International Trade AP Macroeconomics. Where did we come from? Previously, we learned about the trade-off between unemployment & inflation as well as.

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Presentation transcript:

International Trade AP Macroeconomics

Where did we come from? Previously, we learned about the trade-off between unemployment & inflation as well as how monetary and fiscal policy work together to promote (or restrict) economic growth.

Where are we going? In this unit, we’ll learn about international trade and finance. In this lesson, we’ll revisit comparative advantage and expand on the concepts of specialization and trade to show the gains from international trade.

Comparative Advantage: A Reminder Remember: in order to determine who has the comparative advantage, we first determine the opportunity cost. A country/entity with the lowest opportunity cost has the comparative advantage.

Production Possibilities In One Day of Work Which country has the absolute advantage in the production of oranges? Which country has the absolute advantage in the production of avocadoes? Which country has the comparative advantage in the production of oranges? Which country has the comparative advantage in the production of avocadoes? Visual 6.1 Unit 6 Macroeconomics

Production Possibilities In One Day of Work Which country has the absolute advantage in the production of oranges? Israel Which country has the absolute advantage in the production of avocadoes? Israel Which country has the comparative advantage in the production of oranges? US 2 [150/75] (for every bushel of oranges, could produce 2 bushels of avocadoes), Israel 4; therefore in terms of avocadoes it is cheaper for US to produce oranges. Which country has the comparative advantage in the production of avocadoes? US.5 [75/150] (for every bushel of avocadoes could produce.5 bushels of oranges), Israel.25 (1/4 bushel of oranges), therefore in terms of oranges it is cheaper for Israel to produce avocadoes. Visual 6.1 Unit 6 Macroeconomics

Terms of Trade… The terms of trade are expressed in commodities to be exchanged. For each country there is a range of acceptable terms of trade. For example:  The US is willing to trade one bushel of oranges for two or more bushels of avocadoes (because it can already produce two for one).  Israel is willing to trade one bushel of oranges for less than four bushels of avocadoes (because it can already produce four to one).

How do we both win? Thus, both the United States and Israel would be willing to trade one bushel of oranges for 3 bushels of avocadoes. Looking at the numbers, it’s what makes sense for each country. Both countries gain from this trade!

And now… Some resources: Economics of Seinfeld: “Gains from Exchange” Reffonomics: Morton workbook: Activity 49

Works Cited Economics of Seinfeld. Krugman, Paul, and Robin Wells. Krugman’s Economics for AP. New York: Worth Publishers. Morton, John S. and Rae Jean B. Goodman. Advanced Placement Economics: Teacher Resource Manual. 3 rd ed. New York: National Council on Economic Education, Print. Reffonomics.