Why we trade goods and services International Unit 5

Why do countries enter trade agreements? Essential question

Dr. Jane has graduated from medical school and will be starting her practice as a pediatrician soon. While in medical school, she worked as a secretary in the administration offices. During that time, Dr. Jane was praised for her hard work and her efficiency. In fact, she was the best secretary on her floor. Sam, a friend of Dr. Jane’s, referred Secretary Bob to her because Sam knew Dr. Jane would be opening her office soon. Secretary Bob had been a secretary for years and was better than your average secretary, but he was not quite as efficient as Dr. Jane (see table on next slide). Warm UP

Typing Electronic/Physical Filing Returned Phone Calls Dr. Jane 90 words per minute 40 files every 5 minutes 25 every hour Secretary Bob 70 words per minute 30 files every 5 minutes 20 every hour Average Secretary 65 words per minute 15 every hour Should Dr. Jane hire Secretary Bob or perform all the secretarial services herself? Justify your answer and prepare to share with the class. Warm up part 2

“ Nearly all economic theories suggest that the benefits of international trade far exceed the costs” “Specialization and international trade increase the productivity of a nation’s resources and allow for greater total output than would otherwise be possible. “ McConnell and Brue, 16th edition Why do nations trade?

Trade refers to the exchange of goods, services, and/or productive resources among individuals, businesses, and/or governments. Trade refers to exchange among people within a country as well as international trade among people from many countries. What do we mean by trade?

With any trade, someone has the advantage over other parties involved. There are two types of advantages in trade: absolute advantage and comparative advantage. Advantages in trade

What is absolute advantage? Individual – exists when a person can produce more of a certain good/service than someone else in the same amount of time (or can produce a good using the least amount of resources.) National – exists when a country can produce more of a good/service than another country can in the same time period. What is absolute advantage?

Imagine two countries, Jordanstein and Cooperville, both producing MP3 players and Tablets. *Note that neither country has an advantage when it comes to making tablets. Countries # of Labor Hours to Produce 1 MP3 Player # of Labor Hours to Produce 1 Tablet Jordanstein 10 12 Cooperville 15 This is an input problem, because we are looking at the number of hours it takes to produce ONE unit of each. Since Jordanstein only takes 10 hrs to produce 1 MP3 player, while Cooperville takes 15 hours, Jordanstein has the absolute advantage. Make sure to mention that these tables are absolutes. Each country is either producing MP3 players OR Tablets. So 10 MP3 players OR 12 tablets. They are not making BOTh at the same time. For example

Now look at Jacksonland versus Walkerstein Now look at Jacksonland versus Walkerstein. This problem is an OUTPUT problem, because we are looking at how many units they can produce in an hour. Since Jacksonland produces 9 MP3 players while Walkerstein produces 4 MP3 players, Jacksonland has the absolute advantage. Notice that Jacksonland also has the advantage in tablets. Countries # of MP3 Players produced in 1 Hour # of Tablets produced in 1 Hour Walkerstein 4 2 Jacksonland 9 3 Another Example

What is comparative advantage? A person or a nation has a comparative advantage in the production of a product when it can produce the product at a lower domestic opportunity cost than can a trading partner. For input problems, opportunity cost can be expressed as what we are producing divided by what we are giving up. For output problems, opportunity cost can be expressed as what we are giving up divided by what we are producing. What is comparative advantage?

You can read this by saying that when Jordanstein produces MP3 players, it is giving up .833 of a tablet. When Cooperville produces MP3 players, it is giving up 1.67 tablets. Since Jordanstein gives up less to produce MP3 players, it has a comparative advantage in production. __ # of Labor Hours to Produce 1 MP3 Player # of Labor Hours to Produce 1 Tablet Jordanstein 10 Opportunity Cost = 10/12 or .833 of a tablet 12 12/10 or 1.2 MP3 players Cooperville 15 15/12 or 1.67 tablets 12/15 or .6 of an MP3 player Input Example

Output example Who has comparative advantage for MP3 players? Who has comparative advantage for tablets? If these countries were going to trade, who should specialize in MP3 players and who should specialize in tablets? Why? Countries # of MP3 Players produced in 1 Hour # of Tablets produced in 1 Hour Walkerstein 4 Opportunity Cost = 2/4 or .5 Tablets 2 4/2 or 2 MP3 Players Jacksonland 9 3/9 or .33 Tablets 3 9/3 or 3 MP3 Players Output example

How trade decisions are made The country with the lowest opportunity cost for producing a good or service should specialize in that good or service. By doing this, countries can consume beyond production possibilities and allocate resources to their best possible use. Countries use these types of comparative advantages to decide who they will trade with and what they will trade. How trade decisions are made

What is a country’s balance of trade? This refers to the value of a country’s exports minus the value of its imports for a specific time period (usually a year). Remember that this is the same calculation we use for the Net Exports component for determining GDP. If the country’s exports exceed the imports, the country has a trade surplus. If the country’s exports fall short of the imports, the country has a trade deficit. What is a country’s balance of trade?

Complete the Wheat and Sugar handout and turn it in. Summary