/16Department of Electrical Engineering taught in English1-

#oo! has a%solute a!vantage of mo(ing %ut +um has

comparative a!vantage?

#oo! shoul! ma$e the a!vertising vi!eo an! hire Forest

+um to mo( his la(n'

7ours needed to

mo-

8pportunit% cost o mo-ing the 2a-n

Tiger .ood 2 hours .a$ing a!vertisingvi!eo

=177777

orest Gum - hours #or$ing at .c Donal! =97



6hou2d the 9!6! trade -ith other countries/


Imports goods produced abroad and sold domestically Exports goods produced domestically but sold abroad

U,* one (or$er can pro!uce4ne car per month

2 tons of foo! per month@apan4ne car per month

1 ton of foo! per month



Conc2usion


Inter!epen!ence,pecialie an! tra!e

*%solute a!vantage

&omparative a!vantage

International trade is not like a war, in which some countries

win and lose. Trade allows all countries to achieve greater

prosperity.

[eng.economics] lecture #3

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