Class #22 10/24/11

Rizzo started class by giving us a bunch of charts and talking about comparative advantage

Rochester	Rochester	Cornell	Cornell
Wine	Cameras	Wine	Cameras
10 bottles a yr	5 cameras a yr	5 bottles a yr	4 cameras a yr

In this graph, Rochester is better making both cameras and wine. The production possibilities frontier for these structures look like.

butter is replaced with cameras on the X axis and guns is replaced with wine on the Y axis. The X axis is touched at 5 and the Y axis is touched at 10. Cornell’s would be the same except the 5 for cameras would be a 4, and the 10 for wine would be a 5. Any region the the northeasy of the line is unattainable for both Cornell and Rochester at this time. These graphs show the production possibilities of Rochester vs. Cornell.

	Rochester	Cornell
Cost of Cameras	5 cameras cost 10 wines. 1 camera costs 2 wines. Produce what we value	4 cameras costs 3 wines. Price of camera at Cornell is ¾ bottle of wine
Cost of Wine	10 wines cost 5 cameras. 1 bottle of wine costs .5 cameras	3 wines=4 cameras 1 bottle of wine=4/3 of a camera

Rochester is least opportunity costs provider at making wine. That means that they are more efficient at doing it than Cornell. Rochester has a comparative advantage in making wine over Cornell. Cornell is better than Rochester at making cameras. They have a comparative advantage in this.

	Rochester	Cornell
Initial	10 wine, o cameras (trade 3 wines from Rochester for 3 cameras from Cornell)	0 wine and 4 cameras
Final	7 wine and 3 cameras	3 wine and 1 camera

Rochester students have the absolute advantage over Cornell in making cameras and wine.

A good economic question to ask is who is more efficient at making each? Efficiency means trade offs. Opportunity cost is price. We ask who can produce wine and cameras at a lower cost. Who sacrifices the least to make wine and cameras? Price is a trade off. Comparative advantage asks how good you are at making something. Something really important is that NO ONE CAN HAVE COMPARITIVE ADVANTAGE OF EVERYTHING BY LAW. Because you have comparative in one thing, you can’t have a comparative advantage in another thing. IF Rochester and Cornell exchange, both parties become richer.  After the trade, there will be a point to the northeast of the initial production possibilities frontier. This makes both Rochester and Cornell better off so the trade was a good trade. We know that they want to trade if you can sell something for more than it costs to produce (profit). Buyer buys they can get it for less than it costs for them to produce it. If someone can make something for cheaper, than the interest of trade happens.

¾ bottle of wine < price of camera < 2 bottles of wine

If the trade for cameras falls between these two numbers, than it makes sense to trade. Something interesting is no one can figure out an exact price of something through economic predictions, just a range of prices. Both people can be more efficient by not being self sufficient. Being social increases the wealth of all trading parties. Trade is a non-technical form of production. It makes people richer by shuffling things around. Trade allows us to use fewer resources. Living standards improve with the more people we can trade with. If there were 100,000 people in the world only, not nearly as many products as there are today. The more people the better in terms of obtaining products you want at the cheapest price.

Self sufficiency is the road to poverty. The more people, the more specialization that occurs. Both Rochester and Cornell exported and imported their products. We pay for imports with exports. Every export buys an import. Specialization makes all parties better off.

Absolute advantages say nothing about wanting to trade. Relative prices within each country determine trade. Restricting trade is costly. Nothing is free. The US is one big free trade zone which is why we are so much richer than a lot of countries.

Prices are 8%-40% lower because of Wal-Mart’s competition. Saves $263 billion a year in the US. Wal-Mart in reality saves us a lot of money. Free trade between states has closened the gap of average income between states in the US.