What goods do you regularly use that were produced in other countries? Bell Activity What goods do you regularly use that were produced in other countries?

In Lak’ech by Luis Valdez Tu eres me otro yo Si te hago daño a ti, Me hago daño a mi mismo Si te amo y respeto Me amo y respeto yo You are my other me If I do harm to you, I do harm to myself If I love and respect you I love and respect myself

What goods do you regularly use that were produced in other countries? Bell Activity What goods do you regularly use that were produced in other countries?

Absolute and Comparative Advantage Chapter 17 Section 1

I will be able to… Explain how international trade allows for specialization. Compare the concepts of absolute advantage and comparative advantage. Discuss non-production gains from international trade.

Why Nations Trade Nations trade because they believe that the products they receive are worth more than the products they give up. Specialization - Do what you do best, and trade for the rest. To find out what a country specializes in, look at their exports. Imports- goods and services that the country buys from others. International trade is important to all nations. Both goods and services can be traded internationally

American Dependence on Trade

The Basis for Trade 1776, Adam Smith (Wealth of Nations) wrote that a country should import products if they could be made more cheaply abroad. Absolute advantage- can produce a product more efficiently than another country. Even if one country has absolute advantage trade between countries is still beneficial. Comparative advantage- ability to produce a product relatively efficiently, or at a lower opportunity cost. Based on the assumption that everyone will be better off by specializing.

The Gains from Trade Trade is beneficial to both and will lead to economic growth. Increased political stability between nations that have strong trade relationships. Countries at war with each other usually have the least amount of international trade between them. Economists like to see increased trade between nations because it may tend to lower potential hostilities. Gains from trade help an economy to grow. Increased economic growth, generates more jobs, and produces more income

A story of Comparative Advantage Fred & Kate A story of Comparative Advantage

Fred & Kate Fred and Kate are stranded on a deserted island and consume two products, coconuts and fish. In a day, Fred can either gather two coconuts or catch six fish, while Kate can gather one fish or one coconut. Fred Kate Coconuts Fish Output per day 2 6 1 Opportunity Cost 6 fish 2 coconuts 1 fish 1 coconut (3 fish per coconut) (1/3 coconut per fish)

6 day production schedule Fred Coconuts Fish All 6 days on coconuts 5 days coconuts, 1 day fish 4 days coconuts, 2 days fish 3 days coconuts, 3 days fish 2 days coconuts, 4 days fish 1 day coconuts, 5 days fish All 6 days on fish Kate Coconuts Fish All 6 days on coconuts 5 days coconuts, 1 day fish 4 days coconuts, 2 days fish 3 days coconuts, 3 days fish 2 days coconuts, 4 days fish 1 day coconuts, 5 days fish All 6 days on fish Self-Sufficient: Fred devotes 2 gathering coconuts and 4 days catching fish (4 coconuts & 24 fish) Kate devotes 1 day a week to coconuts and 5 days on fish (1 coconut & 5 fish)

Self-Sufficient Fred and Kate each work 6 days a week. Both prefer to consume more fish than coconuts (they prefer fish, but still like coconuts) Their ideal self-sufficient output is: Fred: 4 coconuts and 24 fish Kate: 1 coconut and 5 fish

Benefit of Trade One day while searching for coconuts, Fred and Kate discover each other on the island. They decide to specialize and trade. They decide to trade 1 coconut for 2 fish.

1 coconut= 2 fish Who should specialize in catching fish? Fred, because he has the lowest opportunity cost in terms of coconuts 2. How much will each produce if they specialize? Fred=36 fish Kate=6 coconuts 3. How much will each end up with then they trade? Fred=26 fish, 5 coconuts Kate=10 fish, 1 coconut 4. Did both Fred and Kate benefit from trade?

Yes!

Comparative Advantage The ability of one person or nation to produce a good at a lower opportunity cost than another person or nation Fred has the absolute advantage in producing coconuts and fish but will gain more if he trades Fred has a comparative advantage in producing fish because his opportunity cost of fish is one-third coconut per fish, compared to 1 coconut per fish for Kate.

Marginal Cost (Opportunity Cost) Ronald McDonald can produce 20 pizzas or 200 burgers Papa John can produce 100 pizzas or 200 burgers What is Ronald’s opportunity cost for one pizza in terms of burgers given up? What is Ronald’s opportunity cost for one burger in terms of pizza given up? What is Papa John’s opportunity cost for one pizza in terms of burgers given up? What is Papa John’s opportunity cost for one burger in terms of pizza given up? 1 pizza cost 10 burgers 1 burger costs 1/10 pizza 1 pizza costs 2 burgers 1 burger costs 1/2 pizza Ronald has a COMPARATIVE ADVANTGE in the production of burgers Papa John has a COMPARATIVE ADVANTAGE in the production of pizza 18

What is the difference between absolute and comparative advantage? A country with absolute advantage has the ability to produce the most output. A country with a comparative advantage can produce at the lowest opportunity (marginal cost) https://www.youtube.com/watch?v=5vgRRpJ_sxc&list=PLlOCkpyjIlHHY3hqk6iMogeUTEzxKTd-e

Specialization Advantages of Specialization (Adam Smith) Increases productivity through division of labor Repetition the more times a worker performs a task, the more proficient he becomes Continuity worker does not waste time switching tasks Innovation gains insight leading to better production methods

Comparative Advantage & International Trade Imports: a good or service produced in a foreign country and purchased by US residents Exports: A good or service produced in the US and sold to another country Countries take advantage of comparative advantage to produce a product at a lower cost

Comparative Advantage & International Trade Outsourcing is when a domestic firm shifts parts of its production to a different country by taking advantage of comparative advantage of different countries, firms can produce its product at a lower cost, charge a lower price, and sell more output. Is outsourcing bad for an economy? Loss of jobs resulting from outsourcing are a part of a healthy economy Jobs lost to outsourcing are partly offset by jobs gained by insourcing Cost savings from outsourcing lead to lower prices and more output for firms ABC Macro clip 8: Does outsourcing cost American jobs?