Gains from trade problem part 3, showing gains from trade
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In part 3 (the last one), we look at which country has the comparative advantage, and go through an example of trade the benefits both countries. We show that through specialization and trade, both countries can consume outside of their PPF's. This video is embedded at http://www.freeeconhelp.com/2011/06/how-to-finish-solving-your-comparative.html where a text and graphical explanation accompanies it.
Comments
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I don't know how to thank you, but just know that you've taught me more in these five minutes than what my tutor could not teach in over a year's period of time. SERIOUSLY YOU ARE A F**** SAINT MATE I,M SHARING THIS WITH EVERYONE.
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Is the 1.25 rate arbitrary?
The "inbetween" number of 0.5 - 3.00 is 1.75 -
Man, i mean these videos were efficient, but the writing are terrible......
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TO EVERYONE WHO IS STILL CONFUSED:
If you are not given Terms of Trade:
1. Add up the total production before trade for each product:
In this case:
Papayas: 7+8=15
Apples: 42+9=51
2. Add up the total production with specialization for each product:
In this case:
Papayas: 0+24= 24
Apples: 63+0= 63
3. Now, subtract the number you get for the total production before trade from the number you got for the total production with specialization, for each product:
In this case:
Papayas: 24-15= 9
Apples: 63-51= 12
4. Divide the difference by 2, (we divide by 2 because we have 2 products). This number is your gain in consumption for each country.
In this case:
Papayas: 9/2= +4.5
Apples: 12/2= +6
5. Now take these numbers and add them to the existing consumption without trade for each country and product, and now you have your consumption with trade.
In this case:
US:
Papayas: 7+ 4.5= 11.5
Apples: 42 +6= 48
Mexico:
Papayas: 8+4.5= 12.5
Apples = 9+6= 15
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How did you get +12 for papayas and -15 for apples for USA with trade, what calculation was done to get that?
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How to calculate the opportunity costs between each country?
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You, sir, deserve a medal. You've explained things better than the other two tutors I've had to pay for. LOL
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hey, I've actually tried this, coz i'm having the same problem as Pearl. I've only been given a point on the PPF for each country in my example and there was no T.O.T given and also the amount traded. It says that i have to assume that the two countries specialise and trade. so i have to find out the total gain that results from specialisation. So I'm on the same page as Pearl, unless I'm forgetting something :/
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how did you get 12 and 15?? for my micro assignment i have been given the ratio but i'm not sure how to do the maths in order to draw the graph. Please help
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Thanks a lot! It is really easy to follow and complete
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at this point in the semester that information has to be given. All we know is that if each country has a comparative advantage, then there exists a terms of trade where they can trade and both will be better off. Generally the terms of trade or actual amount traded will be given in the problem. Until consumer theory is taught, this cannot be figured out because we do not understand their preferences.
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I understand the terms of trade are in between the opportunity costs. I don't understand how to apply the terms of trade to the graph itself in order to figure out exactly how much each "country" should trade in order to maximize their consumption possibilities. Moreover, what I don't understand is how to decide how much each country should trade in order to maximize their consumption possibilities. How did you get 12 and 15? I'm very confused =(.
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Based on what you've said, that is correct
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My answer was "You cannot know the terms of trade w/o knowing preferences, how much they trade, or the demand on the market. Basically I'm saying I can't figure it out. All I know is that it would be somewhere between 1/4 and 5."
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You can't know for sure without that information. The best you can do is give an example terms of trade by finding ToT that is mutually beneficial. You can do this by making sure the ToT is between the opportunity costs for the two traders. Example: If the OC of person 1 is 1/2, and the OC of person 2 is 1, then ToT could be 3/4. Hope that helps.
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My problem doesn't tell me how much they trade and asks for the terms of the trade, so I don't know how I'm supposed to figure it. I'm on the second class of Introduction to Microeconomics, so if I have to be more advanced than that then we're all in trouble in that class.
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The problem must tell you how much they trade and then you can do the math necessary (subtract the initial from the final amount to get the gain). You can't really know how much they trade because we don't know their preferences so we take the given information and calculate the difference to show that trade is beneficial (which is the whole point of this exercise :) )
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how did you figure out how much they would gain or lose using the terms of trade?? please and thanks !
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@quinnguyenvn Great question! At this point in your economic career you HAVE to be TOLD this information. It is arbitrary. After you learn consumer theory, and understand preferences, you can derive the exact amount. Hope that helps!
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I don't understand how to choose 1.25 between 0.5 and 3? Someone helps me, please?
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