UNIT IV ECONOMIC SYSTEMS AND TRADE Part 3: Gains from Trade

GAINS FROM TRADE

INTRODUCTION HOW DOES TRADE IMPACT US? How does trade affect your own lives? Label check! What did you learn? How would your life be different without trade?

THE TRADING GAME Not at all satisfied Extremely satisfied Rank your level of satisfaction with the item you were given. Rank your level of satisfaction after trading with your group. Rank your level of satisfaction after trading with the entire class.

DEBRIEFING THE TRADING GAME Did your level of satisfaction increase or decrease as the game progressed? Why? Why do people trade? Do people trade out of free will or is it coerced? Does trade that isn’t coerced always benefit both parties to the trade?

PREVIEW GAINS FROM TRADE Imagine that you are the manager of a fast-food restaurant. You are outgoing, interact well with customers, and work the cash register proficiently. You are also efficient in the kitchen and can manage several tasks at once, such as making pizzas, preparing salads, and filling drinks. You have one employee who is slow in the kitchen and often struggles to cook while filling drink orders. Your employee works the cash register well but interacts little with the customers.

PREVIEW GAINS FROM TRADE Answer these questions: What is your opportunity cost if you work the cash register? What is your opportunity cost if you work in the kitchen? Based on your opportunity costs, where will you work and where will your place your employee? Can you explain your rationale?

PREVIEW GAINS FROM TRADE In this Preview, the manager "specializes" in the task for which he or she holds a lower opportunity cost. The manager then "trades" a wage with an employee in return for the other task. In this lesson, students will examine how individuals benefit when they specialize in producing goods for which they hold a lower opportunity cost and trade for goods for which they do not.

PREVIEW READING ASSIGNMENT Read Sections 4.1 and 4.2 (pgs 57-61) in Econ Alive and complete section 4.2 on your graphic organizer. Link to Econ Alive

SPECIALIZATION Specialization – an approach to production in which people become highly skilled at _____________. Involves division of labor. What does this mean? The allocation of separate tasks to different people. a specific task

BENEFITS OF SPECIALIZATION Societies that specialize are more productive than those that are self- sufficient. WHY? Can concentrate on producing what they are __________at producing. Improves efficiency, resulting in greater ______________. More products and services lead to higher ____________. best productivity living standards

SPECIALIZATION LEADS TO TRADE When societies specialize, they no longer produce everything them- selves … so they must do what? Trade with others. Why? To obtain those things they don’t produce themselves. Satisfies their own wants, frees up their time and resources, and lets them focus on what they do best.

TRADE = VOLUNTARY EXCHANGE Trade is a voluntary exchange. Why? Is an act of willingly trading one item or service for another. People / countries trade because it is in their ______________. mutual interest

TRADE CREATES ECONOMIC INTERDEPENDENCE Economic interdependence: When people rely on others (within their country or from other countries) for most of the goods and services they want.

PINEAPPLES & POTATOES TRADING GAME In this activity you will assume the role of farmers who produce potatoes and pineapples. You will participate in several rounds of trading in order to acquire a certain number of pineapples and Potatoes.

PINEAPPLES & POTATOES TRADING GAME 1.Examine your goal. 2. Choose one of the six production options from your production schedule. 3. Remove the correct combination of pineapple / potato tokens from your envelope. 4. When the marketplace opens, find a farmer from the other region to trade with and try to meet your goal. 5. Record your results in your ledger after each round.

PINEAPPLE S & POTATOES TRADING GAME Debrief - Have one person in your group record your answers to the following questions: How did it feel to be a farmer in Region A? In Region B? Regions A and B had different production capabilities. In real life, why might two regions have different production capabilities? How were you able to meet your goal? Did one group of farmers benefit more from specializing and trading? Why or why not? How does trade make people better off?

NEXT READING ASSIGNMENT Read Sections 4.3 and 4.4 in Econ Alive and complete those sections on your GO. Link to Econ Alive

EXAMPLE OF GLOBAL TRADE Imagine... only two goods are produced: cars and computers. And only two countries can produce them: the United States and Japan.  Should they remain self- sufficient or should they trade?

IF THEY STAY SELF-SUFFICIENT… If they stay self sufficient: Each country must decide on a combination of cars and computers to produce in an hour. Each consumes only what they can produce themselves. United States Japan Cars12 per hour 10 per hour Computers4 per hour5 per hour

ABSOLUTE ADVANTAGE What’s absolute advantage? The condition that exists when someone can produce more of a good or service than someone else can produce using the same amount of resources (time and labor). Someone who is the BEST at doing something has an absolute advantage. United States Japan Cars12 per hour10 per hour Computers4 per hour5 per hour

ABSOLUTE ADVANTAGE Does either country have an absolute advantage in the production of either cars or computers? The U.S. has an absolute advantage in the production of cars Japan has an absolute advantage in the production of computers. United States Japan Cars12 per hour10 per hour Computers4 per hour5 per hour

COMPARATIVE ADVANTAGE What’s comparative advantage? The condition that exists when someone can produce a good or service at a lower opportunity cost than someone else. What’s opportunity cost? What it costs someone to produce something – the value of what is given up.

COMPARATIVE ADVANTAGE Someone who can produce some- thing at a LOWER COST than someone else has a comparative advantage Not the same thing as being the best at something. Regardless of absolute advantage people (and countries) benefit from specializing in the activities in which they have a comparative advantage.

COMPARATIVE ADVANTAGE If Tiger Woods is the world’s best golfer, he has an absolute advantage at golf. Assume he’s also a very fast typist. Should he do his own typing or should he hire a secretary to type for him? What would it cost him to do his own typing? What would it cost his secretary? Who is the lower cost typist? Who has a comparative advantage at typing?

COMPARATIVE ADVANTAGE Does either country have a comparative advantage in the production of cars or in the production of computers? What do you need to know in order to answer that question? Need to know which country can produce cars at a lower cost and which country can produce computers at a lower cost. United States Japan Cars12 per hour 10 per hour Computers4 per hour5 per hour

CALCULATING OPPORTUNITY COST To calculate opportunity cost of the production of a good, use the following shortcut: WE GIVE UP ___________ WHAT WE GET Then reduce if possible United States Japan Cars12 per hour 10 per hour Computers4 per hour5 per hour Example: U.S. opportunity cost of producing one car: 4 computers (we give up) ___________________ 12 cars (what we get) = 1/3 a computer

Opportunity Cost of: 1 Car1 Computer U.S._______ of a computer _____ cars Japan_______ of a computer _____ cars United States Japan Cars12 per hour 10 per hour Comp uters 4 per hour5 per hour CALCULATE THE OPPORTUNITY COST OF EACH COUNTRY The U.S.’ opportunity cost of producing 1 car is 1/3 of a computer, whereas Japan’s opportunity cost of 1 car is ½ of a computer…Who has the lower opportunity cost? The U.S. The U.S.’ opportunity cost of producing 1 computer is 3 cars, whereas Japan’s opportunity cost of 1 computer is 2 cars...Who has the lower opportunity cost? Japan 1/3 1/2 3 2 So, the U.S. has a comparative advantage in the production of cars but Japan has a comparative advantage in the production of computers. What should they do?

The U.S. and Japan should ______________. The U.S. should produce cars and trade for computers. Japan should produce computers and trade for cars. Each would be better off if they specialized in producing the product they can produce at the lowest cost (where they have a comparative advantage) and then trade with each other. WHAT SHOULD JAPAN & THE U.S. DO? specialize and trade

FACTORS THAT GIVE SOME NATIONS A COMPARATIVE ADVANTAGE: Geography obviously impacts farming, mining, forestry, & fishing: Climate Natural resources Geography determines which nations have a comparative advantage in these areas.

FACTORS THAT GIVE SOME NATIONS A COMPARATIVE ADVANTAGE: Other, less obvious factors: Education levels Skill level of work force. Wage levels Differences in technology.

TRADE MAKE US WEALTHIER. HOW? Economists argue that trade creates more winners than losers Trade makes us wealthier in three ways:  Trade moves goods to people who value them more.  Trade increases the quantity and variety of goods available.  Trade lowers the cost of goods.