Thai Nguyen University

Thai Nguyen University of Technology

Faculty of International Training

(ECEN 4503)
Engineering Economics
Lecture #3:

Interdependence and The Gains

from Trade
Thu. 28th 2015
Lecturer: Nguyen Minh Y, Ph.D.

Reviewing

Think like
an
economist
Ten principles
of economics - Scientists

- Policy- How people

makers
make decision
- How they
interact
- How they
Department of Electrical Engineering taught in English
organized

Interdepende
nce and the
gains from
trade

1/1/16

What is interdependence?
Your everyday life:
Waking up in the morning
Washing tooth by the brush and toothpaste made by Colgate.
Drinking coffee grown in Dac Lac province.
Eating breakfast with Acecook noodle.
Going to school by car made in USA.
Etc.

Everyday we rely on many people from around the world.

Department of Electrical Engineering taught in English

1/1/16

1. A Parable for the Modern Economics

Assume the world consists of only two people:
A cattle rancher
A potato farmer

producing only two kinds of foods:

Meats
Potatoes

Case 1: Each person can produce only one kind of foods.

Trade allows them to enjoy greater variety: meat and potatoes.

Case 2: Each person can produce both meat and potatoes, but a

greater cost.
It is obvious that they can benefit by specializing and trading.
4

Department of Electrical Engineering taught in English

1/1/16

A Parable for the Modern Economics

Case 3: One person is better at producing every goods.
This person should stay in self-sufficient? What is reason for

specializing and trading?

Production possibility (a combination of goods that an economy may
produce)
Suppose that each person works 40 hours a week

Hours needed to
make 1 pound of:
Meat

Amount
produced in 40
hours
Potatoes Meat
Potatoes

Farmer

20
10
2 lb
hours/lb hours/lb
Rancher 1 hour/lb 8 hour/lb 40 lb
5

Department of Electrical Engineering taught in English

4 lb
5 lb
1/1/16

A Parable for the Modern Economics

Production possibility frontier

The farmers and Ranchers production

possibilities frontiers

Department of Electrical Engineering taught in English

1/1/16

A Parable for the Modern Economics

Specialization and trade:
After several year, one might find that they can be better by

specializing and trading.

Before specializing:

Farmer
Rancher

Meat

Potatoes

1lb (20 hour)

2 lb (20 hour)

After specializing and trading

3 pounds meat = 1
pound potatoes
Meat
Potatoes

0 lb (0 hour)
3 lb
20 lb (20 hour) 2.5 lb (20 hour) 24 lb (24 hour)
21 lb

Department of Electrical Engineering taught in English

4 lb (40 hour)
3 lb
2 lb (16 hour)
3 lb
1/1/16

A Parable for the Modern Economics

Specialization and trade:
Change after trading

Department of Electrical Engineering taught in English

1/1/16

A Parable for the Modern Economics

Puzzle:
If the rancher is better in producing both goods, how the farmer

ever specialize in doing what he is doing best?

Absolute advantage
The comparison among producers of a good according to their

productivity.

Hours needed to
make 1 pound of:
Meats

Amount
produced in 40
hours
Potatoes Meats
Potatoes

Farmer

20
10
2 lb
hours/lb hours/lb
Rancher 1 hour/lb 8 hour/lb 40 lb
9

Department of Electrical Engineering taught in English

4 lb
5 lb
1/1/16

2. The Principle of Comparative Advantage

Opportunity cost and comparative advantage
Opportunity cost of some item is what we must give up to get that

item.

Hours needed to
make 1 pound of:
Meat

Farmer
Rancher

10

20
hours/lb
1 hour/lb

Opportunity cost of:

Potatoes

1 lb of meat 1 lb of
potatoes
10 hours/lb 2 lbs
1/2 lb meat
potatoes
8 hour/lb
1/8 lb
8 lbs meat
potatoes

Department of Electrical Engineering taught in English

1/1/16

The Principle of Comparative Advantage

Opportunity cost and comparative advantage
Comparative advantage the comparison among producers of a

good according to their opportunity cost.

Farmer
Rancher

11

Hours needed to
make 1 pound of:

Opportunity cost of:

Meat

Potatoes

20
hours/lb
1 hour/lb

10 hours/lb 2 lbs of
potatoes
8 hour/lb
1/8 lb of
potatoes

Department of Electrical Engineering taught in English

1 lb of meat

1 lb of
potatoes
1/2 lb of
meat
8 lbs of
meat
1/1/16

The Principle of Comparative Advantage

Comparative advantage and trade
Trade can benefit everyone in society because it allows people to

specialize in activities in which they have a comparative

advantage.

3 lb of meats = 1 lb of potatoes

12

Department of Electrical Engineering taught in English

1/1/16

Should Tiger Wood mow his own lawn?

Tiger Woods Golf star
Mowing lawn
2 hour

Making advertising video

$50,000/hr

Forest Gum The boy next door

Mowing lawn
4 hour

Working at Mc Donald
$20/hr

13

Department of Electrical Engineering taught in English

1/1/16

Should Tiger Wood mow his own lawn?

Hours needed to
mow

Opportunity cost of mowing the lawn

Tiger Wood

2 hours

Making advertising
video

$100,000

Forest Gum

4 hours

Working at Mc Donald

$80

Wood has absolute advantage of mowing but Gum has

comparative advantage!
Wood should make the advertising video and hire
Gum to mow his lawn.
14

Department of Electrical Engineering taught in English

Forest

1/1/16

Should the U.S. trade with other countries?

Imports goods produced abroad and sold domestically
Exports goods produced domestically but sold abroad

USA one worker can produce

One car per month
2 tons of food per month

Japan
One car per month
1 ton of food per month

15

Department of Electrical Engineering taught in English

1/1/16

Conclusion
Interdependence
Specialize and trade
Absolute advantage
Comparative advantage
International trade is not like a war, in which some countries

win and lose. Trade allows all countries to achieve greater

prosperity.

16

Department of Electrical Engineering taught in English

1/1/16