Economics of International Trade
Today the Global Economy class discussed about the economics of international trade. Main topics include opportunity cost, indifference curve (utility stays the same), production efficient frontier (production possibility frontier), and Ricardo’s economic model of international trade.
Opportunity cost is the cost of something in terms of an opportunity forgone, or the most valuable forgone alternative. In other words, the opportunity cost is the cost of the second best choice. For example, I was taking the class yesterday afternoon. What is the opportunity cost for me? I could have spent the class time reading a book about economics of international trade.
Indifference curve is a graph showing different combinations of two goods (e.g. shoes and computers used in the class) for which the consumer can derive the same level of satisfaction (same amount of utility). The indifference curves are convex curves. The convexity shows the diminishing rate of margin for substitution.
Production possibility frontier or production possibility boundary is a curve showing the tradeoff between producing two products (e.g. shoes and computers). It indicates the opportunity cost to produce one unit of product in terms of one unit of a forgone product. This curve is usually concave.
Putting the above two curves together with one tangent to another, one can determine the optimal consumption and production point. Usually, the real world is not operated at the optimal point.
The class discussed about David Ricardo’s economic model of international trade. Basically the model shows that international trade based on comparative advantage is beneficial to both sides of the trade.
Opportunity cost is the cost of something in terms of an opportunity forgone, or the most valuable forgone alternative. In other words, the opportunity cost is the cost of the second best choice. For example, I was taking the class yesterday afternoon. What is the opportunity cost for me? I could have spent the class time reading a book about economics of international trade.
Indifference curve is a graph showing different combinations of two goods (e.g. shoes and computers used in the class) for which the consumer can derive the same level of satisfaction (same amount of utility). The indifference curves are convex curves. The convexity shows the diminishing rate of margin for substitution.
Production possibility frontier or production possibility boundary is a curve showing the tradeoff between producing two products (e.g. shoes and computers). It indicates the opportunity cost to produce one unit of product in terms of one unit of a forgone product. This curve is usually concave.
Putting the above two curves together with one tangent to another, one can determine the optimal consumption and production point. Usually, the real world is not operated at the optimal point.
The class discussed about David Ricardo’s economic model of international trade. Basically the model shows that international trade based on comparative advantage is beneficial to both sides of the trade.
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