ECON 103 - Chapter 3 Example 1

1
Example
• Two countries:
– The U.S. and Japan
• Two goods:
– Computers and wheat
• One resource:
– Labor, measured in hours
• How much of both goods each country produces
and consumes
– If the country chooses to be self-sufficient
– If it trades with the other country
2
• Production Possibilities in the U.S.
– The U.S. has 50,000 hours of labor
available for production, per month
– Producing one computer requires 100
hours of labor
– Producing one ton of wheat requires 10
hours of labor
3
The U.S. PPF
Wheat
The U.S. has
(tons)
enough labor to
5,000 produce 500
computers,
4,000
3,000 or 5,000 tons of

wheat,
2,000
or any combination
1,000 along the PPF.
Computers
0
100 200 300 400 500
4
The U.S. Without Trade
Wheat Suppose the U.S.
(tons) uses half its labor to
5,000 produce each of the
two goods.
4,000
3,000 Then it will produce

and consume 250
2,000 computers and
2,500 tons of wheat.
1,000
Computers
0
100 200 300 400 500
5
Active Learning 1 Derive Japan’s PPF
Use the following information to draw Japan’s
PPF.
– Japan has 30,000 hours of labor available for
production, per month.
– Producing one computer requires 125 hours of
labor.
– Producing one ton of wheat requires 25 hours
of labor.
• Your graph should measure computers on
the horizontal axis.
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Active Learning 1 Japan’s PPF
Wheat Japan has enough labor to
(tons) produce 240 computers,
2,000
or 1,200 tons of wheat,
or any combination along

1,000 the PPF.
0 Computers
100 200 300
7
Japan Without Trade
Wheat Suppose Japan uses

(tons) half its labor to
produce each good.
2,000
Then it will produce
and consume 120
1,000 computers and 600
tons of wheat.
0 Computers
100 200 300
8
Consumption With and Without Trade
• Without trade:
• U.S. consumers get 250 computers
and 2500 tons wheat
• Japanese consumers get 120 computers
and 600 tons wheat
• Comparison
– Consumption without trade vs. consumption
with trade
– We need to see how much of each good is
produced and traded by the two countries
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Active Learning 2 Production under
trade
A. Suppose the U.S. produces 3400 tons of
wheat.
– How many computers would the U.S. be able
to produce with its remaining labor?
– Draw the point representing this combination
of computers and wheat on the U.S. PPF.
B. Suppose Japan produces 240 computers.
– How many tons of wheat would Japan be able
to produce with its remaining labor?
– Draw this point on Japan’s PPF.
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Active Learning 2 A. U.S. Production With Trade
Wheat
(tons)
Producing 3,400 tons of
wheat requires 34,000
5,000
labor hours.
4,000
The remaining 16,000
3,000 labor hours are used to
produce 160 computers.
2,000
1,000
Computers
0
100 200 300 400 500
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Active Learning 2 B. Japan’s Production With Trade
Wheat Producing 240

(tons) computers requires all of
Japan’s 30,000 labor
2,000 hours.
So, Japan would produce

1,000 0 tons of wheat.
0 Computers
100 200 300
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Exports and Imports
• Imports
– Goods produced abroad and sold
domestically
• Exports
– Goods produced domestically and sold
abroad
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Active Learning 3 Consumption under
trade
Suppose the U.S. exports 700 tons of wheat
to Japan, and imports 110 computers from
Japan. (Japan imports 700 tons wheat and
exports 110 computers.)
A. How much of each good is consumed in
the U.S.? Plot this combination on the U.S.
PPF.
B. How much of each good is consumed in
Japan? Plot this combination on Japan’s
PPF.
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Active Learning 3 A. U.S. Consumption With Trade
Wheat computers wheat

(tons)
produced 160 3400
5,000 + imported 110 0
4,000 – exported 0 700
= amount
270 2700
3,000 consumed
2,000
1,000
Computers
0
100 200 300 400 500
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Active Learning 3 B. Japan’s Consumption With Trade
computers wheat
Wheat produced 240 0
(tons)
+ imported 0 700
2,000 – exported 110 0
= amount
130 700
consumed
1,000
0 Computers
100 200 300
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Trade Makes Both Countries Better Off
U.S.
consumption consumption gains from
without trade with trade trade
computers 250 270 20
wheat 2500 2700 200
Japan
consumption consumption gains from
without trade with trade trade
computers 120 130 10
wheat 600 700 100
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1

3,000 or 5,000 tons of

3,000 Then it will produce

or any combination along

Wheat Suppose Japan uses

Wheat Producing 240

So, Japan would produce

Wheat computers wheat

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