Gains from trade

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Published on March 1, 2014

Author: Abhiprofessional

Source: slideshare.net

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This is a ppt which explains the economic concept gains from trade. It can also be used to explain biography of adam smith and david ricardo. both were great economists.

“The Father of Economics” 1723-1790

Adam Smith University of Glasgow, Oxford, back to Glasgow.  1752: Professor of Moral Philosophy (natural theology, ethics, jurisprudence, and ‘expediency’ [political economy])  1759: Theory of Moral Sentiments  1766: returns to London, working on new book on political economy.  1776: Wealth of Nations published. 

Personal Born in Kircaldy (Scotland)  Father died before he was born and his mother lived to the age of 90  Kidnap by Gipsies when he was 4 and was left abandon  Walked 15 miles in Nightgown until awoken by bells 

 "It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest," Smith wrote.  He is responsible for popularizing many of the ideas that underpin the school of thought that became known as classical economics.

 Economic Development and Policies to Promote Economic Growth ◦ Assumption: An economy always employs its resources fully in production ◦ Methodology: Deductive Theory and historical Description ◦ Vision:  Interdependence of the segments of the economy  Policies to be followed to promote wealth of nation

Maximum production if the entire month is spent in one activity,,, 50 100 50 200

25 50 25 100 If they spend half a month doing each activity

One day, Mary meets Don And Makes an Offer,,, 37 for 25

Before Trading,,, 50 25 0 150

After Trading,,, 37 for 25 25 50 37 113

Comparison,,, Maximum Consumption without trade: 25 25 Consumption after trade: 50 100 25 37 Gains from Trade: 25 Fish 50 113

In economics, the invisible hand of the market is a metaphor conceived by Adam Smith to describe the self-regulating behavior of the marketplace.

David Ricardo • Born in 1772 • At the age of 21, disinherited from family for marrying outside his family’s Jewish faith • Became a successful banker in London • Made a fortune as a stock broker in London •A Member of the Parliament of United Kingdoms • The most popular economist after Adam Smith

 Like Smith, David also produced his views on economy development in his book Principles of Political Economy and taxation. The book concludes that land rent grows as population increases. It also clearly lays out the theory of comparative advantage, which shows that all nations can benefit from free trade, even if a nation lacks an absolute advantage in all sectors of its economy.

Minutes needed to make 1 ounce of ___________________________________ Meat Potatoes ___________________________________ Farmer 60min/oz 15min/oz Rancher 20min/oz 10min/oz  Amounts produced in 8 hours ___________________________________ Meat Potatoes ___________________________________ Farmer 8 oz 32 oz Rancher 24 oz 48 oz 

1oz of meat 1oz of potatoes Farmer 4 oz of potatoes ¼ oz of meat Rancher 2 oz of potatoes ½ oz of meat

(a) The Farmer Production and Consumption ’s Meat (ounces) Farmer's production and consumption without trade 8 4 0 A 16 32 Potatoes (ounces) Copyright©2003 S outhwestern/T hom son Learnin

(b) The Rancher Production and Consumption s ’ Meat (ounces) 24 B 12 0 24 Rancher's production and consumption without trade 48 Potatoes (ounces) Copyright © 2004 S outh-Western

Farmer devotes all his time to growing potatoes.  Rancher spends 6 hours a day raising cattle and 2 hours growing potatoes.  Farmer’s production with trade: 0 oz of meat and 32 oz of potatoes  Rancher’s production with trade: 18 oz of meat and 12 oz of potatoes. 

(a) The Farmer Production and Consumption ’s Meat (ounces) 8 Farmer's consumption with trade A* 5 4 0 Farmer's production and consumption without trade A 16 Farmer's production with trade 17 32 Potatoes (ounces)

(b) The Rancher Production and Consumption s ’ Meat (ounces) Rancher's production with trade 24 Rancher's consumption with trade 18 13 B* B 12 0 12 24 27 Rancher's production and consumption without trade 48 Potatoes (ounces)

Each country exports the good that it had been producing at a cheaper relative price in comparison to any other country.  Therefore, each country exports the good for which its opportunity cost is lower  This is called the Principle of Comparative Advantage 

The conclusion of Adam smith and David Ricardo on the gains from trade have held up well over time . Although economist often disagree in questions of policy, they are united in their support of free trade. Moreover, the central argument for free trade has not changed much in the past twp centuries. Even though the field of economics has broadened its scope and refined its theories since the time of smith and ricardo, economists opposition to trade restrictions is still based largely on the principle of comparative advantage.

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