Most people think of trade as a zero sum game in which one side wins and the other side loses.
The view is that the rich countries are winners and the poor countries arelosers.
Some people think of trade as the redistribution of goods.
In this chapter, we will see that trade is not an unbalanced equation.
We will look at how economists use the scientific method to explain the world we live in.
We need to explore the more nuanced reasons why trade creates value.
Children trade lunch items to get something better.
Calculating assumptions to simplify reality is what economists do to create these models.
The models help economists understand the relationships that drive economic decisions.
The show is dedicated to testing myths.
The myth is confirmed at the end of each episode.
Thirty-six people died.
Some people claim that the fire was caused by the painted fabric in which the zeppelin was wrapped.
The hydrogen used to give the lift was thought to be the cause of the disaster.
The first model had a nonflammable skin.
The second model used a replica of the original fabric but did not contain hydrogen.
The burn times of the models were compared with the original footage of the disaster.
They "busted" the myth that the paint was to blame after examining the results.
The model with the hydrogen burned twice as fast as the one without it.
It seems reasonable to conclude that the disaster was caused by hydrogen.
The scientific method is used by economists to answer questions about observable phenomena and to explain how the world works.
The first step in the scientific method is to observe a phenomenon that interests them.
They build a model to test the hypothesis.
Experiments are designed to test how well the model works.
They can verify, revise, or refute the hypothesis after collecting data from the experiments.
The economist's laboratory is the world around us, from the economy as a whole to the decisions made by firms and individuals.
Experiments can't always be designed to test hypotheses.
They need to gather historical data or wait for real world events to take place to better understand the economy.
Economists try to approach their subject with objectivity.
They don't let personal beliefs and values influence the outcome of their analysis.
Positive analysis is used by economists to be objective.
A statement like "An unemployed an opinion that cannot worker should receive financial assistance to help make ends meet" is a test of opinion.
Financial assistance to the unemployed provides the wrong incentives.
Workers may end up spending more time unemployed if the financial assistance is not enough to meet basic needs.
Both opinions are based on values, beliefs, and opinions.
Positive analysis is a concern for economists.
Policymakers, voters, and philosophers are in the realm of normative statements.
If the unemployment rate goes up, economists try to understand the situation.
Model Building and Gains from Trade should receive unemployment assistance.
Maintaining a positive framework is important for economic analysis because it allows decision makers to observe the facts objectively.
Learning how to analyze complex issues and problems is what thinking like an economist is all about.
International trade, Social Security, job loss, and inflation are some of the complicated economic topics.
Economic models, which are simplified versions of reality, are used by economists to analyze these phenomena and to determine the effect of various government policy options related to them.
We use models to analyze the economy.
A good model should be easy to use and accurate.
One of the most famous models in history was designed by the Wright brothers.
Before the Wright brothers made their famous first flight in 1903, they built a small wind tunnel out of a wooden box.
They put a device inside the box to measure the Wright brothers' wind tunnel dynamics.
The lifting properties of each design were determined by the brothers after they tested over 200 different wing configurations.
The Wright brothers were able to determine the best type of wing to use using the data they collected.
Economic models help us to predict the effects of changes in prices, production processes, and government policies.
The Wright brothers were able to experiment with different wing designs because of a controlled setting.
They could test the change in design by only changing one element.
If the Wright builds economic models.
It brothers changed many design elements at the same time, so economists wouldn't have a way of knowing which change was responsible for improved performance.
Keeping everything else constant.
The simplified version of real ity is what economists start with.
The economic model we study in Chapter 3 is supply and demand.
Factors that we can control and factors that we can't account for in models.
For being trolled.
It was in a model.
The first flight was difficult due to the wind and other factors.
The process of building an economic model is very similar to that used by Orville.
We need to be aware of three factors: what we include in the model, the assumptions we make when choosing what to include in the model, and the outside conditions that can affect the model's performance.
The design of the first airplane was within the control of the Wright brothers.
The weather was an external factor because the Wright brothers couldn't control it.
An airplane model that flies perfectly in a wind tunnel may not fly reliably when exposed to the elements because the world is a complex place.
The test becomes more realistic if we add more variables that we can't control.
We need to choose which variables to include in the model.
We would like to include all the important variables inside the model and exclude the unimportant variables.
Using a model that contains faulty assumptions can lead to spectacular failures.
The financial crisis began in December of 2007.
The faulty assumption that real estate prices will always rise caused banks to sell and repackage mortgage backed investments in the years leading up to the crisis.
In a world where real estate prices were rising annually, this assumption seemed reasonable.
The assumption turned out to be false in the late 1990s.
Some investors prices fell in the 2000s.
The entire financial market believed that real estate was on the edge of collapse because of one faulty assumption.
Which statements are positive and which are not?
Arkansas winters are too cold.
Five serves of real value of money is what you should eat.
0.7 British day is the current exchange rate.
Is it pound per U.S. dollar?
People save 15% on insurance when they switch to Geico.
Everyone should have a life insurance policy.
Duke University graduates earn more than University of Virginia graduates.
The top educational institution in the country is Harvard University.
The average temperature in Fargo in January is 56 degrees.
The phrase "too cold" is a matter of opinion.
This is not a normal statement.
While working at a bank, the word "should" indicates an opinion.
This is not a normal statement.
This is positive.
You can check the current exchange rate to see if the statement is true or false.
This claim was made in one of the commercials.
It's a positive statement because it's a testable claim.
If you had the data from Geico, you could determine if the statement was correct or not.
This sounds like a very sensible statement.
The word "ought" makes it an opinion.
This is not a normal statement.
You can see which graduates earn more.
This is positive.
Some national rankings show that this is true, but others do not.
It is not possible to identify a definitive "top" school because of the different rankings.
This is not a normal statement.
This is a positive statement.
In January, North Dakota is very cold.
Climate data can be used to verify the statement.
We need to learn our first economic model.
You might want to review the appendix at the end of the chapter.
Graphs show the relationship between two variables.
Learning economics depends on your ability to read and understand graphs.
We learned in Chapter 1 that economics is about trade offs.
You may have to decide if you should spend more time studying or hanging out with your friends.
A society has to allocate its resources.
The decision to build new roads will result in less money for new schools.
We can model trade- offs more clearly with these assumptions.
Imagine a society that only produces pizza and chicken wings.
This approach helps us understand trade- offs by keeping the analysis simple, since a real economy produces millions of different goods and services.
The production possibilities frontier is shown in Figure 2.1.
The total resources and the number of people in this society are fixed.
The economy can produce 100 pizzas and 0 wings if it uses all of its resources.
It can make 300 wings and 0 pizzas if it uses all of its resources.
The production possibilities frontier has two outcomes represented by points A and B.
Humans enjoy variety and it is unlikely that the society will choose either of these extreme outcomes.
The economy of our society will end up with a combination of pizza and wings if we decide to spend some of our resources on pizza and wings.
The society would use its resources to make 70 pizzas and 90 wings.
The combination would be 50 pizzas and 150 wings.
If the society uses all of its resources efficiently, each point along the production possibilities frontier represents a possible set of outcomes.
Some combinations of pizza and wings can't be made because there aren't enough resources.
Our society can enjoy point E, but it can't produce the level of output we want.
The points beyond the production possibilities frontier are not feasible with the available resources and technology.
All of the society's resources are being used in the most efficient way possible at any combination of wings and pizzas.
There are points located in the shaded ing wings.
The points represent outcomes inside the production possibilities frontier and indicate inefficient use of the society's resources.
Consider the labor resource.
Pizza and wings will not be as efficient if employees spend a lot of time at work on the Web.
If workers use all of their time efficiently, they will produce an efficient amount of pizza and wings, and output will be somewhere on the PPF.
The only way to get more of one good is to accept less of another.
A society may prefer one point over the other.
If wings suddenly become more popular, the movement from point C to point D will represent a desirable trade off.
20 fewer pizzas will be produced but 60 additional wings will be added.
The opportunity cost of producing one good instead of the other is represented by the trade- offs that occur along the production possibilities frontier.
The opportunity cost of producing more wings is shown in Figure 2.1, when society moves from point C to point D. The movement from point D to point C has an opportunity cost.
We have assumed a constant trade off between the number of pizzas and the number of wings.
Not all resources in our society can be used to make pizza and wings.
Some people are good at making pizza, while others are not.
Both types of workers will be used when the society tries to make as many pizzas as possible.
To get more pizzas, the society will have to use less skilled workers.
Pizza production won't expand at a constant rate.
Production does not expand at a constant rate because resources are not perfect.
To produce 20 extra pizzas, the society can move from point D to point C. To move from point D to point C requires giving up 30 wings.
There is an opportunity cost of 30 wings for moving from point D to point C.
The society will have to use less skilled workers to make more pizzas.
The cost of making an extra 20 pizzas rises from 30 wings between points D and C to 80 wings between points B and A as we move up the PPF.
Suppose the society decides it wants more pizzas and moves from point C to point B with 70 pizzas.
If the society decides that 70 pizzas are not enough, it can expand pizza production from point A to point B.
The society has given up 80 wings.
The opportunity cost of producing an extra 20 pizzas rises from 30 wings to 80 wings as we move up the PPF from point D to point A.
The increased trade- off necessary to produce more pizzas is reflected in the higher opportunity cost.
Changes in relative cost mean that a society faces a good rises as a society significant trade off if it tries to produce more of it.
We have modeled the production possibilities frontier based on the resources available to society.
Most societies want to create economic growth.
The production possibilities frontier can be used to explore economic growth.
If our society develops a new technology that increases efficiency, we can ask what will happen to the PPF.
If a new pizza assembly line improves the pizza production process and does not require the use of more resources, it simply redeploys the resources that already exist.
The society would be able to make more pizza with the same number of workers.
It would allow the same amount of pizza to be made with fewer workers.
The society has expanded its resources.
It is now possible to make 120 pizzas using the same number of workers and the same amount of time that it took to make 100 pizzas.
The ability to produce wings has not changed despite the new pizza- making technology.
The society can now move from point A to point B, where it can produce more goods such as pizzas and wings.
The assembly line allows a re deployment of labor that increases the production of wings.
Point B is possible because of improvements in technology.
If the population grows, the production possibilities frontier will expand.
More workers are needed to make pizza and wings.
The society can make more pizzas and wings with more workers.
More pizzas can be made.
The enhanced pizza- making capacity makes it possible to produce more wings at the same time.
The shift makes point C possible.
You can base your answers on the ppF.
There is a possible amount of cars and bicycles that can be sold.
The curve from point A to point B shows the cost of producing more bikes.
If society makes a lot of bicycles and cars.
The entire PPF will shift if an improved process for manufacturing cars is introduced.
The cost of producing more cars is shown by moving from point A to point B.
The PPF is the maximum that can be produced when all resources are being used efficiently.
Some people who could help produce more cars or bicycles would not be working because of unemployment.
The PPF will not shift upward along the bicycle axis.
The frontier has been pushed out by the extra workers, not just one end of it.
Adding resources and technology make an economy more efficient.
There are three ways to create gains for society.
Determining what to specialize in is an important part of one's work.
Every worker, business, or country is good at what they do.
You should learn about information technology.
An employer will hire you for your specialized skills if you have a certificate or degree.
Your salary is determined by your information technology skills.
You can use your salary to purchase goods and services that you want and that you don't know how to make yourself.
Gains from trade can be made if you specialize and exchange your skilled expertise with others.
We need to return to our good economy.
We'll assume that the economy has only two people.
One person is better at making pizzas while the other is better at making wings.
The potential gains from trade are clear.
Each person will specialize in what he or she is better at producing and then will trade to acquire some of the good produced by the other person.
The production potential of the two people in our econ omy is shown in Figure 2.5.
Mike Piazza can make 24 pizzas, 72 wings, and produce 24 pizzas all at the same time.
The amount of pizza and wings produced by each person is shown in the graphs.
The data in the table at the top of the figure is used to draw the production possibilities frontier.
There is a constant trade off between producing pizza and wings.
The trade off between making pizza and making wings is fixed at 60: 120, or 1:2.
Mike makes 24 pizzas for every 72 wings.
The trade off between producing pizza and producing wings is fixed at 24:72.
Let's assume that each of them wants to make an equal number of pizzas and wings.
Mike makes 18 pizzas and 18 wings, while Debra makes 40 pizzas and 40 wings.
Since she is more productive, she produces more food.
If she can't trade with Mike, she will make 40 pizzas and 40 wings.
At first glance, it would appear that she should work alone.
Table 2.1 compares production with and without trade.
Without trade, Mike and Deb have a combined production of 58 units of pizza and wings.
Her production is 60 units when she makes only pizza.
In this case, her individual pizza output is greater than the combined output of 58 pizzas.
2 additional pizzas and 14 additional wings have been produc tioned.
It leads to greater output.
They would like to eat pizza and wings.
If Mike gets 19 pizzas in exchange for 47 wings, he will be better off by 1 pizza and 7 wings.
She produces 40 pizzas and 40 wings if she doesn't specialize.
She can have 41 pizzas and 47 wings if she trades with Mike.
He will have 72 wings if he produces only wings.
He makes 18 pizzas and 18 wings if he doesn't specialize.
He can have 19 pizzas and 25 wings if he trades with her.
Even though she has an advantage in making pizza and wings, she is better off trading with Mike.
The result is amazing because of specialization.
When they spend their time on what they do best, they are able to produce more and divide the gain.
Workers enjoy gains from trade if they are specialized.
The concept of opportunity cost gives us a second way of proving the principle that trade creates value.
She will produce 40 pizzas and 40 wings.
She will have 41 pizzas and 47 wings if she trades with Mike.
He can have 19 pizzas and 25 wings if he trades with her.
If you look at Table 2.2, you can see that in order to make 1 more pizza, she must give up making 2 wings.
The opportunity cost of a pizza is 2 wings.
The opportunity cost of one wing is 12 pizzas.
In Mike's case, the production of 3 wings is increased by each pizza he produces.
The cost for him to produce 1 pizza is 3 wings.
He gives up 13 pizza when he produces 1 wing.
The ability to make a good at a lower opportunity cost is a comparative advantage.