国际经济学(第11版)

InternationalEconomics:TheoryandPolicyEleventhEditionChapter1IntroductionCopyright©2018,2015,2012PearsonEducation,Inc.AllRightsReservedLearningObjectives1.1Distinguishbetweeninternationalanddomesticeconomicissues.1.2Explainwhyseventhemesrecurininternationaleconomics,anddiscusstheirsignificance.1.3Distinguishbetweenthetradeandmonetaryaspectsofinternationaleconomics.PreviewWhatisinternationaleconomicsabout?Internationaltradetopics:Gainsfromtrade,explainingpatternsandvolumeoftrade,effectsofgovernmentpoliciesontradeInternationalfinancetopics:Balanceofpayments,exchangeratedetermination,internationalpolicycoordination,capitalmarketsInternationaltradeversusfinanceWhatIsInternationalEconomicsAbout?(1of3)Internationaleconomicsisabouthownationsinteractthroughtradeofgoodsandservices,flowsofmoney,andinvestment.Internationaleconomicsisanoldsubject,butcontinuestogrowinimportance.Nationsarenowmorecloselylinkedthaneverbefore.WhatIsInternationalEconomicsAbout?(2of3)U.S.exportsandimportsassharesofgrossdomesticproducthavebeenonanupwardtrend.Internationaltradehasroughlytripledinimportancecomparedtotheeconomyasawholeinthepast50years.Bothimportsandexportsfellsubstantiallyin2009duetotherecession.Figure1.1ExportsandImportsasaPercentageofU.S.NationalIncome(ShadedareasindicateU.S.recessions.)BothimportsandexportshaverisenasashareoftheU.S.economy,butimportshaverisenmore.Source:U.S.BureauofEconomicAnalysisWhatIsInternationalEconomicsAbout?(3of3)ComparedtotheUnitedStates,othercountriesareevenmoretiedtointernationaltrade.TheirimportsandexportsasashareofGDParesubstantiallyhigher.TheUnitedStates,duetoitssizeanddiversityofresources,relieslessoninternationaltradethanalmostanyothercountry.Figure1.2AverageofExportsandImportsasPercentagesofNationalIncomein2015InternationaltradeisevenmoreimportanttomostothercountriesthanitistotheUnitedStates.Source:WorldBankGainsfromTrade(1of4)Thattherearegainsfromtradeisprobablythemostimportantinsightininternationaleconomics.Countriessellinggoodsandservicestoeachotheralmostalwaysgeneratesmutualbenefits.Whenabuyerandasellerengageinavoluntarytransaction,bothcanbemadebetteroff.Norwegianconsumersimportorangesthattheywouldhaveahardtimeproducing.GainsfromTrade(2of4)Howcouldacountrythatisthemost(least)efficientproducerofeverythinggainfromtrade?Countriesusefiniteresourcestoproducewhatmostproductiveat(comparedtotheirotherproductionchoices),thentradethoseproductsforwhattheywanttoconsume.Countriescanspecializeinproduction,whileconsumingmanygoodsandservicesthroughtrade.GainsfromTrade(3of4)Tradebenefitscountriesbyallowingthemtoexportgoodsmadewithrelativelyabundantresourcesandimportsgoodsmadewithrelativelyscarceresources.Whencountriesspecialize,theymaybemoreefficientduetolarger-scaleproduction.Countriesmayalsogainbytradingcurrentresourcesforfutureresources(internationalborrowingandlending)andduetointernationalmigration.GainsfromTrade(4of4)Tradeispredictedtobenefitcountriesasawholeinseveralways,buttrademayharmparticulargroupswithinacountry.Internationaltradecanharmtheownersofresourcesthatareusedrelativelyintensivelyinindustriesthatcompetewithimports.Trademaythereforeaffectthedistributionofincomewithinacountry.PatternsofTradeThepatternoftradedescribeswhosellswhattowhom.DifferencesinclimateandresourcesexplainwhyBrazilexportscoffeeandSaudiArabiaexportsoil.ButwhydoesJapanexportautomobiles,whiletheU.S.exportsaircraft?Whysomecountriesexportcertainproductscanstemfromdifferencesin:LaborproductivityRelativesuppliesofcapital,laborandlandandtheiruseintheproductionofdifferentgoodsandservicesEffectsofGovernmentPoliciesonTrade(1of2)PolicymakersaffecttheamountoftradethroughTariffs:ataxonimportsorexports,Quotas:aquantityrestrictiononimportsorexports,Exportsubsidies:apaymenttoproducersthatexport,orThroughotherregulations(ex.,productspecifications)

thatexcludeforeignproductsfromthemarket,butstillallowdomesticproducts.Whatarethecostsandbenefitsofthesepolicies?EffectsofGovernmentPoliciesonTrade(2of2)Ifagovernmentrestrictstrade,whatarethecostsifforeigngovernmentsrespondlikewise?Tradepoliciesareoftenchosentocatertospecialinterestgroups,ratherthantomaximizenationalwelfare.Governmentstendtoadopttariffs,thennegotiatethemdowninexchangeforreductionintradebarriersofothercountries.InternationalFinanceTopicsExchangingriskyassetssuchasstocksandbondscanbenefitallcountriesbydiversificationthatreducesthevariabilityofincome–anothersourceofgainsfromtrade.Mostinternationaltradeinvolvesmonetarytransactions.Manymonetaryeventshaveimportantconsequencesforinternationaltrade.BalanceofPaymentsGovernmentsmeasurethevalueofexportsandimports,aswellasthevalueoffinancialassetsthatflowintoandoutoftheircountries.Tradedeficits,wherecountriesimportmorethantheyexportinvalue,maybeoffsetbynetinflowsoffinancialassets.Theofficialsettlementsbalance,orthebalanceofpayments,measuresthebalanceoffundsthatcentralbanksuseforofficialinternationalpayments.Allthreevaluesaremeasuredinthegovernment’snationalincomeaccounts.ExchangeRateDeterminationExchangeratesareanimportantfinancialissueformostgovernments.Exchangeratesmeasurehowmuchdomesticcurrencycanbeexchangedforforeigncurrencyandthusaffecthowmuch:Goodsdenominatedinforeigncurrency(imports)costinthedomesticcountry.Goodsdenominatedindomesticcurrency(exports)costinforeignmarkets.Someexchangerateschangecontinually(float)whileothersarefixedforperiodsoftime.InternationalPolicyCoordinationInanintegratedeconomy,onecountry’seconomicpoliciesusuallyaffectothercountriesaswell,leadingtotheneedforsomedegreeofpolicycoordination.Dependsontypeofexchangerateregime.Capitalmarkets,wheremoneyisexchangedforpromisestopayinthefuture,havespecialconcernsinaninternationalsetting:Currencyfluctuationscanalterthevaluepaid.Countries,especiallydevelopingones,mightdefaultondebt.TheInternationalCapitalMarketCapitalmarketsarearrangementsbywhichindividualsandfirmsexchangemoneynowforpromisestopayinthefuture.Internationalcapitalmarketscopewithspecialregulationsthatcountriesimposeonforeigninvestments.Specialrisksofcurrencyfluctuationsandnationaldefault;Sometimesofferopportunitiestoevaderegulationsplacedondomesticmarkets.InternationalTradeVersusFinanceInternationaltradefocusesontransactionsinvolvingmovementofgoodsandservicesacrossnations.Internationaltradetheory(Econ/TradeChapters2–8)andpolicy(Econ/TradeChapters9–12).Internationalfinancefocusesonfinancialormonetarytransactionsacrossnations.Internationalmonetarytheory(EconChapters13–18/FinanceChapters2-7)andpolicy(EconChapters19–22/FinanceChapters8-11).CopyrightInternationalEconomics:TheoryandPolicyEleventhEditionChapter2WorldTrade:AnOverviewCopyright©2018,2015,2012PearsonEducation,Inc.AllRightsReservedLearningObjectives2.1Describehowthevalueoftradebetweenanytwocountriesdependsonthesizeofthesecountries’economiesandexplainthereasonsforthatrelationship.2.2Discusshowdistanceandbordersreducetrade.2.3Describehowtheshareofinternationalproductionthatistradedhasfluctuatedovertimeandwhytherehavebeentwoagesofglobalization.2.4Explainhowthemixofgoodsandservicesthataretradedinternationallyhaschangedovertime.PreviewLargesttradingpartnersoftheUnitedStatesGravitymodel:Influenceofaneconomy’ssizeontrade;Distance,barriers,bordersandothertradeimpedimentsGlobalization:thenandnowChangingcompositionoftradeServiceoutsourcingWhoTradeswithWhom?Morethan30%ofworldoutputissoldacrossnationalborders.Worldtradeingoodsandservicesexceeded$21trillionin2015.The5largesttradingpartnerswiththeU.S.in2015wereChina,Canada,Mexico,Japan,andGermany.Thelargest15tradingpartnerswiththeU.S.accountedfor75%ofthevalueofU.S.tradein2015.Figure2.1TotalU.S.TradewithMajorPartners,2015U.S.trade—measuredasthesumofimportsandexports—ismostlywith15majorpartners.Source:U.S.DepartmentofCommerce.SizeMatters:TheGravityModel(1of3)3ofthetop10tradingpartnerswiththeU.S.in2012werealsothe3largestEuropeaneconomies:Germany,theUnitedKingdom,andFrance.WhydoestheUnitedStatestrademorewiththeseEuropeancountriesthanwithothers?Thesecountrieshavethelargestgrossdomesticproduct(GDP),thevalueofgoodsandservices

producedinaneconomy,inEurope.EachEuropeancountry’sshareofU.S.tradewithEuropeisroughlyequaltoitsshareofEuropeanGDP.Figure2.2TheSizeofEuropeanEconomies,andtheValueofTheirTradewiththeUnitedStatesShowsthecorrespondencebetweenthesizeofdifferentEuropeaneconomiesandthosecountries’tradewiththeUnitedStates.Source:U.S.DepartmentofCommerce,EuropeanCommission.SizeMatters:TheGravityModel(2of3)Thesizeofaneconomyisdirectlyrelatedtothevolumeofimportsandexports.Largereconomiesproducemoregoodsandservices,sotheyhavemoretosellintheexportmarket.Largereconomiesgeneratemoreincomefrom

thegoodsandservicessold,sotheyareabletobuymoreimports.Tradebetweenanytwocountriesislarger,thelargeriseithercountry.SizeMatters:TheGravityModel(3of3)Thegravitymodelassumesthatsizeanddistanceareimportantfortradeinthefollowingway:whereAisaconstanttermTijisthevalueoftradebetweencountryiandcountryjYitheGDPofcountryI,YjistheGDPofcountryjDijisthedistancebetweencountryiandcountryjOrmoregenerallywherea,b,andcareallowedtodifferfrom1.UsingtheGravityModel:LookingforAnomaliesAgravitymodelfitsthedataonU.S.tradewithEuropeancountrieswellbutnotperfectly.TheNetherlands,BelgiumandIrelandtrademuchmorewiththeUnitedStatesthanpredictedbyagravitymodel.Irelandhasstrongculturalaffinityduetocommonlanguageandhistoryofmigration.TheNetherlandsandBelgiumhavetransportcostadvantagesduetotheirlocation.ImpedimentstoTrade:Distance,Barriers,andBorders(1of4)Otherthingsbesidessizematterfortrade:Distancebetweenmarketsinfluencestransportationcostsandthereforethecostofimportsandexports.Culturalaffinity:closeculturalties,suchasacommonlanguage,usuallyleadtostrongeconomicties.Geography:oceanharborsandalackofmountainbarriersmaketransportationandtradeeasier.Multinationalcorporations:corporationsspreadacrossdifferentnationsimportandexportmanygoodsbetweentheirdivisions.Borders:crossingbordersinvolvesformalitiesthattaketime,oftendifferentcurrenciesneedtobeexchanged,andperhapsmonetarycostsliketariffsreducetrade.ImpedimentstoTrade:Distance,Barriers,andBorders(2of4)Estimatesoftheeffectofdistancefromthegravitymodelpredictthata1%increaseinthedistancebetweencountriesisassociatedwithadecreaseinthevolumeoftradeof0.7%to1%.Besidesdistance,bordersincreasethecostandtimeneededtotrade.Tradeagreementsbetweencountriesareintendedtoreducetheformalitiesandtariffsneededtocrossborders,andthereforetoincreasetrade.ImpedimentstoTrade:Distance,Barriers,andBorders(3of4)TheU.S.signedafreetradeagreementwithMexicoandCanadain1994,theNorthAmericanFreeTradeAgreement(NAFTA).BecauseofNAFTAandbecauseMexicoandCanadaareclosetotheU.S.,theamountoftradebetweentheU.S.anditsnorthernandsouthernneighborsasafractionofGDPislargerthanbetweentheU.S.andEuropeancountries.Canada’seconomyisroughlythesamesizeasSpain’s(around10%ofEUGDP)butCanadatradesasmuchwiththeUnitedStatesasdoesallofEurope.Figure2.3EconomicSizeandTradewiththeUnitedStatesTheUnitedStatesdoesmarkedlymoretradewithitsneighborsthanitdoeswithEuropeaneconomiesofthesamesize.Source:U.S.DepartmentofCommerce,EuropeanCommission.ImpedimentstoTrade:Distance,Barriers,andBorders(4of4)YetevenwithafreetradeagreementbetweentheU.S.andCanada,whichuseacommonlanguage,theborderbetweenthesecountriesstillseemstobeassociatedwithareductionintrade.DatashowsthatthereismuchmoretradebetweenpairsofCanadianprovincesthanbetweenCanadianprovincesandU.S.states,evenwhenholdingdistanceconstant.EstimatesindicatethattheU.S.-Canadianborderdeterstradeasmuchasifthecountrieswere1,500-2,500milesapart.Figure2.4CanadianProvincesandU.S.StatesthatTradewithBritishColumbiaSource:StatisticsCanada,U.S.DepartmentofCommerce.Table2.1TradewithBritishColumbia,asPercentofGDP,2009Canadian

ProvinceTradeas

PercentofGDPTradeas

PercentofGDPU.S.Stateat

SimilarDistance

FromBritishColumbiaAlberta6.92.6WashingtonSaskatchewan2.41.0MontanaManitoba2.00.3CaliforniaOntario1.90.2OhioQuebec1.40.1NewYorkNewBrunswick2.30.2MaineSource:StatisticsCanada,U.S.DepartmentofCommerce.TheChangingPatternofWorldTrade:HastheWorldGottenSmaller?(1of3)Thenegativeeffectofdistanceontradeaccordingtothegravitymodelsissignificant,buthasgrownsmallerovertimeduetomoderntransportationandcommunication.Technologiesthathaveincreasedtrade:Wheels,sails,compasses,railroads,telegraph,steampower,automobiles,telephones,airplanes,computers,faxmachines,Internet,fiberoptics,personaldigitalassistants,GPSsatellites…TheChangingPatternofWorldTrade:HastheWorldGottenSmaller?(2of3)Politicalfactors,suchaswars,canchangetradepatternsmuchmorethaninnovationsintransportationandcommunication.Worldtradegrewrapidlyfrom1870to1913.ThenitsufferedasharpdeclineduetothetwoworldwarsandtheGreatDepression.Itstartedtorecoveraround1945butdidnotrecoverfullyuntilaround1970.TheChangingPatternofWorldTrade:HastheWorldGottenSmaller?(3of3)Since1970,worldtradeasafractionofworldGDPhasachievedunprecedentedheights.Verticaldisintegrationofproductionhascontributedtotheriseinthevalueofworldtradethroughextensivecross-shippingofcomponents.A$100productcangiveriseto$200or$300worthofinternationaltradeflows.Figure2.5TheFallandRiseofWorldTradeTheratioofworldexportsofmanufacturedgoodstoworldindustrialproductionroseinthedecadesbeforeWorldWarIbutfellsharplyinthefaceofwarsandprotectionism.Itdidn’treturnto1913levelsuntilthe1970sbuthassincereachednewheights.Source:UNMonthlyBulletinofStatistics,WorldTradeOrganization.WhatDoWeTrade?(1of3)Whatkindsofproductsdonationstradenow,andhowdoesthiscompositioncomparetothepast?Most(about57%)ofthevolumeoftradetodayisinmanufacturedproductssuchasautomobiles,computers,andclothing.Services

suchasshipping,insurance,legalfees,andspendingbytouristsaccountforabout24%ofthevolumeoftrade.Mineralproducts(ex.,petroleum,coal,copper)remainanimportantpartofworldtradeat12%Agriculturalproductsarearelativelysmallpartoftradeat8%.Figure2.6TheCompositionofWorldTrade,2015Mostworldtradeisinmanufacturedgoods,butminerals—mainlyoil—remainimportant.Source:WorldTradeOrganization.WhatDoWeTrade?(2of3)Inthepast,alargefractionofthevolumeoftradecamefromagriculturalandmineralproducts.In1910,Britainmainlyimportedagriculturalandmineralproducts,althoughmanufacturedproductsstillrepresentedmostofthevolumeofexports.In1910,theU.S.mainlyimportedandexportedagriculturalproductsandmineralproducts.In2002,manufacturedproductsmadeupmostofthevolumeofimportsandexportsforbothcountries.Table2.2ManufacturedGoodsasaPercentofMerchandiseTradeblankExportsof

UnitedKingdomImportsof

UnitedKingdomExportsof

UnitedStatesImportsof

UnitedStates191075.424.547.560.7201572.373.674.878.4Source:1910datafromSimonKuznets,ModernEconomicGrowth:Rate,StructureandSpeed.

NewHaven:YaleUniv.Press,1966.2015datafromWorldTradeOrganization.WhatDoWeTrade?(3of3)Low-andmiddle-incomecountrieshavealsochangedthecompositionoftheirtrade.In2001,about65%ofexportsfromlow-andmiddle-incomecountriesweremanufacturedproducts,andonly10%ofexportswereagriculturalproducts.In1960,about58%ofexportsfromlow-andmiddle-incomecountrieswereagriculturalproductsandonly12%ofexportsweremanufacturedproducts.Morethan90percentoftheexportsofChina,thelargestdevelopingcountryandarapidlygrowingforceinworldtrade,consistofmanufacturedgoods.Figure2.7TheChangingCompositionofDeveloping-CountryExportsOverthepast50years,theexportsofdevelopingcountrieshaveshiftedtowardmanufactures.Source:UnitedNationsCouncilonTradeandDevelopment.ServiceOutsourcing(1of2)Serviceoutsourcing(oroffshoring)occurswhenafirmthatprovidesservicesmovesitsoperationstoaforeignlocation.Serviceoutsourcingcanoccurforservicesthatcanbetransmittedelectronically.Afirmmaymoveitscustomerservicecenterswhosetelephonecallscanbetransmittedelectronicallytoaforeignlocation.Otherservicesmaynotlendthemselvestobeingperformedremotely.ServiceOutsourcing(2of2)Serviceoutsourcingiscurrentlynotasignificantpartoftrade.Somejobsare“tradable”andthushavethepotentialtobeoutsourced.Mostjobs(about60%)needtobedoneclosetothecustomer,makingthemnontradable.Figure2.8TradableIndustries’ShareofEmploymentEstimatesbasedontradewithintheUnitedStatessuggestthattradeinservicesmayeventuallybecomebiggerthantradeinmanufactures.Source:J.BradfordJensenandLori.G.Kletzer,“TradableServices:UnderstandingtheScopeandImpactofServicesOutsourcing,”PetersonInstituteofEconomicsWorkingPaper5–09,May2005.Summary(1of2)The5largesttradingpartnerswiththeU.S.areChina,Canada,Mexico,Japan,andGermany.ThelargesteconomiesintheEUundertakethelargestfractionofthetotaltradebetweentheEUandtheU.S.ThegravitymodelpredictsthatthevolumeoftradeisdirectlyrelatedtotheGDPofeachtradingpartnerandisinverselyrelatedtothedistancebetweenthem.Summary(2of2)Besidessizeanddistance,culture,geography,multinationalcorporations,andtheexistenceofbordersinfluencetrade.Moderntransportationandcommunicationhaveincreasedtrade,butpoliticalfactorshaveinfluencedtrademoreinhistory.Today,mosttradeisinmanufacturedgoods,whilehistoricallyagriculturalandmineralproductsmadeupmostoftrade.CopyrightInternationalEconomics:TheoryandPolicyEleventhEditionChapter3LaborProductivityandComparativeAdvantage:TheRicardianModelCopyright©2018,2015,2012PearsonEducation,Inc.AllRightsReservedLearningObjectives3.1ExplainhowtheRicardianmodel,themostbasicmodelofinternationaltrade,worksandhowitillustratestheprincipleofcomparativeadvantage.3.2Demonstrategainsfromtrade

andrefutecommonfallaciesaboutinternationaltrade.3.3Describetheempiricalevidencethatwagesreflectproductivityandthattradepatternsreflectrelativeproductivity.PreviewOpportunitycostsandcomparativeadvantageAone-factoreconomy,theRicardianmodelProductionpossibilitiesHowworldrelativedemandandsupplydeterminetherelativepriceaftertradeGainsfromtrade;RelativewagesandtradeMisconceptionsaboutcomparativeadvantageTransportationcostsandnon-tradedgoodsEmpiricalevidenceIntroductionDifferencesacrosscountriesareakeyreasonwhytradeoccurs:TheRicardianmodel(Econ/TradeChapter3)examinesdifferencesinthe

productivityoflabor

(duetodifferencesintechnology)

betweencountries.TheSpecificFactorsmodel(Econ/TradeChapter4)andtheHeckscher-Ohlinmodel(Econ/TradeChapter5)examinedifferencesinlabor,laborskills,physicalcapital,land,orotherfactorsofproductionbetweencountries.Trademayalsoariseduetoeconomiesofscale(largerscaleofproductionismoreefficient).TheConceptofComparativeAdvantage(1of6)Theopportunitycostofproducingsomething

measuresthecostofnotbeingabletoproducesomethingelsewiththeresourcesused.Comparativeadvantagewillbedeterminedbycomparingopportunitycostsacrosscountries.TheConceptofComparativeAdvantage(2of6)AsimpleexamplewithrosesandcomputersexplainstheintuitionbehindtheconceptsofopportunitycostandcomparativeadvantageintheRicardianmodel.Forexample,supposealimitednumberofworkerscouldproduceeitherrosesorcomputers.Theopportunitycostofproducingcomputersistheamountofrosesnotproduced.Theopportunitycostofproducingrosesistheamountofcomputersnotproduced.TheConceptofComparativeAdvantage(3of6)SupposethatintheUnitedStates10millionrosescouldbeproducedwiththesameresourcesas100,000computers.SupposethatinColombia10millionrosescouldbeproducedwiththesameresourcesas30,000computers.Colombiahasaloweropportunitycostofproducingroses:hastostopproducingfewercomputersinordertofreeupresourcestomakearose.TheConceptofComparativeAdvantage(4of6)Acountryhasacomparativeadvantageinproducingagoodiftheopportunitycostofproducingthatgoodislowerinthecountrythaninothercountries.TheUnitedStateshasacomparativeadvantageincomputerproduction.Colombiahasacomparativeadvantageinroseproduction.TheConceptofComparativeAdvantage(5of6)SupposeinitiallythatColombiaproducescomputersandtheUnitedStatesproducesroses,andthatbothcountrieswanttoconsumecomputersandroses.Canbothcountriesbemadebetteroff?Table3.1HypotheticalChangesinProductionblankMillionRosesThousandComputersUnitedStates−10+100Columbia+10−30Total0+70TheConceptofComparativeAdvantage(6of6)Whencountriesspecializeinproductioninwhichtheyhaveacomparativeadvantage,moregoodsandservicescanbeproducedandconsumed.HavetheUnitedStatesstopgrowingrosesandusethoseresourcestomake100,000computersinstead.HaveColombiastopmaking30,000computersandgrowrosesinstead.Ifproducegoodsinwhichhaveacomparativeadvantage(theUnitedStatesproducescomputersandColombiaroses),theycouldstillconsumethesame10millionroses,butcouldconsume100,000−30,000=70,000morecomputers.AOne-FactorEconomy(1of4)Weformalizetheseideasbyconstructingaone-factorRicardianmodelusingthefollowingassumptions:AOne-FactorEconomy(2of4)Laboristheonlyfactorofproduction.Laborproductivityvariesacrosscountriesduetodifferencesintechnology,butlaborproductivityineachcountryisconstant.Thesupplyoflaborineachcountryisconstant.Twogoods:wineandcheese.Competitionallowsworkerstobepaidawageequaltothevalueofwhattheyproduce,andallowsthemtoworkintheindustrythatpaysthehighestwage.Twocountries:homeandforeign.AOne-FactorEconomy(3of4)Aunitlaborrequirementindicatestheconstantnumberofhoursoflaborrequiredtoproduceoneunitofoutput.aLCistheunitlaborrequirementforcheeseinthehomecountry.aLChoursoflaborproduceonepoundofcheeseinthehomecountry.aLWistheunitlaborrequirementforwineinthehomecountry.aLWhoursoflaborproduceonegallonofwineinthehomecountry.Ahighunitlaborrequirementmeanslowlaborproductivity.Laborproductivityishowmuchoutputonehouroflaborcreates.AOne-FactorEconomy(4of4)LaborsupplyLindicatesthetotalamountoflaborresources−thenumberofhoursworked(aconstantparameter).aLCindicatestheamountoflaborrequiredforeachpoundofcheeseproduced(aconstant).CheeseproductionQCindicateshowmanytotalpoundsofcheesethatthehomecountryproduces.aLWindicatestheamountoflaborrequiredforeachgallonofwineproduced(aconstant).WineproductionQWindicateshowmanytotalgallonsofwinethatthehomecountryproduces.ProductionPossibilities(1of6)Theproductionpossibilityfrontier(PPF)ofaneconomyshowsthemaximumamountofagoodsthatcanbeproducedforafixedamountofresources.Theproductionpossibilityfrontierofthehomeeconomyis:aLCQC+aLWQW≤LProductionPossibilities(2of6)MaximumhomecheeseproductionisMaximumhomewineproductionisProductionPossibilities(3of6)Forexample,supposethatthehomeeconomy’slaborsupplyis1,000hours.aLC

=1hours/lb,so1houroflaborproducesonepoundofcheeseinthehomecountry.aLW=2hours/gallon,so2hoursoflaborproducesonegallonofwineinthehomecountry.ThePPFequationaLCQC+aLWQW≤LbecomesQC+2QW≤1,000.Maximumcheeseproductionis1,000pounds.Maximumwineproductionis500gallons.Figure3.1Home’sProductionPossibilityFrontierThelinePFshowsthemaximumamountofcheeseHomecanproducegivenanyproductionofwine,andviceversa.ProductionPossibilities(4of6)TheopportunitycostofcheeseishowmanygallonsofwineHomemuststopproducinginordertomakeonemorepoundofcheese:Theopportunitycostisconstantbecausetheunitlaborrequirementsarebothconstant.Theopportun