Why People Trade Domestically and

Internationally

Laura Ewing/President www.economicstexas.org

1801 Allen Parkway Houston, TX 77019

What would you trade?

If you could produce anything, what would it be?What is comparative advantage?

If you could produce anything for trade, what would it be? Why?

What human resources do you have available?

What natural resources do you have available?

What capital would you need?

What is it? Why trade? What is comparative advantage?

Trade?

Trade is…

The voluntary exchange of goods and services

Occurs when the expected gains outweigh the costs

Comparative Advantage

Comparative Advantage

Specialization Comparative Advantage

Specializing in the production of goods and services that can be produced at a lower opportunity cost than the cost a trading partner would have to pay to produce the same products.

Specialization

Specialization Comparative Advantage

Based on comparative advantage increases the total output and consumption of the goods that are traded.

What happens to the quantity of products with specialization based on comparative advantage?

What trades have you made recently and why you traded?

Which were domestic? Which were international?

Activity 1: Would you keep or trade an article of clothing?

On a scale of 1 to 5, how happy are you with the item?

Record on sheet.

You have two minutes to trade within your group if you want. You may now show cards.

How many trades were made?

What are examples of trades you made?

Rate your happiness with the items now and record.

Round Number of Trades

Number of students happier after trading

1

2

Group A: White Cards

Group B: Yellow cards

Group C: Green Cards

Pair of baggy jeans (male)

Pair of basic jeans (male) (2)

Pair of low rise jeans (female)

Pair of designer jeans (female)

Professional basketball team jersey

Professional hockey team jersey (2)

T-shirt of favorite band (2)

Pair of summer sandals (female)

Pair of carpenter pants (male) (2)

Pair of athletic shoes (female) (2)

Professonal baseball team cap (2)

Professional football team jersey

Pair of sandals (male) T-shirt of favorite sports team

Sweatshirt

Designer bag (female)

Sports Watch (female) Pair of athletic shoes (male)

1. REVIEW LIST 2. TRADE FOR 2-3 MINUTES

3. YOU DO NOT HAVE TO TRADE

Round 2: Will you trade with others in the class?

Activity 2: Would you keep or trade an article of clothing within the class??

Time: 3 to 4 minutes You do not have to trade

Activity 2: How many trades were made?

What are examples of trades you made?

Rate your happiness with the items now and record.

Round Number of Trades

Number of students happier after trading

1

2

Activity 2: How many trades were made?

Relate activity to the real world…what parallels do you see?

Should the U. S. trade with other countries? Why or why not?

Did more people trade in round 1 or 2? Why?

Were you required to trade? Did anyone have a higher

rating in round one than 2? If so, how did that happen?

The number of items to trade remained the same, but people were happier at the end of which round ___? Why?

Why were you willing to trade?

Opportunity Cost

What is your choice? What is the opportunity cost of your choices?

1. The opportunity cost is the highest valued alternative that is given up when a choice is made

For example: Meat pizza, veggie

pizza, cheese pizza, salad-What are your first and second choices?

How do you relate to the pizza shop?

Domestic & International Issues: To Specialize & Trade or Not

Work individually on Visual 3

Discuss Visual 3

1. Two workers in a pizza shop and then

two countries 2. Decide for each if

they should specialize and trade

3. Key effect for each is to increase the amount of goods produced and consumed

Comparative Advantage

What is your choice? What is the opportunity cost of your choices?

1. Comparative Advantage occurs when people or firms specialize in the production of a good or service for which they have a lower opportunity cost.

For example: Meat pizza, veggie pizza,

cheese pizza, salad-What are your first and second choices?

A: Comparative Advantage: Cell phones or microwave ovens

Show cell phones Show microwave ovens

6. Display visual 4 What is the

opportunity cost of producing - A. 8 cell phones?B. 1 cell phone?C. 4 microwave ovens?D. 1 microwave oven?

1. Country A 2. 6 volunteers 3. Receive Activity 2,

Production Card, Country A

4. This is a small country with six workers

5. Production in one day:◦ Each worker 8 cells or 4

microwave ovens

Country A

A B C D E F G

Number of Cell Phones

48 40 32 24 16 8 0

Number of Microwave Ovens

0 4 8 12 16 20 24

Analysis of Country A’s Production

1. How does the number of cell phones that can be produced change as Country A produces more microwave ovens?

2. How does the number of microwaves Country A can produce change as more cell phones are produced?

3. What does the overall chart show?4. What is this type of chart called? 5. What is the trade-off in producing more of either good?

B: Comparative Advantage: Cell phones or microwave ovens

Show cell phones Show microwave ovens

6. Display visual 4 What is the

opportunity cost of producing - A. 1 cell phone?B. 2 cell phone?C. 1 microwave oven?D. 2 microwave oven?

1. Country B 2. 6 volunteers 3. Receive Activity 2,

Production Card, Country B

4. This is a small country with six workers

5. Production in one day:◦ Each worker 1 cell phone or

2 microwave ovens

Country B

A B C D E F G

Number of Cell Phones

1 1 2 3 4 5 6

Number of Microwave Ovens

12 10 8 6 4 2 1

Analysis of Country B’s Production

1. What does the production possibility curve show you about making cell phones and microwaves ovens in Country B?

2. Why does this occur?3. If each country only produces cell phones, which country can

produce more cell phones? 4. If each country only produces microwave ovens, which country

can produce more microwave ovens?

Absolute Advantage

Who has an absolute advantage in producing microwaves?

Who has an absolute advantage in producing cell phones?

When a worker can produce more of a good than a worker in another country, the worker in the first country has an absolute advantage in producing that good.

Absolute Advantages?

Country A produced at Combination B. Please circle

Country B produced at Combination D. Circle D.

Divide into pairs Use Visual 4 to determine which

country has a comparative advantage in the production of cell phones and microwave ovens.

At B and D combination, what is the total output of cell phones and microwaves?

If the two countries specialize and trade, what is the total output and production? Consumption?

What are disadvantages of S and T?

Visual 5 1. Why do individuals, organizations and nations trade?2. How does overall level of

satisfaction increase when people trade?

3. How does specialization and trade affect production and consumption?

4. What is absolute advantage?

5. What is comparative advantage?

6. View Visual 5

Closure1. Why do individuals, organizations and nations trade?2. How does overall level of

satisfaction increase when people trade?

3. How does specialization and trade affect production and consumption?

4. What is absolute advantage?

5. What is comparative advantage?

6. View Visual 5

Assessment: Activity 4