Warm-up: May 21, 2013 Read “Why People and Nations Trade”. Do NOT write on this! Answer questions A, B, and C in your notebook or on a separate sheet of paper.

International Trade (5/20) I.The US and Int’l Trade A.Imports: B.Exports: C.Trade deficit:

II. Absolute advantage: a country can flat out produce more of the product (save about 10 lines below this chart) A. Plot the production possibilities frontiers for each country. B. What country has the absolute advantage in coffee? In cashews? AlphaBeta 40 million lbs coffee 8 million lbs cashews 6 million lbs coffee 6 million lbs cashews

III. Comparative advantage: the ability to produce a product relatively more efficiently (or at a lower opportunity cost) AlphaBeta 40 million lbs coffee 8 million lbs cashews 6 million lbs coffee 6 million lbs cashews Opportunity cost of producing 1m lb cashews = 5m lbs coffee Opportunity cost of producing 1m lb cashews = 1m lb coffee Beta is the lower-cost producer of cashews Opportunity cost of producing 1m lb of coffee = 1/5m lb cashews Alpha is the lower-cost producer of coffee Opportunity cost of producing 1m lb of cashews = 1m lb of coffee

Specialization increases world output: Total Output Before Specializing (“autarky”) Total Output After Specializing Alpha Beta Coffee 20 lbs + 5 lbs = 25 lbs Cashews 4 lbs + 1 lb = 5 lbs Coffee 40 lbs + 0 lbs = 40 lbs Cashews 0 lbs + 6 lbs = 6 lbs How many more pounds of coffee exists in the world? How many more pounds of cashews exists in the world? What do we do with the extra?

Absolute and Comparative Advantage: time Vacuum a Room 60 minutes45 minutes Wash a load of dishes 30 minutes45 minutes Mike Debbie 1. What is Mike’s opportunity cost of vacuuming in terms of washing dishes? 2. His opportunity cost of washing dishes in terms of vacuuming? 3. What is Debbie’s opportunity cost of vacuuming in terms of washing dishes? 4. Her opportunity cost of washing dishes in terms of vacuuming? 5. Who has the absolute advantage in vacuuming? Washing dishes? 6. Who has the comparative advantage in vacuuming? Washing dishes?

Absolute and Comparative Advantage: time Steve and Jamie have chores to do – mowing the lawn and washing cars. It takes Steve 30 minutes to mow the lawn and 15 minutes to wash a car. It takes Jamie 20 minutes to mow the lawn and 20 minutes to wash a car. a.Who has the absolute advantage in mowing? Washing cars? b.Who has the comparative advantage in mowing? Washing cars? c.What should each person specialize in?

Last practice problem – production again The US, using all resources, can produce 12 million cars or 4 million computers. Japan, using all resources, can produce 10 million cars or 6 million computers. 1.Who has the absolute advantage in car production? Computer production? 2.Who has the comparative advantage in car production? 3.Who has the comparative advantage in computer production? 4.What should each country specialize in?

(a)United States Production Consumption Quantity of roses (boxes) Quantity of computers (b) Colombia Production Consumption Quantity of roses (boxes) Quantity of computers (c) World (US and Colombia) Production Consumption Quantity of roses (boxes) Quantity of computers Table 3: Production and Consumption After Specialization and Int’l Trade

Mystery nations revealed: Country A: Argentina Population: 37,384,816 Per capita GDP: $12,900 Life expectancy: yrs Literacy rate: 96.2% Infant mortality rate: 17.75/1000 Country B: Japan Population: 126,771,662 Per capita GDP: $24,900 Life expectancy: 80.8 yrs Literacy rate: 99% Infant mortality rate: 3.88/1000 Country C: Nigeria Population: 126,635,626 Per capita GDP: $950 Life expectancy: yrs Literacy rate: 57.1% Infant mortality rate: 73.34/1000 Country D: Russia Population: 145,470,197 Per capita GDP: $7700 Life expectancy: yrs Literacy rate: 98% Infant mortality rate: 20.05/1000 Country E: Singapore Population: 4,300,419 Per capita GDP: $26,500 Life expectancy: yrs Literacy rate: 93.5% Infant mortality rate: 3.62/1000

The countries, richest to poorest: 1.Singapore (E) 2.Japan (B) 3.Argentina (A) 4.Russia (D) 5.Nigeria (C)

Factors contributing to long-term economic growth: High investment levels in physical and human capital Greater economic freedom Strong incentives to save and invest Competitive markets Low inflation Political stability Free trade

Countries with highest levels of economic freedom, Hong Kong 2.Singapore 3.Australia 4.Ireland 5.New Zealand 6.United States 7.Canada 8.Denmark 9.Switzerland 10. United Kingdom 11. Chile 12. Netherlands

Countries with lowest levels of economic freedom, Libya 172. Comoros 173. Dem. Rep. of Congo 174. Venezuela 175. Eritrea 176. Burma 177. Cuba 178. Zimbabwe 179. North Korea