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Emphasizing a point from the previous lecture
Suppose that on the world market, one shirt can be exchanged for one bottle of wine
Suppose that in England, it takes 100 workers an hour to produce a shirt and 120 workers an hour to produce a bottle of wine.
England wants to spend half its income on shirts, and half its income on wine.
England has 12,000 workers.
Without trade, England might put 6000 workers in shirts and 6000 in wine. Shirt production = 6000/100 = 60 and wine production = 6000/120 = 50
With trade, England would put all 12,000 workers in shirts and produce 12,000/100 = 120 shirts. It can trade half the shirts for wine on the world market, thereby consuming 60 shirts and 60 bottles of wine. It has gained 10 bottles of wine from being able to trade and specialize.
Note that it does not matter if the rest of the world is absolutely efficient or inefficient. We get the same gains regardless of whether it takes them 50 workers to produce one bottle of wine or 200 workers to produce one bottle of wine. The gains from trade for us are the same. (In which case do we expect foreign workers to earn the highest wages?)
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| Country | Oil Production | Cost per barrel |
|---|---|---|
| Saudi Arabia | 100 barrels | $10 |
| Other | 100 barrels | $30 |
| U.S. | 100 barrels | $35 |
| Other | 100 barrels | $40 |
| Other | 100 barrels | $50 |
Suppose that total world demand is 400 barrels, of which U.S. demand is 110 barrels. What will be the price of oil? Are we self-sufficient in oil? If world demand goes up by 20 barrels, what will be the price of oil?
Next, suppose total world demand is 390 barrels, of which U.S. demand is 100 barrels. Now what is the price of oil? Now are we self-sufficient? If world demand goes up by 20 barrels, what happens to the price of oil?
If the U.S. consumed no oil and the rest of the world consumed 300 barrels, what would be the price of oil?
If the U.S. consumed 100 barrels of oil but refused to consume Saudi oil, what would happen in the world oil market? Assume world demand is 390 barrels.
Conclusion: Saudi foreign policy is a foreign policy issue, not an oil conservation issue