CDAE 272 International Economic Development

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CDAE 272 International Economic Development

• Spring 2008

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• Class 12
• Feb. 21
• Last class
• Economic concepts and methods
• Quiz 3
• Today
• Result of Quiz 3
• 3. Economic concepts and methods
• 4. International trade theories
• Next class
• Quiz 4 (Sections 3.5 and 3.6)
• 4. International trade theories
• Readings
• Important date Problem set 2 due Tuesday, Feb.
  26

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Result of Quiz 3

• N 40 Range 4.5 10 Average
  8.4
• 1. Major difference between a normal good and an
  inferior good
• Normal good prices increases when income
  increases.
• Normal good toilet paper, you buy it
  regardless of the price.
• Normal good demand increases when price
  increases.
• Normal good demand increases when price
  decreases.
• Normal goods are purchased by people with high
  income and inferior goods are
• Normal good good with high demand elasticity.
• Normal good seafood, inferior good tuna
  fish.
• Normal goods are preferred to inferior goods.
• 2. Which of following examples is a good
  explanation of consumer surplus?
• (a) Kevin bought a 50 DVD player when it was
  20 off, his CS 10.
• (b) Kevin received a 50 DVD player as a
  birthday gift, his CS 50.
• (c) Kevin was expecting to pay 50 for a DVD
  player but the price was only
• 45 when he bought it, his CS 5.
• (d) Kevin saved 50 to buy a DVD player but the
  price went up to 60 when he went to the store,
  his CS -10.

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Result of Quiz 3

• 3. Supply and demand in a market
• (a) Draw a graph to show the supply and demand
  functions
• (b) Derive P and Q
• (c) Calculate the CS and PS
• (d) Shift in the demand curve due to a change in
  the price of another good.
• 4. Calculate the change in CS due to a change in
  the price.

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3. Economic concepts and methods

• 3.1. An overview of an economic system -- How
  does it work?
• 3.2. Demand and supply
• 3.3. Market equilibrium and price determination
• 3.4. Excess supply and excess demand
• 3.5. Consumer and producer surplus
• 3.6. Impacts of market interventions
• 3.7. International trade price determination

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• 3.6. Market interventions
• 3.6.4. Impacts of a sales tax (e.g.,
  1.5 per unit)
• -- Notations
• -- Total price paid by consumers Pcon
• -- Net price received by producers
  Pprod
• -- Sales tax t Pcon - Pprod
• -- Total tax revenue T t Q
  -- A graphical analysis
• -- Consumers worse off (a decrease in
  CS)
• -- Producers worse off (a decrease in
  PS)
• -- Government better off
• -- How about the total welfare
  (CSPST)? -- A mathematical analysis

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• A mathematical analysis of the effects of a sales
  tax
• Demand Qd 13 - 1.0 P gt Qd 13 - 1.0
  Pcon
• Supply Qs -2 0.5 P gt Qs -2
  0.5 Pprod
• (1) When there is no sales tax, Pcon
  Pprod P
• Qd Qs gt 13 - 1.0 P -2 0.5 P gt P
  10 gt Q 3
• CS PS CS PS
• (2) When there is a sales tax of t per
  unit (e.g., t 1.5)
• t Pcom - Pprod 1.5 or Pcom Pprod
  1.5
• Qd Qs gt 13 - 1.0 Pcon -2 0.5
  Pprod gt
• 13 - 1.0 (Pprod 1.5) -2 0.5
  Pprod
• gt Pprod 9 gt Q 2.5 Pcon
  10.5
• New CS New PS T
• Changes in CS, PS, T and CS PS Tax
  revenue

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• Take-home exercise
• (Tuesday, Feb. 19)
• Suppose a market has the following supply and
  demand functions
• Demand Qd 15 - 1.5 P
• Supply Qs -1 0.5 P
• (a) What are the equilibrium quantity (Q)
  price (P)?
• (b) What are the CS and PS at the
  equilibrium?
• (c) If a tax of 0.8 per unit is imposed,
  what will be the
• changes in CS, PS and total welfare
  (CSPST)?

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• 3.6. Market interventions
• 3.6.5. Impacts of a price subsidy
  (e.g., 1.5 per unit)
• -- Notations
• -- Total price paid by consumers Pcon
• -- Net price received by producers
  Pprod
• -- Price subsidy s Pprod - Pcon
• -- Total subsidy cost s Q
  -- A graphical analysis
• -- Consumers better off (an increase in
  CS)
• -- Producers better off (an increase in
  PS)
• -- Government worse off
• -- How about the total welfare
  (CSPSSub. cost)? -- A mathematical analysis

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• A mathematical analysis of the effects of a price
  subsidy
• Demand Qd 13 - 1.0 P gt Qd 13 - 1.0
  Pcon
• Supply Qs -2 0.5 P gt Qs -2
  0.5 Pprod
• (1) When there is no subsidy, Pcon Pprod
  P
• Qd Qs gt 13 - 1.0 P -2 0.5 P gt P
  10 gt Q 3
• CS PS CS PS
• (2) When there is a price subsidy of t
  per unit
• s Pprod - Pcon 1.5 or Pcom Pprod
  - 1.5
• Qd Qs gt 13 - 1.0 Pcon -2 0.5
  Pprod gt
• 13 - 1.0 (Pprod - 1.5) -2 0.5
  Pprod
• gt Pprod 11 gt Q 3.5 Pcon
  9.5
• New CS New PS Sub.
  cost
• Changes in CS, PS, T and (CS PS
  sub. Cost)

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• Take-home exercise
• (Thursday, Feb. 21)
• Suppose a market has the following supply and
  demand functions
• Demand Qd 17 - 1.5 P
• Supply Qs -1 0.5 P
• (a) What are the equilibrium quantity (Q)
  price (P)?
• (b) What are the CS and PS at the
  equilibrium?
• (c) If a price subsidy of 0.8 per unit is
  imposed, what will be the changes in CS, PS
  and total welfare (CS PS sub. cost)?

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Impacts of government interventions

• Total
• Qs Qd Q P CS PS welfare
• No intervention Q Q Q P CS PS CSPS
• Floor (min.) price (PF)
• If PF lt P No impact
• If PF gt P ? ? ? ? ? ? ?
• Ceiling (max.) price (Pc)
• If PC gt P No impact
• If PC lt P ? ? ? ? ? ? ?
• Sales tax (t/unit) ? ? ? ? ? ? ?
• Price subsidy (s/unit) ? ? ? ? ? ? ?

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4. International trade theories

• 4.1. Simple examples two-person cases
• 4.2. Absolute and comparative advantages
• 4.3. Trade between two countries
• 4.4. The sources of comparative advantage
• 4.5. Other explanations for international trade
  
• 4.6. Trade between two nations
• 4.7. Measurement of the gains from trade
• 4.8. Exchange rate and its determination

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• 4.1. Simple examples -- two-person cases
• Example 1
• Suppose Kevin and Mark have just completed the
  data collection and analysis for a group
  project and are ready to write the project
  report that will include 18 pages of text and 10
  graphs. Here are the estimated rates for both
  Kevin and Mark
• Kevin Mark
• Text 2 pages/hr. 3 pages/hr.
• Graphs 2 graphs/hr. 1 graph/hr.
• 50/50 share with no specialization
• Kevin 9 pages of text and 5 graphs gt 7 hrs
• Mark 9 pages of text and 5 graphs gt 8 hrs

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• 4.1. Simple examples -- two-person cases
• With specialization
• For example
• Kevin 8 graphs 2 pages of text gt 5 hrs
• Mark 2 graphs 16 pages of text gt 7.3 hrs
  
• OR
• Kevin 10 graphs and no text gt 5 hrs
• Mark 18 page of text and no graph gt 6 hrs
• In this case, Kevin is more productive in
  graphs and Mark is more productive in text.
  When each person is more productive in one
  production, trade and specialization can
  benefit both of them.

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• 4.1. Simple examples -- two-person cases
• Example 2
• Suppose Ashley and Helen are another
  group for the same project (18 pages of text and
  10 graphs) with the following estimated rates
• Ashley Helen
• Text 2 pages/hr. 3 pages/hr.
• Graphs 1 graph/hr. 2 graphs/hr.
• 50/50 share with no specialization
• Ashley 9 pages of text 5 graphs gt 9.5 hrs
  
• Helen 9 pages of text 5 graphs gt 5.5 hrs
• Helen is more productive in both text graphs
  but Ashley is
• less productive in both text
  graphs. Can specialization
• benefit both of them?

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• 4.1. Simple examples -- two-person cases
• With specialization
• Ashley 14 pages of text 2 graphs gt 9 hrs
• Helen 4 pages of text 8 graphs gt 5.33 hrs
• OR
• Ashley 18 pages of text no graph gt 9 hrs
• Helen 10 graphs and no text gt 5 hrs
• Ashley is less productive in both text and
  graphs but is RELATIVELY more productive in
  preparing text (Helen is more productive in
  text graphs and RELATIVELY more productive in
  graphs).

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• 4.1. Simple examples -- two-person cases
• What can we conclude from the first two
  examples
• (1) When each person is more productive in one
  activity, specialization and trade can
  benefit both of them
• (2) When each person is RELATIVELY more
  productive in one activity, specialization and
• trade can benefit both of them.
• What can we conclude from the third
  example
• (David and John) on the next
  page?

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• 4.1. Simple examples -- two-person cases
• Example 3
• David John
• Text 6 pages/hr. 3 pages/hr.
• Graphs 4 graphs/hr. 2 graphs/hr.
• 50/50 share with no specialization
• David 9 pages of text 5 graphs gt 2.75 hrs
  
• John 9 pages of text 5 graphs gt 5.5 hrs
• David is more productive in ________________
  
• John is relatively more productive in
  ___________
• Can specialization benefit both David
  and John? Why?