US – What Are We Good At?

US – What Are We Good At?

What Are Other Countries Good At?

Chapter 3 – Interdependence and the Gains from Trade • Absolute Advantage – person or nation can produce more of a given product using a given amount of resources • Comparative Advantage – the ability to produce a product with less opportunity cost • Law of comparative advantage – a nation is better off when it produces goods and services for which it has a comparative advantage or

Output vs. Input • Output – final good or service, maximum amount that can be produced • “How much is produced” • Ex. China manufactured 2 million Iphones last year • Input – resources "put in" to the economy that will help to produce an output; shows the number of resources required to produce a specific amount • “How much is necessary to produce” • Land, Labor, Capital (F.O.P.) • Ex. It takes China 1 hour to produce 1 Iphone, it takes 6 workers, it takes 2 factories, etc.

Output vs. Input output input • The United States manufactured 2000 airplane engines last year ___________________ • It takes the average worker 3 hours to produce a textile in China __________________ • Saudi Arabia can produce up to 11 million barrels of crude oil per day ________________ • It takes 1 machine to cultivate a farm (it used to take 10 people) __________________ • McDonalds requires 2 acres of property to build a restaurant ______________________ • McDonalds has the capability of producing 8500 burgers per minute ________________ • It takes 2 hours and four workers to unload a truck at Wal-Mart ____________________ • The United States produced 2000 tons of soybeans last year ____________________ output input input output input output

Activator Chapter 3 – Interdependence and the Gains from Trade • Two men live alone on an isolated island. To survive they must undertake a few basic economic activities like water carrying, fishing, cooking and shelter construction and maintenance. The first man is young, the second man is old. The younger man can gather 60 coconuts every hour, or catch 20 fish. While the older man can only gather 20 coconuts or catch 10 fish every hour.

Coconuts or Fish? Output Question

Coconuts or Fish? Output Question • Young Man has absolute advantage because he can produce both items more efficiently than the old man

Output Method • OGO – “Other Goes Over” method shows the opportunity cost of production • Per Unit Opportunity Cost • Total Cost/Total Production 20/60= 1/3 F 60/20= 3 C 10/20= 1/2 F 20/10= 2 C Young Man 1 Coconut = 1/3 Fish 1 Fish = 3 Coconut Old Man 1 Coconut = 1/2 Fish 1 Fish = 2 Coconut = = = =

Output Method • Young Man has comparative advantage in collecting coconuts because he gives up less fish relative to his production of coconuts than the old man • His opportunity cost for collecting coconuts is lower relative to the old man • The old man has the comparative advantage in catching fish because he gives up less coconuts relative to his production of fish • His opportunity cost for catching fish is lower • Important Note: the only time two people/nations/firms will not trade is if there is no comparative advantage, opportunity cost is the same. 20/60= 1/3 F 60/20= 3 C 10/20= 1/2 F 20/10= 2 C

Coconuts or Fish? Input Question • Young Man has absolute advantage because he can produce both items more efficiently than the old man

Input Method • IOU – “Input - Other Goes Under” method shows the opportunity cost of production • Total Production/Total Cost 1/2 2/1 = 2 3/12 = 1/4 12/3 = 4

Determining Comparative Advantage • Scenario: Canada and Mexico are considering the trade of two goods. Canada can produce 100 Furs or 100 trees. Mexico can produce 50 furs or 200 trees. Fur Trees 100/100 100/100 = 1 T = 1 F 100 100 Canada = 1/4 F Mexico 200/50 = 4 T 50/200 50 200 1 • It costs Canada ______ fur for every tree it produces. • It costs Mexico ______ fur for every tree it produces. • It costs Canada ______ tree for every fur it produces. • It costs Mexico ______ tree for every fur it produces. 1/4 1 4 • Therefore, Canada should specialize in the production of Fur, while Mexico should specialize in the production of trees

Determining Comparative Advantage • China has comparative advantage in car production • US has a comparative advantage in Cheese production 15/5= 3 CH 5/15= 1/3 CAR 4/2= 2 CH 2/4= 1/2 CAR

Kate and Carl • It costs Kate ________ birdhouses to produce 1 t-shirt. • It costs Kate ________ shirts to produce 1 birdhouse. • It costs Carl ________ to produce 1 t-shirt. • It costs Carl ________to produce 1 birdhouse. • ________ has a comparative advantage when producing t-shirts. • ________ has a comparative advantage when producing birdhouses. • Therefore, ___________ should produce t-shirts and __________ should produce birdhouses. 1/3 3 1 1 1/3 3 1 1 Kate Carl Kate Carl

Karateconomics

Absolute and Comparative Advantage Practice • Which country enjoys an absolute advantage in beans? United Kingdom • Which country enjoys an absolute advantage in rice? India

Absolute and Comparative Advantage Practice 10/20 = 1/2 Beans 20/10 = 2 Rice 15/5 = 3 Beans 5/15 = 1/3 Rice • Who has the higher opportunity cost when producing Rice? UK • Who has the higher opportunity cost when producing Beans? India • Who has comparative advantage when producing Beans? UK • Who has comparative advantage when producing Rice? India • Therefore, India should specialize in the production of, Rice while the U.K. should specialize in the production of Beans

Absolute and Comparative Advantage Practice 10/14 = .71 Vegs 14/10 = 1.4 Fish 15/14 = 1.07 Vegs 14/15 = .93 Fish • Which of the following is true? • Country Y has absolute advantage in producing both fish and vegetables, but comparative advantage in fish. • With trade, country X will import fish. • Country Y has comparative advantage in producing fish. • These countries will not be able to benefit from specialization and trade. • Country X will export fish to country Y. • Answer: _____e________

Absolute and Comparative Advantage Practice • Which country enjoys an absolute advantage? Russia

Absolute and Comparative Advantage Practice 20/60 = 1/3 Butter 60/20 = 3 Guns 10/30 = 1/3 Butter 30/10 = 3 Guns For every Gun that Russia produces, they give up _____1/3________ Butter. For every Butter that Russia produces they give up ____3________ Guns. For every Gun that Cuba produces they give up ______1/3_____ Butter. For every Butter that Cuba produces they give up _____3_______ Guns. Why is there no comparative advantage? Opportunity Cost is the same Therefore, the two countries should not trade is when their opportunity cost is__________equal/the same____________________

Absolute and Comparative Advantage Practice • Which country enjoys an absolute advantage in cars? Italy • Which country enjoys an absolute advantage in bikes? Morocco

Absolute and Comparative Advantage Practice 4/2 = 2 Bikes 2/4 = 1/2 Cars 5/1 = 5 Bikes 1/5 Cars • Who has the higher opportunity cost when producing cars? Morocco • Who has the higher opportunity cost when producing bikes? Italy • Who has the comparative advantage when producing cars? Italy • Who has the comparative advantage when producing bikes? Morocco • Therefore, Italy should specialize in the production of cars while Morocco should specialize in the production of bikes

Daily Ten #1 - Shirts and Shoes Identify the country of origin for your shirts and shoes.

Should Tiger Woods Mow His Own Lawn? How can people benefit from specialization and trade?

Tiger Tiger Woods Y’all! Tiger can mow his lawn in only two hours, but he can also make $10,000 in two hours doing appearances. Tiger has a neighbor, Forrest. It will take Forrest 4 hours to mow Tiger’s lawn. Forrest could also spend those 4 hours working at McDonald’s for $20 total. Should Tiger mow his own lawn?

What is each person’s Opportunity Cost of mowing Tiger’s lawn? Who mows lawns the best? Who makes more money working? How can Tiger benefit from Forrest?

Specialization

Terms of Trade • Terms of trade – rate of exchange wherein both parties mutually benefit • Gains from Trade – refers to the net benefits to agents from voluntary trading with each other; the specific amount that each party benefits through trade

20/60= 1/3 F 60/20= 3 C 10/20= 1/2 F 20/10= 2 C or or What Should be the Terms of Trade? 1 Fish for 2 ½ Coconuts More than 2 Coconuts Less than 3 Coconuts

Coconuts or Fish? Terms of Trade 20/60= 1/3 F 60/20= 3 C 10/20= 1/2 F 20/10= 2 C YM: 1 Fish costs 3 Coconut OM: 1 Fish costs 2 Coconut Fish 1 Terms of Trade 1 Fish for 2.5 Coconuts YM OM 1 2 3 2.5 Coconuts

Coconuts or Fish? Terms of Trade 20/60= 1/3 F 60/20= 3 C 10/20= 1/2 F 20/10= 2 C Coconuts YM: 1 Coconut costs 1/3 Fish OM: 1 Coconut costs 1/2 Fish 1 Terms of Trade 1 Coconut for .44 Fish OM YM 1/3 1/2 2/3 1 .44 Fish

Gains From Trade Example Slavia and Lebos are considering the trade of two goods, clothing and food. Slavia can produce 10 food or 10 clothing. Lebos can produce 3 Food or 9 Clothing. • First, Input the data to determine who has a comparative advantage in production. Food 1 10/10 = 1 C 10/10 = 1 F 10 10 9/3 = 3 C 3/9 = 1/3 F 3 9 Lebos Slavia • Indicate Per Unit Opportunity Cost: Slavia 1 F costs _______ C 1C costs _______F Lebos 1 F cost _______ C 1C costs _______F • Who has the comparative advantage in the production of food? _________________________________ • Who has the comparative advantage in the production of clothing? _________________________________ 2 3 1 1 1 Clothing 3 1/3 Slavia Lebos • Term of Trade • If Slavia wants to experience gains from trade then they must agree to trade 1 food for _________ clothing. • If Lebos wants to experience gains from trade then they must agree to trade ________ clothing for 1 food. +1 >3

Finding the Gains From Trade • First, graph original production possibilities • Then, graph the new points based on gains trade. • Slavia and Lebos agree to trade at a rate of 1 food for 2 clothing (1F = 2C). • Slaviaproduces all food (10) and trades 1 food for 2 clothing. • Therefore ending up with 9 food and 2 clothing. • Lebosproduces all clothing (9) and trades 2 clothing to Slavia for 1 food. • Therefore, Lebos ends up with 7 clothing and 1 food. Slavia Lebos Food Food Production Possibilities Before Trade 10 9 8 7 6 5 4 3 2 1 10 9 8 7 6 5 4 3 2 1 Production Possibilities After Trade 0 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 0 Gains from trade +1 Clothing Clothing Gains from trade +1/3 Food Clothing

Application Question Comparative Advantage • Two people are academics who are paid for how many papers they produce. In one year Jane can write 4 economics papers or 6 law papers. John can write 3 economics papers or 1 law paper. They need to figure out who should be the lawyer and who should be the economist. • Create two graphs that summarize all the possible choices that they can produce. Then determine opportunity cost in the chart below Jane John 4 3 Economics Papers Economics Papers Law Papers Law Papers 6 1 0 0 6/4 = 1.5 LP 4/6 = 2/3 EP 1/3 = .33 LP 3/1 = 3 EP

Application Question Comparative Advantage • They end up producing a total of 9 papers, 6 law papers and 3 economics papers. They decide to trade one law paper for one of economics papers; Jane ends up with 5 law papers and 1 economics paper while John can have 1 law paper and 2 economics papers • Plot the new points on the respective PPFs. Jane John 4 1 3 Economics Papers Economics Papers Law Papers Law Papers 5 6 1 0 0 *Notice that they have broken through the constraints imposed by the scarcity of time. Both of these points lie outside the respective PPFs. John could not have written 1 law paper and 2 economics papers in a year because it takes him a year just to write the law paper. Jane could never have written 5 law papers and 1 economics papers in one year: it would have taken her 13 months to do so.*

Sample Free Response Question • 6 points (1 + 2 + 2 + 1) • (a) 1 point: • One point is earned for stating that the opportunity cost of a bicycle in Artland is 600/300 = 2 hats. • (b) 2 points: • One point is earned for stating that Rayland will import bicycles. • One point is earned for any one or more of the following explanations: • Rayland has a comparative advantage in hats. • Rayland has a comparative disadvantage in bicycles. • Rayland has a lower opportunity cost in hats or higher opportunity cost in bicycles. • Artland has a comparative advantage in bicycles. • Artland has a comparative disadvantage in hats. • Artland has a lower opportunity cost in bicycles or a higher opportunity cost in hats. • (c) 2 points: • One point is earned for stating that it is advantageous for Artland. • One point is earned for stating that it is NOT advantageous for Rayland. • (d) 1 point: • One point is earned for stating that Rayland has a comparative advantage in producing hats. • The diagram above shows the production possibilities curves for two countries: Artland and Rayland. Using equal amounts of resources, Artland can produce 600 hats or 300 bicycles, whereas Rayland can produce 1,200 hats or 300 bicycles. • Calculate the opportunity cost of a bicycle in Artland. • If the two countries specialize and trade, which country will import bicycles? Explain. • If the terms of trade are 5 hats for 1 bicycle, would trade be advantageous for each of the following? • Artland • Rayland • If productivity in Artland triples, which country has the comparative advantage in the production of hats?

Extra Credit Chapter 3 • What is the difference between absolute and comparative advantage? • Give an example of how in the “real-world” everyone benefits from trade • Explain your interpretation of the political cartoon: • Illustrator’s message • Clues (people, symbols etc.) • Do you agree or disagree?

Review Question Comparative Advantage • Two people are academics who are paid for how many papers they produce. In one year Jane can write 4 economics papers or 6 law papers. John can write 3 economics papers or 1 law paper. They need to figure out who should be the lawyer and who should be the economist. • Create two graphs that summarize all the possible choices that they can produce. Then determine opportunity cost in the chart below Jane John Economics Papers Economics Papers Law Papers Law Papers 0 0

Absolute and Comparative Advantage and Sports • Two athletes Joe and Jim play on the same team football team. Joe is bigger, faster, and stronger than Jim. The coaches are trying to determine what positions to play Joe and Jim for the upcoming season. When Joe plays quarterback, he throws 20 td’s per season. When he plays receiver he scores 12. When Jim plays quarterback he throws 14 td’s. When he plays receiver he scores 5 td’s. Who should play what? • Plug in the information to the table below.

Trade Barriers and Agreements Trade Barrier – a trade restriction, used to prevent a foreign product from freely entering a nation’s territory Import Quotas – a limit on the amount of a good that can be imported Voluntary Export Restraint – a self-imposed limitiation on the a number of products shipped to a particular country Tariffs – a tax on imported goods

International Cooperation and Agreements International Free Trade Agreement – results from cooperation between countries to reduce trade barriers and tariffs to promote trade North American Free Trade Agreement (NAFTA) – agreement between Canada, Mexico and the U.S. to eliminate tariffs and other trade barriers European Union (EU) – a regional trade organization of European nations World Trade Organization (WTO) – a worldwide organization whose goal is to promote free global trade

Measuring Trade Exchange Rate – the value of one foreign nation’s currency in relation to another nation’s currency Determining the Rate of Exchange 1 Dollar = 12 Mexican Pesos Hotel room costs 500 Pesos per night 500/12 = $41.66

Due Monday 1-23 • Comparative Advantage Article (Lance Armstrong, Martha Stewart) • Absolute and Comparative Practice • Homework - The Legacy of Adam Smith and David Ricardo, pg. 57 • Homework - YouTube Video #34: Compartive Advantage and Trade • Homework - Should Tiger Woods Mow His Own Lawn, pg. 58 • Homework - The Changing Face of International Trade, pg. 59 • Chapter 3 Practice Review • Free Response Questions • Daily Tens (3) • Notes Chapter 3 • Terms Chapter 3

Specialization and Trade

a. Angela’s PPF

US – What Are We Good At?