International Trade Economics Mr. Hellums

Warm up- You Choose… You have $300 to spend and it will buy: (a)One U.S.-made bicycle and one U.S.-made cell phone. (b)One Korean-made bicycle, one Japanese- made cell phone, and four bottles of French wine. (c)A $300 investment in a Canadian lumber company. Which is the best choice for you? Why?

Reasons for Trade F Why Do People Trade? –Voluntary Exchange –Coincidence of Wants –Both Parties Gain F Wealth Creation

Opening Markets Creates Wealth Remember China and Deng Xiaoping!

Economic Concepts for Trade F Absolute Advantage –I can make more of a good or I can do a job faster. F Comparative Advantage –I can make a good at a lower opportunity cost. This will decide what to produce and what to trade for.

Specialization F Specialize In Production Where You Have a Comparative Advantage

Example Assume David Ricardo and Ricky Ricardo are going to throw a party in exactly one hour. They decide on serving homemade pizzas and cakes. Assume they have like 15 ovens in their apartment and lots of pots and pans. Use the information in the next slide to determine who should produce what.

Example David Ricardo Ricky Ricardo Bake Cakes2 cakes/hr.4 cakes/hr. Make Pizza6 pizzas/hr.8 pizzas/hr.

Example David Ricardo Ricky Ricardo Bake Cakes2 cakes/hr.4 cakes/hr. Make Pizza6 pizzas/hr.8 pizzas/hr. Who has the absolute advantage in baking cakes? Who has the absolute advantage in making pizza?

Example David Ricardo Ricky Ricardo Bake Cakes2 cakes/hr.4 cakes/hr. Make Pizza6 pizzas/hr.8 pizzas/hr. Why? Well, because 4 cakes>2 cakes & 8 pizzas>6 pizzas.

Example David Ricardo Ricky Ricardo Bake Cakes2 cakes/hr.4 cakes/hr. Make Pizza6 pizzas/hr.8 pizzas/hr. Who has the comparative advantage in baking cakes? Who has the comparative advantage in making pizza?

Example Who has the comparative advantage in baking cakes? Who has the comparative advantage in making pizza?

Example Why? Ricky only gives up 2 pizzas in order to bake a cake, whereas David gives up 3 pizzas in order to bake a cake.

Example Furthermore, it only cost David 1 / 3 of a cake to make a pizza, whereas it costs Ricky ½ of a cake to make a pizza.

Comparative Advantage Producing a Meal Cooking Cleaning BarbieKen 10 min 20 min 40 min 30 min Totals 30 min 70 min

Opportunity Costs Cooking Cleaning BarbieKen 1/2 cleaning 2/1 cooking 4/3 cleaning 3/4 cooking

What Will Ken & Barbie Do? F Who has the lower opportunity cost in cooking? –Barbie F Who has the lower opportunity cost in cleaning –Ken F How can they benefit from specialization and trade? –If Barbie cooks and Ken cleans, both will gain more free time!

Nations trade like people! F Nations Specialize According to the Principle of Comparative Advantage F Lesson - Don’t Try to Do Everything; It is Not Efficient F Trade Between Countries Creates Wealth F Examples –David and Ricky have more pizza and cake at the party –Ken and Barbie Have Time for Other Activities