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International Trade

Explore the concept of comparative advantage and how it applies to international trade decisions. Learn why specializing in areas of comparative advantage creates wealth and how trade between countries benefits all parties involved.

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International Trade

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  1. International Trade Mr. Hellums Economics

  2. 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?

  3. Reasons for Trade • Why Do People Trade? • Voluntary Exchange • Coincidence of Wants • Both Parties Gain • Wealth Creation

  4. Opening Markets Creates Wealth Remember China and Deng Xiaoping!

  5. 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.

  6. Specialization • Specialize In Production Where You Have a Comparative Advantage

  7. 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.

  8. Example

  9. Example Who has the absolute advantage in baking cakes? Who has the absolute advantage in making pizza?

  10. Example Why? Well, because 4 cakes>2 cakes & 8 pizzas>6 pizzas.

  11. Example Who has the comparative advantage in baking cakes? Who has the comparative advantage in making pizza?

  12. Example Who has the comparative advantage in baking cakes? Who has the comparative advantage in making pizza?

  13. 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.

  14. Example Furthermore, it only cost David 1/3of a cake to make a pizza, whereas it costs Ricky ½ of a cake to make a pizza.

  15. Comparative AdvantageProducing a Meal Barbie Ken 40 min 10 min Cooking 20 min Cleaning 30 min 30 min 70 min Totals

  16. Opportunity Costs Barbie Ken 1/2 cleaning Cooking 4/3 cleaning 2/1 cooking 3/4 cooking Cleaning

  17. 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!

  18. 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 Timefor Other Activities

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