Are you in college or high school, have a microeconomics 101 final impending* and thinking to yourself, "I can't make any sense of this seemingly random collection of graphs, jargon, algebra, jargon, tables, and jargon?"
Do not fear. Your fellow Kossak is a professor of econ who has taught principles of micro many, many times. I'm here to help.
More after the bump.
* Yes, I said "impending", as in impending ... DOOM. muhahaha
By far the toughest section of microeconomics 101 for most students is the "gains from trade" chapter. Every textbook has this chapter and most present it early on.
This is the chapter that has two country, two good economies that start out in a no trade equilibrium (autarky is the jargon). For example, Norway has 100 units of labor and can produce 5 barrels of herring or 5 bushels of wheat per unit of labor expended. Sweden also has 100 units of labor and can produce 3 barrels of herring or 2 bushels of wheat.
Sound familiar? Having unpleasant flashbacks?
The student is invariably asked to identify which good each country will choose as its production specialty. Depending on the class, students may be asked to find the "boundries on trade", the rates of exchange that allow trade to benefit both sides. In my class I simply provide this number. In your class you may need to know how to derive these numbers.
Many professors ask students to calculate the numeric values of "gains from trade". Gains from trade are the increases in consumption each country enjoys in each good when post-trade bundles are compared to the consumption bundles under autarky.
Confused? Most students are. Typically in my classes the average scores on the gains from trade problems on exams are 20 percentage points lower than the rest. If the average grade on my final is 80%,the gains from trade problems would clock in somewhere around 60%.
That is why, in my view, you should spend some time mastering the concepts behind these problems. Doing so will pay off handsomely for you, the student, because this is one of the key areas of the exam where you are most likely to lose points.
How can I help? I have made 2 instructional videos specifically addressing the concepts behind these problems.
The first details how to construct a "Comparative Advantage" table, which is the first thing you should always do when starting these problems.
Here is the Youtube video on comparative advantage:
If you are expected to go beyond the calculation of opportunity costs and need to do a full-fledged “gains from trade” problem with all the bells and whistles, here is a step-by-step guide:
Many of you are already aware of Khan Academy. Sal Khan has nice video up on the difference between comparative trade and absolute advantage - a key distinction in all of this.
I hope these are useful resources for you. I will monitor the comments as time and obligations allow. I appreciate any feedback or requests for other topics in microeconomics 101 that you would like me to cover.
Good luck on your exams.