But Economic Growth Also Has Opportunity Costs!

But economic growth also has opportunity costs! (Let TA handle in recitation) An important factor responsible for economic growth is an increase in capital Capital goods long-lasting tools used to produce final/consumption goods (goods that are used up) But capital itself has to be produced by the use of other resources (e. G. Tractors, R & D) More capital a society produces today higher will be future output of final goods growth in the output of final goods => APP will push out further. The further out the APP pushes over time greater will be future output. Higher capital odds production => sacrificing some current final goods.

More current resources need to be devoted to producing capital goods that make economic growth possible. E. G. Economic growth due to new technologies => Use resources for research & development (R&D) => Trade-off: less consumer goods this year Current period final goods foregone = opportunity costs of economic growth So, society faces a tradeoff: Less current period consumption vs. more current resources for capital goods to increase future consumption In panel (a), production is tilted toward current consumption goods, with relatively ewe resources devoted to production of capital goods.

As a result, in the future, there will not be much of an increase in capital, so the APP will not shift out much in the future. In panel (b), production is tilted more toward capital goods, with a greater sacrifice of current consumption. As a result, there will be a greater increase in capital, so the APP will shift out more in the future.

International Comparative Advantage: A nation has comparative advantage in producing a good if it can produce it at a lower opportunity cost than some other nation Greatest total production of every good or service When nations shift production toward their comparative advantage goods and trade with each other United States has an absolute advantage in producing both goods U. S, opportunity cost of: * 10 bushels of soybeans is 20 T-shirts China, opportunity cost of: * 10 bushels of soybeans is 50 T-shirts Comparative advantage in soybeans = Lowest opportunity cost of soybeans: U.

S. U S, opportunity cost to: * 40 T-shirts is 20 bushels of soybeans * 40 T-shirts is 8 bushels of soybeans Comparative advantage in T-shirts = Lowest opportunity cost of T-shirts: China Each nation produces more of its comparative advantage good World production of both goods increases Each country can enjoy a higher standard of living Total production of every good or service is greatest when nations shift production toward their comparative advantage goods and trade with each other Chapter 1 – Assigned problems 4.

Suppose that you are considering what to do on an upcoming weekend. Here are your options, from least to most preferred: ( 1) study for upcoming midterms; ( 2) fly to Colorado for a quick ski trip; ( 3) go into seclusion in your dorm room and try to improve your score on a computer game. What is the opportunity cost of a decision to lay the computer game all weekend? (Your answer will not be in dollars. ) 5.

Use the information in Table 1 of the text( as well as the assumption about foregone income made in the chapter (page 4)) to calculate the average opportunity cost of a year in college for a student at a four- year private institution under each of the following special assumptions: a. The student receives free room and board at home at no opportunity cost to the parents. B. The student receives an academic scholarship covering all tuition and fees ( in the form of a grant, not a loan or a work- study aid). C.

The student works half- time while at school assume for this problem that the leisure or study time sacrificed has no opportunity cost). 6. Use the information in Table 1 of the text ( as well as the assumption about foregone income made in the chapter (page 4)) to compare the opportunity cost of attending a year of college for a student at a two- year public college, under each of the following special assumptions: a. The student receives free room and board at home at no opportunity cost to the parents. B. The student receives an academic scholarship covering all tuition and fees ( in the form of a grant, not a loan or a work- study aid). The student works half- time while at school ( assume for this problem that the leisure or study time sacrificed has no opportunity cost). Chapter 2 – Assigned problems 5. Suppose that one day, Gilligan ( the castaway) eats a magical island plant that turns him into an expert at eve-retrying. In particular, it now takes him Just half an nor to pick a cup to berries, and 15 minutes to catch a TLS. A. Redo Table 2 in the chapter. B. Who? Gilligan or Maryanne? has a comparative advantage in picking berries? In fishing? C.

Suppose that Gilligan reallocates his time to produce two more units of his imperative ad-vantage good and that Maryanne does the same. Construct a new version of Table 3 in the chapter, showing how production changes for each cast- away and for the island as a whole 6. Suppose that two different castaways, Mr.. And Mrs.. Howell, end up on a different island. Mr.. Howell can pick 1 pineapple per hour, or 1 coconut. Mrs.. Howell can pick 2 pineapples per hour, but it takes her 2 hours to pick a coconut. A. Construct a table like Table 2 showing Mr.. And Mrs.. Howl’s labor requirements. B. Who? Mr.. Or Mrs..

Howell? has a compare-dive advantage in picking pineapples? In picking coconuts? Which of the two should specialize in which tasks? Drop part (c) in recitations 7. You and a friend have decided to work Jointly on a course project. Frankly, your friend is a less than ideal partner. His skills as a researcher are such that he can review and outline only two articles a day. Moreover, his hunt- and- peck style limits him to only 10 pages of typing a day. On the other hand, in a day you can produce six outlines or type 20 pages. A. Who has an absolute advantage in outlining, you or your friend? What about typing? B.

Who has a comparative advantage in outlining? In typing? C. According to the principle of comparative advantage, who should specialize in which task? 8. Suppose that an economy’s APP is a straight line, rather than a bowed out, concave curve. What would this say about the nature of opportunity cost as production is shifted from one good to the other? If the APP is a downward-sloping straight line, then the law of increasing opportunity cost does not hold. Instead, the opportunity cost of producing an additional unit of good 1 or good 2 remains constant as more of either is produced (I. E. , there are constant opportunity costs in production).