1. Modules 2-4 Business cycle, PPC, Comparative Advantage and Practice
See last weeks slide to explain the color codes
AP Week 2
Modules 2-4
Business cycle, PPC, Comparative Advantage and Practice

2. HOMEWORK THIS WEEK and things graded
Read modules 2-4
Learn the bold terms
Complete either notes from your reading or the red slides on the PP for each day
Notebook will be graded for having notes daily- in class, reading and from PP. (red only unless you miss a day then the gradient)
Planner
Group turns in sheets on Thursday and on Friday
IN CLASS YOU WILL CREATE 2 MODELS ON YOUR BIG CHART- MUST SHOW TO ME

3. AP Unit 1 Monday 1-9-17 Read Module 2 in Krugman’s Economic for AP
Learn the terms
The business Cycle
Objective: be able to: draw and label a business cycle, explain the 4 sections and what the business cycle indicates.
You will be able to discuss the historical value and data of the United States’ business cycle using historical data.
Do Now: How do you imagine the business cycle to look?
EQ: Why do we monitor? What is the role of the government?

4. The overall economic goals or objectives of the government are:
Steady economic growth
Price levels to remain stable (inflation at a steady level)
Low unemployment
The business cycle is a graph that helps to show how the economy is doing over a period of time.

5. Things you should learn in module 2
What a business cycle is and why policy makers (government) seek to diminish the severity of business cycle
How unemployment and unemployment are measured and how they change over the business cycle
How aggregate output and employment changes over the cycle
Why price stability is the preferred status
How economic growth determines a countries standard of living and does it really indicate a complete picture
How models provide simplified representations to help understand economic concepts
Terms: business cycle, depression, recessions, expansions, employment, unemployment, labor force, unemployment rate, output, aggregate output, inflation, deflation, price stability, economic growth, model, other things equal assumption

7. Do the handout from St. Louis Federal Reserve,
“Why Scarce Resources Are Sometimes Unemployed”

8.
Jason Welker “The Business Cycle”- 10 min. without stopping- shows how to draw and what this model indicates, terms defined
The business cycle model is one often referred to in the media, which likes to use terms like "boom' and 'bust'. It is a model that can communicate several important pieces of information about a nation's economy. Basically, the business cycles is a graph which shows the level of real GDP over time. The vertical axis shows the level of GDP, and horizontal axis time.
A typical nation's business cycle will most likely look like a wave, showing how GDP rises and falls over time. Assuming the country is achieving economic growth over the long-run, business cycle's 'line of best fit' or 'trend line' will slope upwards, indicating that over the span of years or decades, a nation's economy will produce more output. But over shorter periods of time, output may fluctuate, as the economy experiences those 'booms and busts' the media are so fond of.
There are four fundamental phases in any nation's business cycle:
1) Expansion: Also known as the recovery phase, when the nation's output is rising at a rate faster than the long-run trend.
2) Peak: This is the end of a period of expansion, when output begins to decline
3) Contraction: Also known as the recession phase, when the nation's output is falling over time.
4)Trough: This is the end of a period of recession, when output begins to recover (the economy enters an expansion phase again).
This video lesson will explore the four phases of a nation's business cycles and explain how the goal of macroeconomic policies is to 'smooth out' the fluctuations in the business cycle, and thereby reduce the amount of uncertainty faced by a nation's households and firms regarding the future level of economic activity.

9. Facts and figures on Business Cycle
A depression is a very deep and prolonged downturn, we have not had one since
Recession are less prolonged economic downturns
National Bureau of Economic Research says we have had 11 recessions in US since WWII.
The average last 14 months
Average expansion lasted 57 months
Average length of a business cycle from beginning of a recession to beginning of the next recession is 5 years and 7 months. Shortest was 18 months and longest was 10 years and 8 months
Rule of thumb is that a recession is declared with 2 consecutive quarters with a drop in aggregate output. So 6 months.
The US has National Bureau of Economic Research (NBER) make the call- not everyone agrees to their call.

11. Employment, Unemployment and the Business Cycle
Employment is the total number of people currently working for pay
Unemployment is the total number of people who are actively looking for work, but are not currently employed
Labor Force- the sum of employment and unemployment
Unemployment Rate is the percentage of the labor force that is unemployed
Unemployment is never a zero

12. US employment data To expand your understanding
as you look at the data note the following: Are there more males or females working? Does it give us why? Look at the different age groups do the numbers change? How would you describe the changes? Why do you think the changes occur? For those who want a deeper understanding of how the Natural Rate of Unemployment is determined and its indications this article is a rather simple explanation to start your quest. ate/

13. Aggregate Output and the Business Cycle
The economy is about how much output a country has. Output is the quantity of goods and services produced
In macroeconomics we look at the aggregates, the aggregate output is the economy’s total production of goods and services for a given time period (a year is common but also by the quarters- 3 months)
CONNECTION BETWEEN THESE IS THAT AS OUTPUT INCREASES THE UNEMPLOYMENT DECREASES- THEY HAVE AN INVERSE RELATIONSHIP

14. Inflation, Deflation and Price Stability
While wages have risen significantly overtime the reality is that due to inflation the average worker really has not made gains, they have simply stayed level.
Inflation is the rise in the overall price level
Deflation is the fall in the overall price level
Disinflation is a fall in the rate of inflation (inflation is still occurring, just at a lower rate)
A change in the prices of a few goods simply changes the opportunity cost of purchasing those goods but does not mean inflation or deflation

15. What does inflation and deflation do to the economy?
Inflation discourages people from holding on to cash- the value of the cash is falling so they will want to exchange it for something that will hold its value better
Deflation can cause people to hold on to their cash rather than invest it. This can stall a recession or cause it to become worse.

16. Economic Growth Real GDP per capita has grown 9 times as much as it was in 1900- 2009.
Many times we look back to periods in history and think, “wow that was a great time and so much better.” Reality is that a closer look would not always prove that.
Take the 1950’s many consider that a great time of prosperity, but by today’s standards American’s were very poor. This is based on the data that most homes did not have what is considered necessities like a washer and AC.
Economic growth- an increase in the maximum possible output of an economy- this is indicated by an outward movement of the PPC or an actual movement of the long run aggregate supply. We measure this with Real Gross Domestic Product and generally divided by population to give us the per capita. (pg 13 has graph)

17. Models used in Economics
Model- a very simplified version of a reality that is used to better understand real-life situations
Economists are not able to put people in a dome and control everything to see how they react to different situations so they create models to show what happens. The use of models allows economist to look at one change at a time- holding all other things equal (ceteris peribus)

18. AP Tip-
You need to know how to draw and label the business cycle graph as well as explain the relation to unemployment, output and economic growth at different phases.

19. Tuesday Week 2
Objective: Be able to draw and label a PPC, be able to define a PPC (PPF), be able to describe the use of this model to demonstrate the concepts of scarcity, trade-off and opportunity cost as well as efficiency and economic growth
Be able to create visually and verbally explain the PPC.
Do Now: annotate and summarize your notes over the business cycle
EQ: How is the PPC used in economics?

20. Unit 1: Basic Economic Concepts
Paul Solomon Production Possibility Curve

21. REVIEW Explain relationship between scarcity and choices
Differentiate between positive & normative
Differentiate between price and cost
Explain the “Invisible Hand” of Capitalism
Differentiate between consumer and capital goods
Give examples of each of the 4 Factors of Production
Define tradeoffs
Define opportunity cost
Differentiate between accounting costs and economic costs

22. The Economizing Problem…
WE HAVE A PROBLEM!!
The Economizing Problem…
Scarcity
Society has unlimited wants but unlimited resources

23. The Production Possibilities Curve (PPC) Using Economic Models…
Step 1: Explain concept in words
Step 2: Use numbers as examples
Step 3: Generate graphs from numbers
Step 4: Make generalizations using graph

24. What is the Production Possibilities Curve?
A production possibilities graph (PPG) is a model that shows alternative ways that an economy can use its scarce resources
This model graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency.
4 Key Assumptions
Only two goods can be produced
Full employment of resources
Fixed Resources (Ceteris Paribus)
Fixed Technology

25. Production “Possibilities” Tablef 14 12 9 5 2 4 6 8 10
Bikes
Computers
Each point represents a specific combination of goods that can be produced given full employment of resources.
NOW GRAPH IT: Put bikes on y-axis and computers on x-axis

26. Production Possibilities
How does the PPG graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency? 14 12 10 8 6 4 2
Impossible/Unattainable
(given current resources) A B G C
Bikes
Efficient D
Inefficient/ Unemployment E
Computers

27. Opportunity Cost Example:
1. The opportunity cost of moving from a to b is…
2 Bikes
2.The opportunity cost of moving from b to d is…
7 Bikes
3.The opportunity cost of moving from d to b is…
4 Computer
4.The opportunity cost of moving from f to c is…
0 Computers
5.What can you say about point G?
Unattainable

28. The Production Possibilities Curve (or Frontier)

29. Production Possibilities
A B C D E
CALZONES
PIZZA
List the Opportunity Cost of moving from a-b, b-c, c-d, and d-e.
Constant Opportunity Cost- Resources are easily adaptable for producing either good.
Result is a straight line PPC (not common)

30. Production Possibilities
A B C D E
PIZZA
ROBOTS
List the Opportunity Cost of moving from a-b, b-c, c-d, and d-e.
Law of Increasing Opportunity Cost-
As you produce more of any good, the opportunity cost (forgone production of another good) will increase.
Why? Resources are NOT easily adaptable to producing both goods.
Result is a bowed out (Concave) PPC

31. Constant vs. Increasing Opportunity Cost
Identify which product would have a straight line PPC and which would be bowed out?
Corn
Cactus
Wheat
Pineapples

32. PER UNIT Opportunity Cost How much each marginal unit costs
Units Gained
Example:
1. The PER UNIT opportunity cost of moving from a to b is…
1 Bike
2.The PER UNIT opportunity cost of moving from b to c is…
1.5 (3/2) Bikes
3.The PER UNIT opportunity cost of moving from c to d is…
While moving from A to B cost you 2 bikes you gained 2 computers, the opportunity cost per unit is 1 bike for every 1 computer. 2/2=1
2 Bikes
4.The PER UNIT opportunity cost of moving from d to e is…
2.5 (5/2) Bikes
NOTICE: Increasing Opportunity Costs

33. The Production Possibilities Curve and Efficiency

34. Two Types of Efficiency
Productive Efficiency-
Products are being produced in the least costly way.
This is any point ON the Production Possibilities Curve
Allocative Efficiency-
The products being produced are the ones most desired by society.
This optimal point on the PPC depends on the desires of society. 34

35. Productive and Allocative Efficiency
Which points are productively efficient?
Which are allocatively efficient? 14 12 10 8 6 4 2
Productively Efficient combinations are A through D A B G
Allocative Efficient combinations depend on the wants of society
(What if this represents a country with no electricity?)
Bikes C E F D
Computers 35

36. Why two types of efficiency? Is combination “A” efficient?
Yes and No. It is productively efficient but it is not the combination society wants
Size 20 running shoes A
Size 10 running shoes

37. Shifting the Production Possibilities Curve

38. 3 Shifters of the PPC Production Possibilities
4 Key Assumptions Revisited
Only two goods can be produced
Full employment of resources
Fixed Resources (4 Factors)
Fixed Technology
What if there is a change?
3 Shifters of the PPC
1. Change in resource quantity or quality
2. Change in Technology
3. Change in Trade

39. Production Possibilities
What happens if there is an increase in population?
Robots
Pizzas

40. Production Possibilities
What happens if there is an increase in population?
Robots
Pizzas 40

41. Production Possibilities
What if there is a technology improvement in pizza ovens
Robots
Pizzas 41

42. Production Possibilities
What if there is a technology improvement in pizza ovens
Robots
Pizzas 42

43. Capital Goods and Future Growth
Countries that produce more capital goods will have more growth in the future.
Panama – Favors Consumer Goods
Mexico – Favors Capital Goods
Current
PPC
Future
PPC
Future
PPC
Capital Goods
Current
PPC
Capital Goods
Consumer goods
Consumer goods
Panama
Mexico

44. PPC Practice Draw a PPC showing changes for each of the following:
Pizza and Robots (3)
1. New robot making technology
2. Decrease in the demand for pizza
3. Mad cow disease kills 85% of cows
Consumer goods and Capital Goods (4)
4. BP Oil Spill in the Gulf
5. Faster computer hardware
6. Many workers unemployed
7. Significant increases in education

45. New robot making technology
Question #1
New robot making technology Q
A shift only for Robots
Robots Q
Pizzas 45

46. Question #2 Decrease in the demand for pizza Q
The curve doesn’t shift!
A change in demand doesn’t shift the curve
Robots Q
Pizzas 46

47. Mad cow disease kills 85% of cows A shift inward only for Pizza
Question #3
Mad cow disease kills 85% of cows Q
A shift inward only for Pizza
Robots Q
Pizzas 47

48. Question #4 BP Oil Spill in the Gulf Q
Decrease in resources decrease production possibilities for both
Capital Goods (Guns) Q
Consumer Goods (Butter) 48

49. Question #5 Faster computer hardware Q
Quality of a resource improves shifting the curve outward
Capital Goods (Guns) Q
Consumer Goods (Butter) 49

50. Question #6 Many workers unemployed Q The curve doesn’t shift!
Unemployment is just a point inside the curve
Capital Goods (Guns) Q
Consumer Goods (Butter) 50

51. Question #7 Significant increases in education Q
The quality of labor is improved. Curve shifts outward.
Capital Goods (Guns) Q
Consumer Goods (Butter) 51

52. AP week 2 Wednesday

53. Absolute and Comparative Advantage Module 4
Wednesday
Absolute and Comparative Advantage Module 4
Objective: Be able to explain how trade leads to gains for individuals and the economy and analyze that the impact may not be equal for everyone. Be able to explain the difference between absolute and comparative advantage and create charts to demonstrate.
You will be able to calculate the comparative advantage, deduce which country has the absolute and comparative advantage. You will be able to write out the equations.
Do Now: complete the PPC that was handed to you as you came in to demonstrate that you understand how and as a review from yesterday. Review your notes from yesterday and from your readings.
EQ: What does comparative advantage tell us and how do I calculate? 53

54. Terms: trade, gains from trade, specialization, comparative advantage, absolute advantage

55. We are not self sufficient and while we might survive on a deserted island we would not be able to have as much stuff as if we could trade.
The concept of specialization was a major point if Adam Smith’s 1776 book The Wealth of Nations.
Adam Smith is considered the Father of Economics,
mostly known for the concept of the “invisible hand” and that all people do what is in their own best interest.
The concept of specialization is that if everyone does what they can do at the least opportunity cost then trade everyone benefits.

56. Gains from trade
Even if a country can produce more of all the goods than another country that country can still benefit from trade.
Examples are castaways on pgs 24 and on handouts
The production possibility curve is often used to demonstrate the comparative advantage

57.
Jason Welker’s 10 min. video on comparative knowledge

58. Per Unit Opportunity Cost 1 hat costs a half of a shirt
Per Unit Opportunity Cost Review
Per Unit Opportunity Cost
= Opportunity Cost
Units Gained
Assume it costs you $50 to produce 5 t-shirts. What is your PER UNIT cost for each shirt?
$10 per shirt
Now, take money our of the equation. Instead of producing 5 shirts you could have made 10 hats.
What is your PER UNIT OPPORTUNITY COST for each shirt in terms of hats given up?
1 shirt costs 2 hats
What is your PER UNIT OPPORTUNITY COST for each hat in terms of shirts given up?
1 hat costs a half of a shirt 58

59. Per Unit Opportunity Cost Review
Ronald McDonald can produce 20 pizzas or 200 burgers Papa John can produce 100 pizzas or 200 burgers
What is Ronald’s opportunity cost for one pizza in terms of burgers given up?
What is Ronald’s opportunity cost for one burger in terms of pizza given up?
What is Papa John’s opportunity cost for one pizza in terms of burgers given up?
What is Papa John’s opportunity cost for one burger in terms of pizza given up?
1 pizza cost 10 burgers
1 burger costs 1/10 pizza
1 pizza costs 2 burgers
1 burger costs 1/2 pizza
Ronald has a COMPARATIVE ADVANTGE in the production of burgers
Papa John has a COMPARATIVE ADVANTAGE in the production of pizza 59

60. Absolute and Comparative Advantage
Absolute Advantage
The producer that can produce the most output OR requires the least amount of inputs (resources)
Ex: Papa John has an absolute advantage in pizzas because he can produce 100 and Ronald can only make 20.
Comparative Advantage
The producer with the lowest opportunity cost.
Ex: Ronald has a comparative advantage in burgers because he has a lowest PER UNIT opportunity cost.
Countries should trade if they have a relatively lower opportunity cost.
They should specialize in the good that is “cheaper” for them to produce. 60

61. Additional notes and resources to practice

62. BEFORE WE GET STARTED, ON THE ARTICLE “WHY SCARCE RESOURCES ARE SOMETIMES UNEMPLOYED”
What are the factors of production (the resources)?
What does inefficient have to do with unemployed use of resources? Why did they use Labor as an example?
What are the 3 types of unemployment?
How are frictional and structural similar? What is the significance of structural?
NROU is ? What unemployment is included?
What is cyclical?
How does it correlate to the business cycle?
What causes this form?
Can you explain underemployment?
Is labor the only resource unused? Explain?
Friedman, Making a Pencil 2.5 minutes

63. Economics Principles of N. Gregory Mankiw Sixth Edition
Please ask your students in advance to bring calculators to class. This PowerPoint chapter includes simple in-class exercises that lead students to see for themselves the gains from trade arising from comparative advantage.
This PowerPoint chapter covers the same topics as Chapter 3 in the textbook (comparative & absolute advantage, the gains from trade), but using a different example and a different approach that is likely to benefit your students. The textbook presents these topics using an example involving two individual producers (the farmer & rancher). After the example, the textbook states that its lessons apply to countries as well as individual producers. This PowerPoint presentation takes the opposite approach, illustrating the concepts with an example involving two countries, and then states that that the lessons apply to individuals as well as countries. Seeing the analysis both ways, and seeing a different example in class than in the textbook, will help students better learn these concepts.
The example in this PowerPoint chapter builds on the PPF example introduced in the Chapter 2 PowerPoint. (It is not essential to cover the Chapter 2 PowerPoint before this one, though.)
This PowerPoint omits “Should Tom Brady (formerly Tiger Woods) Mow His Own Lawn?” It’s a great example of comparative advantage, but it does not introduce any new concepts, and students can easily understand it on their own.

64. In this chapter, look for the answers to these questions:
Why do people—and nations—choose to be economically interdependent?
How can trade make everyone better off?
What is absolute advantage? What is comparative advantage? How are these concepts similar? How are they different?

65. hair gel from Cleveland, OH
Interdependence
Every day you rely on many people from around the world, most of whom you’ve never met, to provide you with the goods and services you enjoy.
hair gel from Cleveland, OH
cell phone from Taiwan
dress shirt from China
coffee from Kenya 65

66. Interdependence
One of the Ten Principles from Chapter 1: Trade can make everyone better off.
We now learn why people—and nations—choose to be interdependent, and how they can gain from trade.

67. The opportunity cost can be determined by the slope.
How many did you lose counting down and then over to create a fraction.

68. Our Example Two countries: the U.S. and Japan
Two countries: the U.S. and Japan
Two goods: computers and wheat
One resource: labor, measured in hours
We will look at how much of both goods each country produces and consumes
if the country chooses to be self-sufficient
if it trades with the other country
The lessons illustrated by this international trade example also apply to trade between two individual producers. Note that this chapter in the textbook does the reverse: It develops the lessons in the context of an example involving two individual producers, and then states that the lessons also apply to international trade. So, between this PowerPoint and the textbook chapter, students will see the same concepts and lessons developed in two different but entirely consistent approaches and examples.
The example here is highly contrived and unrealistic in order to illustrate complex concepts as simply as possible. The example has some qualities that make it especially valuable:
* The two goods are fundamentally different (one is agricultural, the other manufactured), which makes gains from trade based on comparative advantage very likely. An example using more similar goods, say laptop computers and MP3 players, would not be appropriate for this chapter because it would more likely give rise to inter-industry trade, and the gains would likely arise from a source other than comparative advantage (probably increasing returns to scale).
* In the example here, it turns out that the U.S. has an absolute advantage in both goods, yet both countries gain from trade. Students see, therefore, that comparative advantage, not absolute advantage, is what’s necessary for trade to be mutually beneficial.
* In the real world, one often sees gains from trade based on comparative advantage occurring between countries that are very different—such as between rich industrialized countries and poor developing countries. This example shows that trade based on comparative advantage can also occur between countries that are at similar levels of industrialization and income. (Of course, the U.S. and Japan are very different, but they are far more similar than are, say, the U.S. and Botswana.) 68
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69. Production Possibilities in the U.S.
Get out graph paper and create a PPC
The U.S. has 50,000 hours of labor available for production, per month.
Producing one computer requires 100 hours of labor.
Producing one ton of wheat requires 10 hours of labor.
Based on this data how many computers and tons of wheat can the US produce?
Create a PPC with wheat on the vertical and computers on the horizontal.
If you just covered Chapter 2, point out to your students that the U.S. PPF here is the same as in the Chapter 2 PowerPoint.
Warn students that, in a few moments, they will be asked to derive Japan’s PPF. They will need to follow the same steps that you are about to show for deriving the U.S. PPF. 69

70. The U.S. PPF The U.S. has enough labor to produce 500 computers,
4,000
100
5,000
2,000
1,000
3,000
500
200
300
400
Computers
Wheat (tons)
The U.S. has enough labor to produce 500 computers,
or 5000 tons of wheat,
or any combination along the PPF.
Deriving the intercepts, or endpoints of the PPF:
The U.S. has 50,000 labor hours.
It takes 100 hours to produce a computer. If the U.S. uses all its labor to produce computers, then it will produce 50,000/100 = 500 computers. Hence, the horizontal intercept is (500 computers, 0 wheat).
It takes 10 hours to produce a ton of wheat. If the U.S. uses all its labor to produce wheat, then it will produce 50,000/10 = 5000 tons of wheat. Hence, the vertical intercept is (0 computers, 5000 tons of wheat).
The PPF is the straight line that connects the two endpoints. 70
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71. The U.S. Without Trade
4,000
100
5,000
2,000
1,000
3,000
500
200
300
400
Computers
Wheat (tons)
Suppose the U.S. uses half its labor to produce each of the two goods.
Then it will produce and consume
250 computers and
2500 tons of wheat.
Of course, the U.S. could choose a different point. The actual choice will depend on the preferences of society. (In the following chapter—on supply and demand—we will learn what determines how much of each good society produces.)
Important note for students: Without trade, a country consumes what it produces. 71
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72. ACTIVE LEARNING 1 Derive Japan’s PPF
Use the following information to draw Japan’s PPF.
Japan has 30,000 hours of labor available for production, per month.
Producing one computer requires 125 hours of labor.
Producing one ton of wheat requires 25 hours of labor.
Your graph should measure computers on the horizontal axis.
Using this information to draw Japan’s PPF requires a calculator (or the ability to do long division).
If your students have the “gutted handout” of these slides, they can draw their PPF on the axes provided on the following slide.
This activity should take only three minutes of class time. It’s good practice and review for students, and helps break up the lecture.
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73. Japan’s PPF Japan has enough labor to produce 240 computers,
Computers
Wheat (tons)
2,000
1,000
200
100
300
Japan has enough labor to produce 240 computers,
or 1200 tons of wheat,
or any combination along the PPF.
Horizontal intercept: (30,000 labor-hours)/(125 hours per computer) = 240 computers.
Vertical intercept: (30,000 labor-hours)/(25 hours per ton of wheat) = 1200 tons of wheat. 73
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74. Japan Without Trade
Computers
Wheat (tons)
2,000
1,000
200
100
300
Suppose Japan uses half its labor to produce each good.
Then it will produce and consume
120 computers and
600 tons of wheat. 74
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75. Consumption With and Without Trade
Without trade,
U.S. consumers get 250 computers and 2500 tons wheat.
Japanese consumers get 120 computers and 600 tons wheat.
We will compare consumption without trade to consumption with trade.
First, we need to see how much of each good is produced and traded by the two countries. 75

76. ACTIVE LEARNING 2 Production under trade
1. Suppose the U.S. produces 3400 tons of wheat. How many computers would the U.S. be able to produce with its remaining labor? Draw the point representing this combination of computers and wheat on the U.S. PPF. 2. Suppose Japan produces 240 computers. How many tons of wheat would Japan be able to produce with its remaining labor? Draw this point on Japan’s PPF.
Give your students a few minutes to solve these problems before showing the answers on the next slides. This will break up the lecture, get the students involved, and give them practice with “word problems.”
It is not necessary that all students finish both problems before moving on. It’s fine if most finish the first, and a few finish the second. However, the second problem is easy for most students.
Note that most students will need a calculator to solve the first problem.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

77. U.S. Production With Trade
Computers
Wheat (tons)
4,000
100
5,000
2,000
1,000
3,000
500
200
300
400
Producing 3400 tons of wheat requires 34,000 labor hours.
The remaining 16,000 labor hours are used to produce 160 computers.
Point out to students that the red dot represents the combination (160 computers, 3400 tons of wheat). We will assume that this is the combination the U.S. produces in the scenario in which the U.S. trades. 77
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78. Japan’s Production With Trade
Computers
Wheat (tons)
2,000
1,000
200
100
300
Producing 240 computers requires all of Japan’s 30,000 labor hours.
So, Japan would produce 0 tons of wheat.
The red dot represents the combination (240 computers, 0 tons wheat). We will assume this is the combination that Japan produces.
Point out that, just because Japan is not producing any wheat does not mean that Japan’s consumers must all go on the Atkins diet (which shuns bread and other foods made from wheat). When trade is allowed, Japan can trade some of its computers for wheat produced in another country. 78
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79. Exports & Imports Exports: goods produced domestically and sold abroad
Exports: goods produced domestically and sold abroad
To export means to sell domestically produced goods abroad.
Imports: goods produced abroad and sold domestically
To import means to purchase goods produced in other countries.
These terms are so basic that many instructors skip this slide.
There’s a subtle point that you might want to mention (if you’re anal like me), or that your students might ask about (especially if tourism is an important part of your local economy):
Someone from Germany or South Korea visits Las Vegas and spends $200 on a pair of tickets to a show. How should we classify this and other expenditures by foreign tourists on lodging and entertainment while they are vacationing here?
Answer: We count it in U.S. exports. It doesn’t matter that the service was consumed here. What matters is that it was produced here but sold to a foreign buyer.
Hence, a more precise definition of exports would be goods and serviced produced here and purchased by foreign buyers. This stricter definition of exports doesn’t care whether the good or service was consumed in the buyer’s home country or in the exporting country.
Similarly, a stricter and more precise definition of imports would include purchases by domestic residents of goods and services produced abroad—including entertainment and lodging services that tourists from the U.S. consume in the foreign countries they visit. 79

80. ACTIVE LEARNING 3 Consumption under trade
Suppose the U.S. exports 700 tons of wheat to Japan, and imports 110 computers from Japan.
(So, Japan imports 700 tons wheat and exports 110 computers.)
How much of each good is consumed in the U.S.? Plot this combination on the U.S. PPF.
How much of each good is consumed in Japan? Plot this combination on Japan’s PPF.
Some students need help figuring out that consumption of a good is the difference between the amount produced and the amount exported.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

81. U.S. Consumption With Trade
Computers
Wheat (tons)
wheat
computers
3400
160
produced
4,000
100
5,000
2,000
1,000
3,000
500
200
300
400
110
+ imported
700
– exported
2700
270
= amount consumed
The red point again represents production.
Trade un-tethers consumption from production. The light blue point represents consumption. Notice that the consumption point is above the PPF. Without trade, it would not be possible to consume this combination of the two goods!
In a sense, international trade is like technological progress: it allows society to produce quantities of goods that would otherwise not be possible. 81
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82. Japan’s Consumption With Trade
wheat
computers
Computers
Wheat (tons)
2,000
1,000
200
100
300
240
produced
700
+ imported
110
– exported
700
130
= amount consumed
Again, the light blue point representing consumption is above the PPF. Without trade, it would not be possible to consume this combination of the goods. 82
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 82

83. Trade Makes Both Countries Better Off
IT DOES NOT MEAN THAT THE COUNTRIES CAN PRODUCE MORE, BUT THEY CAN CONSUME MORE!
U.S.
consumption without trade
consumption with trade
gains from trade 20
270
250
computers
200
2700
2500
wheat
gains from trade
consumption with trade
consumption without trade
Japan
These tables summarize the gains from trade for both countries. 10
130
120
computers
100
700
600
wheat 83
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84. Where Do These Gains Come From?
Absolute advantage: the ability to produce a good using fewer inputs than another producer
The U.S. has an absolute advantage in wheat: producing a ton of wheat uses 10 labor hours in the U.S. vs. 25 in Japan.
If each country has an absolute advantage in one good and specializes in that good, then both countries can gain from trade.
The last bullet point states that gains from trade will arise if each country has an absolute advantage in something. We will see next, though, that absolute advantage is not required for both countries to gain from trade. 84

85. Where Do These Gains Come From?
Which country has an absolute advantage in computers?
Producing one computer requires labor hours in Japan, but only 100 in the U.S.
The U.S. has an absolute advantage in both goods!
So why does Japan specialize in computers? Why do both countries gain from trade? 85

86. Two Measures of the Cost of a Good
SOMETIMES THEY DO WITH INPUT
OTHER TIMES IT IS OUTPUT
Two countries can gain from trade when each specializes in the good it produces at lowest cost.
Absolute advantage measures the cost of a good in terms of the inputs required to produce it.
Recall: Another measure of cost is opportunity cost. (OUTPUT)
In our example, the opportunity cost of a computer is the amount of wheat that could be produced using the labor needed to produce one computer. 86

87. Opportunity Cost and Comparative Advantage
Comparative advantage: the ability to produce a good at a lower opportunity cost than another producer
Which country has the comparative advantage in computers?
To answer this, must determine the opportunity cost of a computer in each country. 87

88. Opportunity Cost and Comparative Advantage
The opportunity cost of a computer is
10 tons of wheat in the U.S., because producing one computer requires 100 labor hours, which instead could produce 10 tons of wheat.
5 tons of wheat in Japan, because producing one computer requires 125 labor hours, which instead could produce 5 tons of wheat.
So, Japan has a comparative advantage in computers. Lesson: Absolute advantage is not necessary for comparative advantage! 88

89. Comparative Advantage and Trade
Gains from trade arise from comparative advantage (differences in opportunity costs).
When each country specializes in the good(s) in which it has a comparative advantage, total production in all countries is higher, the world’s “economic pie” is bigger, and all countries can gain from trade.
The same applies to individual producers (like the farmer and the rancher) specializing in different goods and trading with each other. 89

90. ACTIVE LEARNING 4 Absolute and comparative advantage
Argentina and Brazil each have 10,000 hours of labor per month.
In Argentina,
producing one pound coffee requires 2 hours
producing one bottle wine requires 4 hours
In Brazil,
producing one pound coffee requires 1 hour
producing one bottle wine requires 5 hours
Which country has an absolute advantage in the production of coffee? Which country has a comparative advantage in the production of wine?
Allow a few minutes for students to work on this problem. Ask for volunteers to share their answers.
Variation: Before asking for volunteers, instruct students to compare their answers with their neighbors. Not everyone will volunteer to explain their answer to the class, but everyone will at least get to explain his or her answer to a classmate.
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91. ACTIVE LEARNING 4 Answers
Brazil has an absolute advantage in coffee:
Producing a pound of coffee requires only one labor-hour in Brazil, but two in Argentina.
Argentina has a comparative advantage in wine:
Argentina’s opp. cost of wine is two pounds of coffee, because the four labor-hours required to produce a bottle of wine could instead produce two pounds of coffee.
Brazil’s opp. cost of wine is five pounds of coffee.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

92. Unanswered Questions…
We made a lot of assumptions about the quantities of each good that each country produces, trades, and consumes, and the price at which the countries trade wheat for computers.
In the real world, these quantities and prices would be determined by the preferences of consumers and the technology and resources in both countries.
We will begin to study this in the next chapter.
For now, though, our goal was merely to see how trade can make everyone better off.
The textbook has a brief explanation of the range of prices that will permit gains from trade in the context of the farmer-rancher example.
The second bullet point mentions technology and resources. In our example, the technology is how many labor-hours are required to produce each good. The resources are simply the quantity of labor-hours available in each country.
In the following chapter (on supply & demand), students will begin their study of how prices and quantities are determined. 92

93. SUMMARY
Interdependence and trade allow everyone to enjoy a greater quantity and variety of goods & services.
Comparative advantage means being able to produce a good at a lower opportunity cost. Absolute advantage means being able to produce a good with fewer inputs.
When people—or countries—specialize in the goods in which they have a comparative advantage, the economic “pie” grows and trade can make everyone better off.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

94. Thursday
Objective: Be able to demonstrate the ability to create and analyze PPC and a business cycle for historical periods of the USA.
You will work in small groups to analyze movements and changes to the PPC and the business cycle. You will verbalize as well as record your findings
Do Now: With your shoulder partner quiz one another over terms we have learned this week. What are your weak ones? Strong ones?
EQ: How do the models of the PPC and the BC relate? How do they demonstrate the concept of scarcity, economic growth and how do they reflect those concepts as well as unemployment?

95. Complete a hand out each so that you have one in your notebook for a resource, turn them all in together to demonstrate that your group all understands these concepts.
Make sure everyone in your group understands how to draw these two models and has them correctly drawn on their big chart. If there are discrepancies then identify and resolve.
If you finish early then practice vocabulary terms

96. Friday
Objective: you will be able to solve a free response question from a prior AP test.
You will work in small groups to answer different questions and then swap the questions.
Do Now: Review your vocabulary terms
EQ: How do I tackle a FRQ?
Each group will be asked to demonstrate their understanding on one or more of the FRQ in a random draw. Model your thought process. Identify terms that provide you insight in what the question is actually asking.