Explicit act of trade creates nothing new at all, but creates more wealth.
Kirby Puckett was input into producing a complete set of baseball cards. Trade is a non technical form of production. If its cheaper to to get the good, then people will do it.
Usually when goods are exchanged, some things can only be produced if you exchange resources across the planet.
China is the leading producer of rare earth metals. Trade sets stage to make world richer. Technical parts of production aren’t possible without trade in the first place.
The source of wealth was because people have goods that people don’t value as much as other people value them. Professor Rizzo gave an interesting example of showing efficiency. Mike and rich are neighbors that work on their own lawn and take a certain amount of time to do things as depicted below.
Task | Mike | Rich |
Weeding | 80 mins | 120 mins |
Mowing | 40 mins | 120 mins |
Total | 120 mins | 240 mins |
If Rich offeres to weed ¾ of mikes driveway if Mike cuts his grass, then Mike mowes for 80 mins and weeds for 20 mins which is a total time of 100 mins on lawncare. Rich now spends 120 mins weeding his own house, and 90 mins on Mike’s house. This gives him a total work time of 210 mins now. Both Mike and Rich would save time from this. This makes the trade efficient.
Trade is efficient, get more from stock of resources.
Trade made both Mike and Rizzo better off. Rich still spends more time on lawns though. Poorer person always gains more than richer person. Mikes share of wealth increased more in other direction. Constant marginal returns
Production Possibilities Frontier
This is shows decreasing marginal returns depicted by this graph
http://www.google.com/imgres?q=production+possibilities+frontier+bread+and+books&um=1&hl=en&client=safari&rls=en&biw=1270&bih=628&tbm=isch&tbnid=jfOUMdZ5aaenHM:&imgrefurl=http://cdis.missouri.edu/exec/data/courses/2305/public/lesson01/lesson01.aspx&docid=k7IyNa6hDMEC5M&imgurl=http://cdis.missouri.edu/exec/data/courses/2305/public/lesson01/Lesson-1-Experiment.jpg&w=428&h=334&ei=QpykToabKYng0QGY-JCIBQ&zoom=1&iact=hc&vpx=314&vpy=147&dur=2795&hovh=198&hovw=254&tx=85&ty=97&sig=116585071145512099430&page=1&tbnh=133&tbnw=169&start=0&ndsp=18&ved=1t:429,r:1,s:0
If Rizzo only produces books, he can produce 2,000. If Rizzo only makes bread, he can make 4,000. The amount of books and bread Rizzo can produce is based on materials, resources, cost, ect.
Properties of PPF
1. Can produce any amount of each product that is inside of the curve.
2. If Rizzos wife can produce 5,000 pieces of bread and only 1,000 books then she has an absolute advantage in making bread. The absolute advantage is the person who produces more. Rizzo has an absolute advantage in producing books.
3. All points to northeast are unachievable as of now.
4. Points on PPF are productively efficient (most outputs from inputs) For outcome to be economical and efficient, what is produced has to be what people want. (getting what people want at lowest cost)
5. Slope. (captures tradeoffs. Ex. Less bread to produce more books.) Slope tells you how much bread you have to give up to get 1 more book. Give up more bread as you make more books.
6. Change in slope has meaning. “Law of diminishing returns” (law of increasing opportunity costs) Not only do you make trade offs to get more of something, but tradeoffs get worse as you get more.
If the X and Y axis were teachers and doctors, you get lower quality inputs when you expand. Quality of doctors gets worse as you take more teachers to become doctors. When we pull away good teachers, we take away from teaching quality as well.
7. Economic growth. Comes from when you get to the outside of the line. Growth can come from
1. More resources creadted, found, more stuff,ect
2. Technology (changes to let us use resources better) In 1970, we used 16,000 BTU’s of energy to produce each dollar in GDP. It costs 7,000 BTU’s today. This shows that we use 50% less energy today than we used back then. This allows us to consume more resources with the same energy output.
3. Trade (If we find a resource that only helps medical care, the X axis will go further out. If we find a new energy source, it helps all of the inputs, not just 1.
COMPETITIVE ADVANTAGE
Rochester graduates Cornell Graduates
Wine Cameras Wine Cameras
10 bottles 5 cameras a year 5 bottles 4 cameras a year
a year a year
Rochester is better at making cameras and wine. A PPF for a situation like this would look like.
The difference between this graph and the concave one is that as the Y axis decreases, the X axis increases at the same rate and vice versa. In the concave graph, It depicts decreasing marginal returns based on how much you move in one direction, the slope increases and decreases at different rates. Total production changes at different rates based on where you are on the line. On the linear line, the total production stays the same.
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