I’m writing class essays while I’m here at Georgetown to ensure I translate everything I’m learning into my own words and assist with deep learning. After orientation, we began a three-week, two-class intensive with 4.5 credits packed into thirteen days of classroom time. The below covers my main learnings from the economics-focused class, Structure of Global Industries.
Credit for good material goes to Georgetown and their faculty. Mistakes or omissions are mine.
The Structure of Global Industries, Pt 1
1. Economic Frameworks
Supply and Demand
Over and over again the concepts in class came down to different applications of supply and demand. The law of supply says that increased price increases quantity produced and that a decrease in price decreases quantity produced. This is coupled with the law of demand that says the a increase in price decreases demand and a decrease in price increases demand. These fundamental laws interact with each other to find a price and quantity equilibrium, where the price entices producers to make this quantity (supply) and the price entices enough consumers to purchase (demand).
– A finite of supply of gold plus an increased demand for gold has led to an increase in price
– Long lines outside Apple stores when new phones release (price increase here is normal phone cost + hours spent waiting)
If the price changes on a good, what will the response be? Will demand suddenly increase? An example of inelasticity would be a 10% increase in the price of Netflix. For most of us, that wouldn’t change our purchase of that subscription. This means the demand here is inelastic. A counter example could be a $0.50 increase in the price of Orbits gum. Many more people would switch to a different brand of gum if the price increased.
High elasticity often happens at the upper end of the price axis, where price is high and quantity produced is low (think luxury goods). Low elasticity often happens at the upper end of the quantity axis, where price is lower (think commodities).
Production possibility frontier
This was a helpful thought exercise in understanding international trade. Imagine a country that can produce only two things. Let’s keep it paleolithic and say this country is made up of a caveman and a cavewoman who can catch fish and pick berries.
If the caveman picks berries all day he can pick two units of berries. If the cavewoman fishes all day she can catch two units of fish. For the sake of the thought exercise, assume a unit of fish and a unit of berries are equal.
1 caveman day = 2 units of berries
1 cavewoman day = 2 units of fish
2 total days = 4 total units
Let’s say now that the caveman goes to help the cavewoman catch fish. Unfortunately he’s too slow and only can catch one unit of fish per day. The next day, the cavewoman goes to help the caveman pick berries. She’s not very good at picking berries so she can only pick one unit of berries per day.
1 caveman day fishing = 1 unit of fish
1 cavewoman day fishing = 2 units of fish
2 total days = 3 total units
1 caveman day picking berries = 2 units of berries
1 cavewoman day picking berries = 1 units of berries
2 total days = 3 total units
It’s clear that most they can produce is four units. This is the production possibility frontier – the maximum units they can produce.
Productivity and the two-good model
Now we’ll assume that there are two paleolithic countries, each with one caveman and one cavewoman. Country A has an abundance of rivers and lakes and together they can catch 6 units of fish per day, but they don’t have much fertile land so together they can only pick 2 units of berries per day. Country B has the opposite and can catch only 2 units of fish per day but can pick 6 units of berries.
This is where trade becomes beneficial for both countries. Country A benefits by trading 2 units of fish (1/3 day of work for them) for 2 units of berries (a full day of work for them). They have the same total units of food but with trade they have the berries they would have picked in a full day plus 4 units fish. The reverse is true for Country B. They have 6 total units of food (4 units of berries and 2 units of fish).
Country A’s comparative advantage in catching fish gives them an incentive to produce that and trade it for berries. This advantage can come from a number of things: factor abundance (your country naturally has a lot of something), institutions (school, etc), policy (tax incentive to produce something), and sometimes just luck and chance (discovering the wheel).
Purchasing Power Parity (PPP)
This is an economic theory that says the same basket of goods in one economy should cost the same relative amount in another economy. Relative is typically measured as a percentage of GDP. For example, a gallon of milk costing 1% of your average daily wage in Country A should cost the same 1% of average daily wage in Country B. This is helpful when determining exchange rates.
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Parts two and three covering policy and strategy are coming up soon.--- Follow @chriscottrell