international trade economics mr. hellums. warm up- you choose… you have $300 to spend and it will...
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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
Why Do People Trade?– Voluntary Exchange– Coincidence of Wants– Both Parties Gain
Wealth Creation
Opening Markets Creates Wealth
Remember China and Deng Xiaoping!
Economic Conceptsfor Trade
Absolute Advantage– I can make more of a good or I can do
a job faster. Comparative Advantage
– I can make a good at a lower opportunity cost. This will decide what to produce and what to trade for.
Specialization 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.
ExampleDavid Ricardo
Ricky Ricardo
Bake Cakes
2 cakes/hr. 4 cakes/hr.
Make Pizza 6 pizzas/hr.
8 pizzas/hr.
ExampleDavid Ricardo
Ricky Ricardo
Bake Cakes
2 cakes/hr. 4 cakes/hr.
Make Pizza 6 pizzas/hr.
8 pizzas/hr.
Who has the absolute advantage in baking cakes?Who has the absolute advantage in making pizza?
ExampleDavid Ricardo
Ricky Ricardo
Bake Cakes
2 cakes/hr. 4 cakes/hr.
Make Pizza 6 pizzas/hr.
8 pizzas/hr.
Why?Well, because 4 cakes>2 cakes & 8 pizzas>6 pizzas.
ExampleDavid Ricardo
Ricky Ricardo
Bake Cakes
2 cakes/hr. 4 cakes/hr.
Make Pizza 6 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 AdvantageProducing a Meal
Cooking
Cleaning
Barbie Ken
10 min
20 min
40 min
30 min
Totals 30 min 70 min
Opportunity Costs
Cooking
Cleaning
Barbie Ken
1/2 cleaning
2/1 cooking
4/3 cleaning
3/4 cooking
What Will Ken & Barbie Do? Who has the lower opportunity cost in
cooking? – Barbie
Who has the lower opportunity cost in cleaning– Ken
How can they benefit from specialization and trade?– If Barbie cooks and Ken cleans, both will gain
more free time!
Nations trade like people! Nations Specialize According to the Principle of
Comparative Advantage Lesson - Don’t Try to Do Everything; It is Not
Efficient Trade Between Countries Creates Wealth Examples
– David and Ricky have more pizza and cake at the party– Ken and Barbie Have Time
for Other Activities