Gains from Trade & Markets
- Suppose Wisconsin and Minnesota each have 100 workers available for either dairy farming or cookie baking. The maximum production possibilities per worker for each good are listed in the following table: (so, the way to read this is that if a Wisconsin worker spent all their time cookie baking, they could make two dozen cookies, OR if they spent all their time dairy farming they could make 6 gallons of milk)
|Milk||6 gallons||2 gallons|
|Cookies||2 dozen||6 dozen|
- Graph the production possibilities frontier (PPF) for each state (assume that opportunity costs are constant at all quantities so that the PPF is a straight line rather than a curve in this case)
- Can this economy ever operate outside its PPF? Why or Why not?
- What does it mean if we say that this economy is operating inside its PPF?
- How would you show what happens to the PPF if a disease kills half the cow population? How would you show what happens to the frontier if hormones are given cows that enable them to produce more milk per day. Can this economy now produce more milk, more cookies, or more of both goods? Explain
- Which state has the comparative advantage in milk production? In cookie production? How do you know this?
- Describe how trade between the two states can enable both to consume levels of milk and cookies that would be unattainable without trade. Is there a trading price they could both agree on? Feel free to use a numerical example if that
Writing Assignment: (2-3 pages total for these three questions)
Read the attached short Washington Post article entitled “Georgetown student advertises for a personal assistant.” Describe the basic situation outlined in the article and discuss whether you think this is a legitimate opportunity to benefit from division of labor and differences in opportunity cost. What is the trade being executed here, and do you think this is a fair market exchange? Discuss
Read the attached article from The Economist magazine called “The Zero-Sum ”
This article analyzes some of President Obama’s comments several years ago in the State of the Union address last year. We’ve seen similar comments recently from President Trump, so this tends to be a common talking point by political leaders. Summarize the main argument of the story in a sentence or two. Given what we’ve learned so far about trade, do you agree with their points? Should there always be winners and losers in trade? Discuss.
Summarize the key points of what we’ve learned about the benefits and downsides of free trade and market exchange for a society and/or an individual. What are your current feelings about the views of Smith, Ricardo, Malthus, and others on trade and how would you approach answering a friend or family member who asked you about current political proposals to end trading