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Why Do People Trade?

Why Do People Trade?. Capstone Lesson 44. Class Ranking of Tradable Items. Voluntary Trade. Benefits both parties Win-Win Consider simple daily examples Consider city, state or nation without trade. What are these people about to say to each other?. Absolute and Comparative Advantag e.

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Why Do People Trade?

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  1. Why Do People Trade? Capstone Lesson 44

  2. Class Ranking of Tradable Items

  3. Voluntary Trade • Benefits both parties • Win-Win • Consider simple daily examples • Consider city, state or nation without trade What are these people about to say to each other?

  4. Absolute and Comparative Advantage • Comparative Advantage: The comparison of the production of goods according to their opportunity cost. • Absolute Advantage: The comparison of the production of goods according to their productivity. • Examples: U.S. and Mexico; Babe Ruth hitting and pitching

  5. To Trade or Not to Trade? • If you have an absolute advantage in everything would you still benefit from trade? • Yes • Babe Ruth had a comparative advantage as a hitter—opportunity cost of pitching is too high. • Specialize where you have a comparative advantage—both parties better off (more wealth)

  6. LeBron James and Scotty • LeBron James is a great basketball player and a great lawn mower. • James could mow his lawn in 2 hours. • He could also film a Nike commercial in that time making $10,000 – opportunity cost of mowing yard. • His nieghbor Scotty can mow James’ lawn in 4 hours. • He could also work at McDonald’s and earn $32 – opportunity cost of mowing yard.

  7. LeBron James and Scott • James is better than Scotty at mowing grass—he has an absolute advantage. • Scotty has a comparative advantagemowing grass. • Would James still benefit from trade? Would Scotty? • Yes, as long as James pays Scotty more than $32 and less than $10,000 they are both better off (wealthier) than if this trade did not occur.

  8. Other Applications • People (countries) should specialize in what they are good at and trade for other stuff: • Why don’t we grow our own food? Or build our own homes? • Why do we use assembly lines? • I don’t teach economics, biology, and history. • Josh Freeman and Aaron Rogers don’t play every position on the field.

  9. North American Free Trade Association • Trading Members: Canada, Mexico, USA • Purposes: • Reduce trade barriers • Increase economic activity in North America • Improve the standard of living of member nations

  10. World Trade Ogranization • 153 countries are members. All the major economies in the world are included. • Purposes: • Promote trade among countries by reducing trade barriers • Establish common rules for trade • Increase international trade • Improve the world’s standard of living

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