International Trade

Where does your “stuff” come from? Look around the room and at the clothes you’re wearing. Come up with a list of where they were made. What do you notice?

Section Objectives Analyze the locations of resources and evaluate the significance of these locations Explain the concepts of absolute and comparative advantage Describe the effects of trade on employment

Why Trade? Countries have an unequal distribution of resources, so they trade in order to get everything they want/need. Resource Distribution: Natural Resources Human Capital Physical Capital Some of the unequal distribution is caused naturally, others are influenced by government policies and historical patterns.

Trade and Specialization Specialization occurs when producers (individuals or nations) decide to produce only certain goods For example, US produces wheat and soybeans, but we cannot produce diamonds or coffee Costa Rica specializes in producing coffee. Costa Rica will sell the coffee beans and buy other things that it needs. Self sufficiency sounds appealing, but it is better for countries to specialize in products and then engage in trade.

Trade Advantages Everyone can benefit from trade whether they have abundant resources or scarce resources. Absolute Advantage – the ability to produce more of a given product using a a given amount of resources Country A can produce (10) microchips per hour and can produce 3 t-shirts per hour. Country B can produce (1) microchip per hour and can produce 2 t-shirts per hour. Country A has an absolute advantage in both microchips and t-shirts, but they should still trade…

Trade Advantages Comparative Advantage – the ability to produce a product more efficiently given all the other products that could be produced. David Ricardo argued that a country is better off when it produces goods and services for which it has a comparative advantage.

The importance of opportunity costs Country A – in an hour they can produce either (10) microchips or (3) t-shirts. Therefore, they sacrifice 3.33 microchips for 1 t-shirt. Alternatively, the opportunity cost of a microchip is .3 t-shirts. Country B – in an hour they can produce either (1) micro chip or (2) t-shirts. Therefore they sacrifice .5 micro chips for 1 t-shirt. Alternatively, the opportunity cost of a microchip is 2 t-shirts. Country B has a lower opportunity cost when producing t-shirts. Country A has a lower opportunity cost when producing microchips.

More on the example Assume each country has two hours to produce. If the countries decide to be self sufficient: Country A will produce 10 microchips and 3 t-shirts. Country B will produce 1 microchip and 2 t-shirts. 11 microchips and 5 t-shirts will be produced. If the countries decide to trade: 20 microchips and 4 t-shirts will be produced. Trading will result in a net of more economic activity. It is easier to produce what you are good at and trade for what you aren’t as good at. Country A will probably get richer here. It can trade 1 microchip for 2 t-shirts. If it tried to produce 2 t-shirts at home it would cost 6.66 microchips Yet Country B still benefits from trade because they can trade for more microchips.

Trade Patterns Export – a good that is sent to another country for sale Import – a good that is brought in from another country Not always that simple, sometimes goods are produced in multiple countries US is one of the largest exporters and largest importers

Trade and Employment Trade allows nations to produce a limited number of goods, but allows them to consume a wider variety of goods In the short run, trade can hurt certain sectors of the economy Workers need re-training Structural unemployment – skills don’t match jobs Also results in population shifts – this is why Penn/Ohio/Michigan are hurting

Quick Review What is the difference between absolute advantage and comparative advantage? Why do countries trade? Is trade “good?”