Absolutely Comparative Advantage

1. Absolutely Comparative Advantage Unit 5

2. What do you know? Answer this question in at least 4 sentences: If you can produce everything you need, why would you trade? Can you define these terms? • Advantage • Absolute • Goods • Services • Balance of trade • Balance of payments • Specialization • Deficit • Surplus

3. Terms Content Terms Balance of Trade Balance of Payment Absolute Advantage Comparative Advantage Trade Deficit Trade Surplus Academic Terms Distinguish Specialize Essential Questions How do a nation’s limited resources affect its decision to engage in international trade? Why do specialization and trade lead to increased efficiencies, production, consumption, and satisfaction? How does the use of comparative advantage increase gains from trade for two or more nations? In what ways have you personally benefitted from gains from trade? By the end of this lesson you should know…. Georgia Performance Standard SSEIN1 The student will explain why individuals, businesses, and governments trade goods and services. a. Define and distinguish between absolute advantage and comparative advantage. b. Explain that most trade takes place because of comparative advantage in the production of a good or service. c. Explain the difference between balance of trade and balance of payments. Literacy Standards RH.11-12.3 Analyze a complete set of ideas or sequence of events and explain how specific individuals, ideas, or events interact and develop over the course of the text. RH.11-12.7 Integrate and evaluate multiple sources of information presented in different media or formats as well as in words in order to address a question or solve a problem. WH.11-12.1 Write arguments to support claims in an analysis of substantive topics or text using valid reasoning and relevant and sufficient evidence.

4. As a class, brainstorm possible answers to the question: Do you have any lotion? Why do countries trade?

5. Countries trade because… • they cannot produce a product domestically. • to have a wider variety of goods available to consumers. • even if a they can produce a product, if another country specializes it that item, buying it from them may increase quality and decrease the price. • they wish to conserve limited resources. • other countries have an advantage. Specialize-a task assigned to one person or group that does it more efficiently

6. Anything you can do I can do better I can make more than you can Type of Advantage There are 2 types of advantage. • Absolute Advantage • Comparative Advantage Advantage-a condition or circumstance that puts one in a favorable position

7. Absolute Advantage Absolute Advantage- the concept that if 2 countries or businesses have the same amount of resources, one country can produce more than the other using fewer resources. Country A has and Absolute Advantage Country A can produce 1 million gallons of milk per year Country X can produce ½ million gallons of milk per year

8. Absolute Advantage Absolute Advantage occurs on an individual/firm level as well. Who has an absolute advantage in this example? Why might that bakery have an advantage? Chance It Home Bakerycan produce 150 dozen cookies per month Tucker’s Tasty Treats Bakerycan produce 500 dozen cookies per month

9. Write your own example of absolute advantage using local businesses or student entrepreneurs in your area. Be sure to write at least 5 sentences and explain why one business or individual has an absolute advantage

10. Is Absolute Advantage Everything? Does this mean that Chance It Home Bakery should go out of business because they cannot make as many cookies as Tucker’s Tasty Treats? The answer is no. Absolutely advantage is not the best way to determine who should produce. Can you think of a reason or an example of why Chance It bakery should continue making cookies? Let’s compare cost

11. Comparative Advantage Comparative Advantage- the concept that one country or business can produce a good or service at a lower opportunity cost than the other. Country X has and Comparative Advantage Country A can produce 1 million gallons of milk per year at $1.25 per gallon Country X can produce ½ million gallons of milk per year at $1 per gallon

12. Comparative Advantage Comparative Advantage also occurs on an individual/firm level. Fill in the blanks to give Chance It Home Bakery a comparative advantage? Given this scenario, Chance It should specialize in baking cookies because they have a lower opportunity cost. Chance It Home Bakerycan produce 150 dozen cookies per month for $____ per dozen Tucker’s Tasty Treats Bakerycan produce 500 dozen cookies per month for $____ per dozen

13. Anything you can do I can do better I can make more than you can How can you distinguish between Comparative and Absolute Advantage? Distinguish-to perceive as different; to separate into kinds or categories

14. If a country can produce everything it needs, why would it trade? Even if a country like the United States has an absolute advantage with Panama in both milk and cookies, it might be cheaper to produce cookies in Panama which gives them a comparative advantage. In this case, it is more efficient for the US to specialize in producing milk, and Panama to specialize in producing cookies. When we specialize and trade, products become cheaper for consumers.

15. The US can make more televisions than China so why don’t we make our own? According to The US Department of Labor, federal minimum wage is $7.25 per hour. In China, individual provinces set the minimum wage. There is no federal or national minimum wage. In one of the highest paying provinces Shenzhen, minimum wage in 1,300 Yuan per month which works out to approximately $1.29 per hour. If it takes a 6 hours of labor to build a television it would cost: $43.50 in labor if made in the US $7.74 in labor if made in China Because labor is so much cheaper in China, it makes sense that they would specialize in manufacturing products that required a great deal of low skilled labor, while the US specializes in producing goods and services that require a great deal of human and physical capital.

16. Strike a Balance When countries trade, it is important to keep a balance of goods exported and imported. The term balance of trade refers to the value of all goods and services exported minus the value of all goods and services imported. If a countries exports exceed its imports, then the country has a trade surplus. If the country imports more than it exports, then there is a trade deficit. Balance of Payments is how countries keep track of all monetary transactions in each sector(public and private) of the international market. It is the difference between the money a country pays out for imports and the money a country gets paid from other countries for exports. Does this leaf make me look tasty?

17. Debate! We absolutely should not! Yes we definitely should Divide students into 3 groups. One group will debate in the affirmative (for the statement), another group will debate in the negative(against the statement) and the third group will help evaluate the arguments each round so the teacher can award points. Go ahead and assign the groups, affirmative, negative and evaluator. (no you don’t get to know the topic before you are assigned a group) Once the class is divided, click to the next slide.

18. Debate! Here is the debate topic. Remember the affirmative group must argue that this statement is true, the negative group will argue that the statement is false. The United States should impose trade restrictions with China. • Each student will receive 30 seconds to deliver their speech or rebuttal. • At the end of each round, arguments will be evaluated on the clarity, persuasiveness and use of evidence in support. We absolutely should not! Yes we definitely should

19. Define these Terms? Content Terms Balance of Trade Balance of Payment Absolute Advantage Comparative Advantage Trade Deficit Trade Surplus Academic Terms Distinguish Specialize Answer these Questions? How do a nation’s limited resources affect its decision to engage in international trade? Why do specialization and trade lead to increased efficiencies, production, consumption, and satisfaction? How does the use of comparative advantage increase gains from trade for two or more nations? In what ways have you personally benefitted from gains from trade? You made it to the end of this lesson!! Can you…. Sample Questions

20. Try these Questions 2. In the country of Balmoria, it takes 9 hours of labor to harvest a bushel of wheat and 6 hours of labor to build a wooden bookcase. In the nearby country of Dashmund, it takes 8 hours of labor to harvest a bushel of wheat and 7 hours to build a wooden bookcase. In terms of labor on these identical goods, which statement describes the situation accurately? • Dashmund has an absolute advantage in both wheat and bookcases. • Balmoria has an absolute advantage in both wheat and bookcases. • Dashmund has a comparative advantage in wheat harvesting. • Balmoria has a comparative advantage in wheat harvesting. • The table represents the number of bushels of wheat and rice that the United States and China can produce in one day.(numbers are in thousands). Which of these conclusions can be drawn from the data? • The United States has an absolute advantage in the production of wheat, and China has an absolute advantage in the production of rice. • The United States has an absolute advantage in the production of rice, and China has an absolute advantage in the production of wheat. • China has an absolute advantage in the production of both wheat and rice. • The United States has an absolute advantage in the production of both wheat and rice.

21. Try these Questions 3. Which of the following results when federal government expenditures are less than the federal government’s total receipts? • a trade surplus • a federal budget deficit • a negative balance of payments • a federal budget surplus

22. Check your answers • D (this is a question from the released EOCT) • C (this is a question from the EOCT Student Guide) • D (this is a question from the released EOCT)

23. Additional Resources “Our Comparative Advantage” New York Times. http://www.nytimes.com/roomfordebate/2011/01/18/can-the-us-compete-with-china-on-green-tech/our-comparative-advantage US Department of Laborhttp://www.dol.gov/whd/minimumwage.htm “China Boosts Minimum Wage” Bloomberg Business Week http://www.businessweek.com/articles/2012-03-07/china-boosts-the-minimum-wage Georgia Department of Education’s Economics/Business/Free Enterprise EOC Assessment Guide http://www.gadoe.org/Curriculum-Instruction-and-Assessment/Assessment/Documents/Milestones/Assessment%20Guides/GM%20Economics%20EOC%20Assessment%20Guide%20081715.pdf

24. Economics GPS Frameworks: Unit 5- “International Trade of Mystery”https://www.georgiastandards.org/Frameworks/GSO%20Frameworks/Economics%20Unit%205.pdf • Georgia Department of Education Released EOCT’s and answer keyshttp://www.doe.k12.ga.us/Curriculum-Instruction-and-Assessment/Assessment/Pages/EOCT-Released-Tests.aspx Additional Resources

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