1. UNIT 8: CHAPTERS 35-36 International Trade & Finance

2. Ch. 35—International Trade UNIT 8, DAY 1

3. 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. 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, describe where you will work and where you will place your employee. Explain your rationale.

4. Should you grow it all? Essential Question: How does trade make people better off? Objective: Explain the concept of comparative advantage and apply it to a simulation. Task: Assume the role of a farmer producing potatoes and pineapples. Participate in several rounds of production and trade to acquire a certain amount of each product.

5. Directions for Farmers 1. Examine your goal. Determine what you should produce by choosing one production option from the schedule on your handout. 2. Gather your goods. Remove the corresponding numbers of potato and pineapple tokens from your envelope. Then put your handout and envelope aside. 3. To market! When the market opens, find a farmer from the other region to trade with. This will be the farmer you trade with in all rounds. You made trade only whole tokens. 4. Keep track! After the first and each successive round, complete your ledger to record production

6. Round 1…and 2, 3, 4 and 5 You must choose 1 of the production options on your chart BEFORE entering the market. The farmer you choose to trade with in this round MUST REMAIN THE SAME in every other round. Farmers are not required to trade. Trade only WHOLE tokens. POST ROUND: Complete your ledger. Return all tokens to your envelope.

7. Debriefing How did it feel to be a farmer in Region A? In region B? Regions A and B had different production schedules. In real life, why might two regions have different production schedules? How were you able to meet your goal? Did one group of farmers benefit more from specializing and trading? How does trade make people better off?

8. How does specialization lead to economic interdependence? Specialization – an approach to production in which individuals become highly skilled at a specific task.  Example of specialization is division of labor – the allocation of separate tasks to different people Benefits of Specialization in a Country  Improves productivity (a measure of the efficiency or output of a system)  Leads to a higher standard of living

9. Specialization Encourages Trade Societies that specialize are more productive than those that are self-sufficient When societies specialize, they no longer produce everything themselves…so they must TRADE with others to obtain those things they do not produce Trade is a voluntary exchange – the act of willingly trading one item or service for another  People & countries trade because it is in their mutual interests

10. Trade Creates Economic Interdependence Trade creates economic interdependence…  When people rely on others (within their country or from other countries) for most of the goods and services they want. We are dependent on other countries for the goods and services we consume. TASK! Look in your backpack (or on your clothes) for at least 5 different country of origin labels. Be prepared to share.

11. Back to the Simulation Region A: Goal=4 potatoes, 2 pineapples Region A: Goal=4 potatoes, 2 pineapples Who could produce the most potatoes? Pineapples? Could either meet their goals in isolation? What was the optimal production decision for each? Region B: Goal=11 potatoes, 2 pineapples Region B: Goal=11 potatoes, 2 pineapples Farmer A’s Production Schedule PotatoesPineapples Option 140 Option 231 Option 322 Option 413 Option 504 Farmer B’s Production Schedule PotatoesPineapples Option 1150 Option 2121 Option 392 Option 463 Option 5 3 4 Option 605

12. Absolute Advantage: Comparative Advantage: ability to produce more units of a good or service than some other producer using the same quantity of resources ability to produce a good or service at lower opportunity cost than another producer Absolute & Comparative Advantage

13. Applying the Definitions Who had absolute advantage in product? Who had the comparative advantage in potatoes? Who had the comparative advantage in pineapples? Hint…compare each person’s opportunity cost of one product to another

14. The Simulation Again… What is Farmer A’s opportunity cost of producing 1 potato? What is Farmer A’s opportunity cost of producing 1 pineapple? What is Farmer B’s opportunity cost of producing 1 potato? What is Farmer B’s opportunity cost of producing 1 pineapple? The Law of Comparative Advantage says you should specialize in the producing which ever good you can produce at lower opportunity cost. So, Farmer B should produce potatoes and Farmer should produce pineapples.

15. Which matters more? Comparative Advantage! Why?  Economic basis for specialization and trade  Specialize in producing goods with comparative advantage  both countries are better off

16. Putting it all together… 1. Due to different ___, farmers in Region A and B had different production schedules. 2. Farmers A & B decided to ___ in producing one good instead of producing both goods. 3. Farmer A decided to produce only pineapples because he held a ___ advantage in the production of pineapples. 4. Farmer B could produce more pineapples and potatoes than Farmer A. Thus, Farmer B had a/an ___advantage in the production of both goods. Still Farmer B specialized in producing potatoes because he had a/an ___advantage in that good. 5. At the marketplace, Farmer A & B entered into a/an ___in which they traded 1 pineapple from 2 potatoes. 6. Farmer A & B were both better off because… Word Bank Factors of production Absolute Specialize Voluntary exchange Comparative

17. UNIT 8 Ch. 35: International Trade

18. US Trade Patterns US consumes 20% of all global imports US produces 15% of all global exports Export ratio (exports/GDP relatively small compared to other countries)

19. Export Ratios

20. Imports – Exports– G & S purchased from foreign sources. G & S sold to foreign buyers. Imports & Exports

21. Trade Balances Trade balance = exports – imports Any imbalance in America’s trade must be offset by reverse imbalances elsewhere.  Negative Trade Balance=Trade Deficit  Positive Trade Balance=Trade Surplus  So, the US’s trade deficit with China is offset by China’s trade surplus with the US

22. WHY? Self Sufficient is Ineffficient

23. Specialization Trade lets nations focus on what they each do best Results:  Increased world output  Increase living standards (for trading nations)

24. In a world without trade… Closed Economy: country that does not engage in international trade  Can you think of any examples? Production Possibilities =Consumption Possibilities

25. In a world with trade… Open Economies: countries that engage of international trade  Can you think of any examples? Nations specialize in what they do best Global output increases Consumption Possibilites> Production Possibilities

26. Comparative Advantage Absolute Advantage The ability of a country to produce a specific good at a lower opportunity cost than its trading partners. Maximizes world output The ability of a country to produce a specific good with fewer resources (per unit of output) than other countries. Pursuit of Comparative Advantage

27. Terms of Trade Definition: rate at which goods are exchanged  the amount of good A given up for good B in trade (opportunity cost) Country will not trade unless terms are less than domestic opportunity costs Market price lies somewhere between each country’s respect opportunity cost for production

28. Practice with Comparative Advantage Given the following chart, who has absolute and comparative advantage in each good? Brouda has AA and CA in dresses Wussler has AA and CA in tuxes TuxesDresses Brouda-topia100200 Wussler-ville120150 O/C of 1 more tux OC of 1 more dress Brouda-topia Wussler-ville

29. Brouda-topia Wussler-ville Production & Consumption Possibilities Curves

30. RICE & RADIOS…20 MINUTES Practice with Comparative Advantage

31. Production & Opportunity Costs Production Data CountryRiceRadios Indonesia Japan Opportunity Cost of 1 More X CountryRiceRadio Indonesia Japan

32. Analysis Who has absolute advantage in rice? Who has absolute advantage in radios? Who has the comparative advantage in rice? Who has the comparative advantage in radios? Are the countries better off using comparative advantage as the basis for trade? Why?

33. Graphs Terms of Trade: 1 lb rice=2 radios & _______________ IndonesiaJapan Rice Radios

34. TOYS AND T-SHIRTS Practice with Comparative Advantage

35. Production & Opportunity Costs Production Data CountryToysT-Shirts China US Opportunity Cost of 1 More X CountryToysT-Shirts China US

36. Analysis Who has absolute advantage in toys? Who has absolute advantage in t-shirts? Who has the comparative advantage in toys? Who has the comparative advantage in t-shirts? Are the countries better off using comparative advantage as the basis for trade? Why?

37. Graphs Terms of Trade: 1 shirt=3 toys & _______________ ChinaUS Shirts Toys

38. 30 MINUTES Create Your Own Comparative Advantage Story…

39. CALCULATORS AND BACKPACKS…20MINUTES Review with Comparative Advantage

40. Production & Opportunity Costs Production Data (12 hrs labor) CountryCalcsBPs Canada Japan Opportunity Cost of 1 More X CountryCalcBP Canada Japan

41. Analysis Who has absolute advantage in calculators? Who has absolute advantage in backpacks? Who has the comparative advantage in calculators? Who has the comparative advantage in backpacks? Are the countries better off using comparative advantage as the basis for trade? Why?

42. Increasing the Quantities…12 million hrs of labor (split equally among products in each country) CountryCalculator OutputBackpack Output Canada Japan Total

43. Shifting Labor Allocations… 4. If Canada reallocates 1.8 million from calculators to backpacks  Canada loses _________ calculators  Canada gains ________ backpacks 5. For Japan to keep total calculator output unchanged…  They need ______ hours  Japan gains _________ calculators  Japan loses _________ backpacks

44. Results of the Change… 6. World output in calculators has not changed, but world output in backpacks is _______________

45. Shifting Allocations Again 7. Japan reallocates 900,000 hours to calculators (include Canada’s reallocation to backpacks) 8. What is the result of each country shifting its resources towards the product in which it has a comparative advantage? CountryLabor HrsCalculatorsLabor HrsBackpacks Canada4.27.8 Japan6.95.1 Total

46. CH. 35 Arguments Against Trade & Trade Barriers

47. Import Competing Industries Workers and producers have an economic interest in restricting trade. Why?  Compete with imported products  Risk loss of job, business with competition

48. Flaws in “Import Competition” Argument Net gain from international benefits overall  Greater world output (more consumer choice)  Higher standards of living (lower prices for products)

49. More Compelling Arguments … National Security:  defense-related goods, food, technology  Why? A war could disrupt this flow leaving us vulnerable. Exporting vital technology to a potential enemy is not wise. Dumping: the sale of goods in export markets at prices below domestic prices  Predatory Pricing: dumpers can wipe out domestic competition, then raise prices later

50. More compelling arguments… Infant Industries: New industries may need temporary protection from imports.  Why? Even normal export prices might make it difficult or impossible for a new domestic industry to develop.  Valuable if a comparative advantage can develop quickly Improve Terms of Trade:  How? Putting restrictions on imports can move the terms of trade in our favor  Drawbacks: May cause retaliation that increases prices in LT

51. Barriers to Trade Embargo: prohibition against trading particular goods  Examples: Cuba, USSR, Haiti Tariff: a tax (duty) imposed on imported goods.  Impact 60% of exports to US with average tariff under 5%  Winners: Domestic Industry  Losers: Domestic Consumers  Critique: Beggar Thy Neighbor Approach  Example: Great Depression Tariffs lower world trade, make matters worse Quota: limit on the quantity of a good that may be imported in a given time period.  Impact 12% of US imports  More damaging than tariffs

52. Impact of Trade Restrictions (Embargo) LO3

53. Impact of Trade Restrictions LO3

54. Impact of Trade Restrictions LO3

55. Impact of Trade Restrictions S 1 PRICE (dollars per unit) QUANTITY (units per year) D 1 p 1 q 4 0 (d) Quota-restricted trade p 2 q 2 q 1 p 4 S 4 Q LO3

56. Political Cartoon Consider the arguments for and against free trade Create a political cartoon critiquing the an argument for either side The cartoon should:  Highlight winners and losers in the particular trade topic  Be neat and colorful Be prepared to share 4 points on your Unit 8 Test