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Exports equal 32% of global economic output, but Exports equal 32% of global economic output, but only 13% of U.S. output. [U.S. supplies 1/8 of worlds.

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Presentation on theme: "Exports equal 32% of global economic output, but Exports equal 32% of global economic output, but only 13% of U.S. output. [U.S. supplies 1/8 of worlds."— Presentation transcript:

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2 Exports equal 32% of global economic output, but Exports equal 32% of global economic output, but only 13% of U.S. output. [U.S. supplies 1/8 of worlds exports] only 13% of U.S. output. [U.S. supplies 1/8 of worlds exports] American imports & exports$4.1 trillion. In 2010, American imports & exports totaled over $4.1 trillion. $1.832 trillion in exports$2,330 trillion in imports Deficit $498 B [$1.832 trillion in exports & $2,330 trillion in imports] [Deficit $498 B] Loonie David Ricardo No, it is comparative advantage that matters, not absolute advantage. Adam Smith Nations should specialize and trade based on absolute advantage. Euro

3 alarm clock MADE IN JAPANJoe Smith started the day early having set his alarm clock (MADE IN JAPAN) for 6 a.m. coffeepotMADE IN CHINA electric razorMADE IN HONG KONGWhile his coffeepot (MADE IN CHINA) was perking, he shaved with his electric razor (MADE IN HONG KONG). dress shirt(MADE IN SRI LANKA)designer jeans (MADE IN SINGAPORE)tennis shoesMADE IN KOREAHe put on a dress shirt (MADE IN SRI LANKA), designer jeans (MADE IN SINGAPORE) and tennis shoes (MADE IN KOREA). electric skillet MADE IN INDIAcalculator (MADE IN MEXICO)After cooking his breakfast in his new electric skillet (MADE IN INDIA) he sat down with his calculator (MADE IN MEXICO) to see how much he could spend today. watch (MADE IN TAIWAN ) radio(MADE IN INDIA)car(MADE IN GERMANY)GAS S audi ArabiaAMERICAN JOB.After setting his watch (MADE IN TAIWAN ) to the radio (MADE IN INDIA) he got in his car (MADE IN GERMANY) filled it with GAS from S audi Arabia & continued his search for a good paying AMERICAN JOB. computer (MADE IN MALAYASIA),At the end of yet another discouraging and fruitless day checking his computer (MADE IN MALAYASIA), Joe decided to relax for a while. sandals (MADE IN BRAZIL) wine (MADE IN FRANCE)TV (MADE IN INDONESIA)He put on his sandals (MADE IN BRAZIL) poured himself a glass of wine (MADE IN FRANCE) and turned on his TV (MADE IN INDONESIA), and then wondered why he can't find a good paying job in America..... Actually this is a good thing. We get more choices, lower prices, & because more is bought, more jobs are created.

4 GlobalizationQ uestion : W hat is the definition of Globalization ? Princess Dianas deathAnswer: Princess Dianas death Question: How Come? English princessEgyptian boyfriend French tunnelGerman car Dutch engineBelgian Scottish whiskyItalian Paparazzi Japanese motorcyclesAmerican doctor Brazilian medicinesAnswer: An English princess with an Egyptian boyfriend crashed in a French tunnel, driving a German car with a Dutch engine, driven by a Belgian who was drunk on Scottish whisky, followed closely by Italian Paparazzi, on Japanese motorcycles; treated by an American doctor, using Brazilian medicines. CanadianBill Gates technologyyour computerTaiwanese chipsKorean monitorBangladeshi workers Singapore plantIndian lorry-drivers IndonesiansSicilian longshoremenMexicoThis is sent to you by a Canadian, using Bill Gates technology, and youre probably reading this on your computer, that uses Taiwanese chips, and a Korean monitor, assembled by Bangladeshi workers in a Singapore plant, transported by Indian lorry-drivers, hijacked by Indonesians, unloaded by Sicilian longshoremen, and trucked to you from Mexico. Lorry-drivers Globalization… That is Globalization… The process by which individuals and businesses in other parts of the world are affected by events elsewhere in the world.

5 Globalization: Merchandise Exports as a Share of World GDP (32%) Globalization $1.8 t rillion a year Globalization increases U.S. income by $1.8 t rillion a year, or $10,000 per household. Or, without globalization, $1.8 trillion Americans would be poorer by $1.8 trillion a year. Percent of GDP 30% 5% 0 10% 15% 20% 25% 32 %

6 i P ads 14 million i P ads were sold in the U.S. last year, but because they were made in China, were counted imports as imports. 22 million pairs of Nikesimported Nikes are imported each year, employing 50,000 Vietnamese. $700 $600 $500 $400 $300 $200 $ $677 $381 American companies golf have 54 million golf balls balls produced in imports China so they are imports. $498

7 Global Cow Who Supplied My Cheese?

8 The values given are for Imports and Exports added together. Top 10 Countries with which the U.S. Trades These Countries represent 66.89% of U.S. Imports, & 60.41% of U.S. Exports in goods. The values are exports and imports added together November 2011 Year To Date Total in Total in Billions Billions Country Name of U.S. $ of U.S. $ Canada Canada China China Mexico Mexico Japan Japan Germany Germany United Kingdom United Kingdom Korea, South Korea, South Brazil Brazil France France Saudi Arabia Saudi Arabia

9 2010 Trade Balance -$498 billion $ $696 $381 $498 Trade is analogous to technology, disruptive but ultimately beneficial.

10 Principal U.S. Exports & Imports – 2007 [in Billions of Dollars] Chemicals Consumer Durables Agricultural Products SemiconductorsComputers Generating Equipment AutomobilesAircraft Medical equipment Telecommunications Electrical machinery Fuels and lubricants PetroleumAutomobiles Household Appliances ComputersMetalsClothing Consumer Electronics Generating Equipment SemiconductorsTelecommunicationsAircraftChemicalsExportsImports Source: Department of Commerce Data $ $

11 . Exports to Exports to: Imports from Imports from: Value (Billions of Dollars) Goods U.S. Exports & Imports of Goods, 2007 Most of our imports come from developing countries. Industrial Countries$553 Developing Countries 596 Total $1,149 Industrial Countries$819 Developing Countries 1,146 Total $1,965 The U.S. and World Trade

12 *1. National Defense Argument vital to our defense pens pottery peanuts papers candles thumbtacks tuna fishing pencils*1. National Defense Argument: certain industries should remain based in our country, especially if they manufacture items vital to our defense. Items this argument have been used for include: pens, pottery, peanuts, papers, candles, thumbtacks, tuna fishing, and pencils. *2. Infant Industry Argument mature enough to compete*2. Infant Industry Argument: new industries must be protected from older, established foreign competitors until they are mature enough to compete. However, removing protection is almost impossible. 3. Dumping Argument sale of goods abroad at a price below their cost3. Dumping Argument: domestic industries need to be protected from foreign dumping. Dumping is the sale of goods abroad at a price below their cost and therefore undersell domestic competitors to put them out of business; obtain monopoly power and raise their prices. 4. Foreign–Export–Subsidies Argument subsidize the firms that export goods4. Foreign–Export–Subsidies Argument: Some governments subsidize the firms that export goods. Firms say that this forces them to compete with both the firm and the government in question. * You can make a good argument for these.

13 5. Low Foreign Wages Argumentlow wage advantageoffset by its productivity disadvantage5. Low Foreign Wages Argument: A countrys low wage advantage may be offset by its productivity disadvantage. High wages means high productivity. Low wages mean low productivity. recentminimum wages Some recent minimum wages in other countries: Turkey: 41¢; India: 42¢, Hungary: $1.22, Brazil: $1.50, Mexico: $6 a day, Haiti: 68¢ or $5.50 per day; Indonesia: $1.06 a day [where Nikes are made]. worker productivity there is probably low cost Even though these wages are very low, worker productivity there is probably low. It may take several workers to do what one American worker can do. The more important question is what does it cost to do the job? Saving Domestic Jobs Argument previous arguments in disguiseSaving Domestic Jobs Argument: This argument is actually most of the previous arguments but in disguise.

14 ROW U.S. China Japan Ger. FR. U.S. China Japan Germany France Italy UK Korea Russia Brazil Rest World Country Share of Global Manufacturing

15 all time high twice as much 19 million11 millionncreasingproductivitybuilding the same amount of stuff with fewer workers U.S. manufacturing is not dying. It is at an all time high. We are making more than twice as much today as we were in the 70s. However weve gone from 19 million manufacturing jobs to 11 million because of increasing productivity or building the same amount of stuff with fewer workers. Where will they go? High tech employs millions compared to almost none 50 years ago. twice as much with fewer workers 44% of jobs were in agriculture 2.2% today plowed fields curing cancer So, we are building twice as much with fewer workers. That trend will continue and then some. Health care. Clean energy. And fields we cant imagine yet. For instance, in 1900, 44% of jobs were in agriculture. Tremendous improvements in farm productivity pushed that number to 2.2% today. Those who once would have plowed fields now work at curing cancer, building roads, etc. We dont want those farm jobs back. So, all of you who thought U.S. manufacturing was dead TAKE That!!!

16 1. How many domestic jobs in the firms that produce good X are being saved because of the tariff? 2. How much do consumers have to pay in higher prices to save those jobs? HOW MUCH Lets just see HOW MUCH consumers do have to pay when we protect domestic jobs when we protect domestic jobs with tariffs and quotas.

17 12,000 x $40 = $480,000[NS-NT];12,000 X $25 = $300,000[S-T ] 12,000 x $40 = $480,000[NS-NT]; 12,000 X $25 = $300,000[S-T ] (It cost $180,000 to save one clock-radio guys job) Suppose Joe Export lives & works in the U.S. making dancing sells 12,000 clock radios. He produces and sells 12,000 clock radios per year price of $40 each at a price of $40 each. There is no international trade. U.S. market is openedto dancing clock radios One day the U.S. market is opened to dancing clock radios Japanese manufacturers have acomparative from Japan. The Japanese manufacturers have a comparative advantage and sell them for $25 each. Joe can not compete at this price. His sales drop to such a degree that he goes out of business. International trade has harmed him but helped American consumers because they save $180,000. I can do the econ rap.

18 Industry Yearly LossEmploymentAnnual C ost To EconomyLoss If BarriersPer Job To EconomyLoss If BarriersPer Job From BarriersWere RemovedSaved From BarriersWere RemovedSaved Textiles$15,850 billion71,639 D airy Products 1,630 million 2,378 Sugar 657 million 2,040 Peanuts 74 million 397 Meat 177 million 928 Non-rubber 170 million 1,377 footwear Orange Juice 307 million 609 Canned Tuna 100 million 390 Chicken of the Sea I love the chicken in this tuna can. Chicken Sea ofthe $221, , , , , , , ,640

19 High Cost of Protection $100 billion higher prices negative-sum game. High Cost of Protection It cost an average of $231,289 per job saved. Consumers pay $100 billion annually in higher prices. Protecting sugar raises candy and soft drink prices; protecting steel makes car prices higher. This is a negative-sum game. Free trade is a good idea for most of us despite the hardship it imposes on a few of us. So you can see that, Free trade is a good idea for most of us despite the hardship it imposes on a few of us.

20 Keep The Money At Home Point: Point: When I buy a coat in England, I have the coat and England has the money. But when I buy a coat in America, I have the coat and America has the money. America is more wealthy because it has both the coat and the money. Abe Lincoln Counterpoint: Counterpoint: Money is not wealth in and of itself, it merely facilitates trade. If America sends dollars to England, England will eventually use those dollars to buy American goods. If we dont buy goods from other countries, then other countries will not be able to buy goods from us.

21 Point: Point: Protecting businesses from foreign competition preserves American jobs. Counterpoint: Counterpoint: Few are helped by protective policies, but they are more visible and more vocal than the many who are hur t. Protecting jobs in import competing industries raising prices to consumers and costs jobs in industries that use imported inputs. America and consumers pay dearly each time protectionist measures save jobs.

22 Point2:preserved 4,598 Point2: Import quotas on Japanese autos preserved 4,598 American jobs American jobs. Counterpoint2:$241,235 Counterpoint2: but at a cost to consumers of $241,235 per job per job per year, in higher prices paid for cars. Saving a 30,000 auto job costconsumers $120,000 annually $30,000 auto job cost consumers $120,000 annually in higher prices.. Protecting American businesses from foreign competition does potentially preserve American jobs. Point 1: saved 17,000 Point 1: Restrictions on imported steel in the 80s saved 17,000 jobs jobs in the steel industry and its suppliers. Counterpoint: Counterpoint: That is half the story. Here is the rest of the story. saved 17, The higher steel prices saved 17,000 jobs in the steel loss of 52,400 jobs industry but led to the loss of 52,400 jobs in American steel-using industries. For every job saved, three were lost. In the last few years, tariffs have preserved 3,500 steel jobs; by contrast tariffs have cost steel users between 12,000 and 43,000 jobs due to higher prices. *The more you pay for protected goods, the less you have to use to buy other goods. The less consumers have to buy other goods, then fewer jobs will be created by the market.

23 Counterpoint: Counterpoint: Low wages, combined with low productivity, will result in high unit costs. High wages in the U.S. Result from the high productivity of American workers, aided by the availability of raw materials, massive capital equipment, sophisticated management, and elaborate infrastructure. Point: Point: If we trade freely with low wage countries, U.S. businesses will flee to those countries and U.S. wages will plummet.

24 I know you are against free trade as a former employee. But – how do you feel about free trade as a consumer?

25 Over $4 trillion going both ways Over $4 trillion going both ways *Exports support 14 million American jobs. [Wages 16.5 % higher] *Exports support 14 million American jobs. [Wages 16.5 % higher] 6.5 million Americans work for foreign companies in the U.S. 6.5 million Americans work for foreign companies in the U.S. Toyota alone has created more than 100,000 U.S. jobs. Toyota alone has created more than 100,000 U.S. jobs Deficit in goods $501 Surplus in services $135 $381 $ Deficit in goods $646 Surplus in services $149 $488 $ Deficit in goods $646 Surplus in services $149 $488 $488 Total: $2,330 Imports Total: $1,832 Exports Exports Imports

26 American investment bankersengineers Hiring American investment bankers, engineers, consulting fees, royalty payments, accounts, architects, advertising agencies and even $20 billion lawyers [they earned $20 billion]. American hospitalsU.S. schools Using American hospitals or attending U.S. schools. About 3% of all college students are foreigners. Tuition-paying foreign students pay $18 billiontuition, housing, & consumer goods about $18 billion a year on tuition, housing, & consumer goods. 500 million$70 billion 500 million visit the U.S. every year bringing in $70 billion. Foreign tourism exports,hotel rooms, airline fares visitors buy tourism exports, such as hotel rooms, airline fares and consumer goods and consumer goods. American movies & TV programs Watching American movies & TV programs [foreign sales $5 B accounted for about half of the film industrys $5 B box-office revenue. 700,000 foreign college students About 700,000 foreign college students attend American colleges. Texas3 rd largest Texas attracted the 3 rd largest # of foreign students with 38,000 $615 million net spending to the Texas economy who provide $615 million net spending to the Texas economy. India104,000China98,000S. Korea India leads with 104,000; China is next with 98,000; S. Korea has 75,000Canada 30,000Japan29,000USC7,500 75,000; and Canada has 30,000; & Japan – 29,000; USC-7,500. CCCC630 foreign1/3 of Richlands CCCC has 630 foreign students. 1/3 of Richlands are foreign; 2,000UTD out of 15, % of grad students 2,000 at UTD out of 15,000. They make up 25 % of grad students & 5% of undergrads1/3 of U.S. sci and eng doctorates 5% of undergrads. 1/3 of U.S. sci and eng doctorates & 40% of comp sci Begging at the gates of worlds best PHDs in comp sci go to foreigners. Begging at the gates of worlds best Kentucky colleges welcome 5,018 foreign students who contribute $85 million to the states economy. Texas 55% of engineering masters degrees go to foreigners 75% of engineering PH.D.sgo to foreigners In Texas, 55% of engineering masters degrees go to foreigners. Over 50% of the PH.D.s in mathematics go to nonresident aliens. Also, 75% of engineering PH.D.s go to foreigners. U.S. E xport of S ervices [X = $543 B ; M = $394 B in 09[ [+149B] 38 U.S. schools have 65 branches in 34 countries. The U.S. has more great colleges than the rest of the world combined.

27 C anada 365China 120Japan 230 M exico 163Mexico 249 C anada 92 D eficit of$273China IMPORTS 83Germany 36Taiwan 50UK 49 K orea 39 F rance 49UK 48Germany 39Korea 27France 29Singapore 32Netherlands 26Taiwan EXPORTS 61Japan

28 CountryImports fromExports to Australia BeefAirplanes AluminumComputers AutosAuto parts Belgium JewelryCigarettes CarsAirplanes OpticalDiamonds Canada CarsAuto parts TrucksCars PaperComputers China ToysSoybeans ($9 B) ShoesS emiconductors 5 B ClothesChemicals ($4 B) Germany CarsAirplanes EnginesComputers Auto partsCars Japan CarsAirplanes ComputersComputers TelephonesTimber Russia OilCorn PlatinumWheat ArtworksOil Seed crops [canola & sunflower] South Korea ShoesAirplanes CarsLeather ComputersIron ngots

29 Toyota Camry and Toyota Tundra Honda Accord and Honda Odyssey Minivan BMW Z4 Roadster & BMWX5 SUV Mercedes-Benz-M-Class Toyota Corolla Subaru Legacy Hyundai Elantra Nissan Maxima Chrysler Crossfire Dodge Ram Plymouth voyager Chrysler PT Cruiser Pontiac Firebird Chevrolet Camaro and Impala Ford Fusion Mercury Capri Chrysler 300 BuyAmerican?BuyAmerican?BuyAmerican?BuyAmerican? 1957 Chrysler 300 Chrysler 300

30 Toyota Camry and Tundra – U.S.A. (California and Texas) Honda Accord and Honda Odyssey Minivan – U.S.A. (Ohio) BMWX4 Roadster and BMWX5 SUV – U.S.A. (South Carolina) Mercedes-Benz-M-Class – U.S.A. (Alabama) Toyota Corolla – U.S.A. (California) Subaru Legacy – U.S.A. (Indiana) Nissan Maxima– U.S.A. (T ennessee ) Hyundai Elantra– U.S.A. (Alabama) Dodge Ram – Mexico Plymouth Voyager – Canada Chrysler PT Cruiser – Mexico Pontiac Firebird – Canada Chevy Camaro and Impala – Canada Mexico Ford Fusion - Mexico Mercury Capri – Australia Chrysler Crossfire - Germany Chrysler Canada Foreign nameplates were made in the U.S. Domestic nameplates were made in other countries.

31 This competition gives consumers higher quality, more choices, and lower prices. Globalization has blurred national auto identities. Fiat Daimler Mercedes SUVs Mitsubishi 10% of Hyundai Motor Fiat owns Chrysler. Daimler builds Mercedes SUVs in Vance, Alabama and owns stake in Mitsubishi and 10% of Hyundai Motor. GM didSaabstakes in Isuzu, Suzuki, GM did own Saab and has stakes in Isuzu, Suzuki, Subaru, Fiat and Daewoo Subaru, Fiat and Daewoo. FordMazda and Volvo. Ford owns Mazda and Volvo. By 2011, predictions are that foreign-based automakers will build more cars at U.S. auto plants than the Big 3.

32 Toyota Georgetown, KY Princeton, IN Fremont, CA San Antonio, TX [$800 mil. Plant employing 2,000] Honda Marysville, OH East Liberty, OH Lincoln, AL HyundaiMontgomery,ALNissan Smyrna, TN Canton, MS Mitsubishi Normal, IL Hyundai Montgomery, AL BMW Spartanburg, SC Mercedes-Benz Vance, AL Subaru Lafayette, IN Volkswagen Chattanooga, SC KIA West Point, GA Honda provides 50,000 high-output V-6 engines for GM cars, blurring the distinction Asian and European between U.S./foreign cars. Asian and European auto cos employ 92,700 Americans auto cos employ 92,700 Americans directly 574,500 indirectly 33% of and 574,500 indirectly accounting for 33% of U.S. auto productionBig 3 U.S. auto production. The Big 3 employ 240,000 workers 240,000 workers. It is less expensive to build an Accord here than ship it from Japan. 16% of Honda cars are imported Only 16% of Honda cars sold here are imported from Japan from Japan. Honda also buys $13 billion worth of parts from 620 suppliers in North America. BMW plant in S. Carolina sends 40% of its The BMW plant in S. Carolina sends 40% of its cars to other countries cars to other countries. This is an example of in-sourcing 20% of our exports in-sourcing. A s many as 20% of our exports are a result of in-sourcing. Toyotas Tundra plant in San Antonio received 110,000 applications for the 2,000 positions that pay from $15.50 to $25 an hour.

33 [parts from 15 countries] Switzerland may get the inputs to make the speedometer and gears from several countries. Ford Escort

34 1. Nestle 2. Shell 3. Lipton 4. Baskin-Robbins 5. Burger King 6. Alka Seltzer 7. Volvo 8. Sony 9. Tropicana 10. TV Guide 11. Vaseline 12. Bayer 13. Gatorade 14. Adidas 15. Levi Straus Switzerland Netherlands Great Britain Germany Sweden Japan Canada Australia Germany U.S. Germany U.S.

35 Global Fruit Basket ApplesNew Zealand Apricots China Bananas Ecuador Blackberries Canada Blueberries Chile Coconuts Philippines Grapefruit Bahamas Grapes Peru Kiwifruit Italy Lemons Argentina Limes El Salvador Oranges Australia Pears South Korea Pineapples C osta R ica Plums Guatemala Raspberries Mexico Strawberries Poland Tangerines S.Africa W atermelons H onduras

36 mixed nutsalmonds Italywalnuts ChinaBrazilian nuts Boliviacashews India hazelnutsCanada In an average can of mixed nuts, you find almonds from Italy, walnuts from China, Brazilian nuts from Bolivia, cashews from India, pistachios from Turkey, and hazelnuts from Canada.

37 Trade fosters competition, which rewards productivity and restrains cost. More-traded Products Five-year price change (percent) V ideo Equipment TV sets T oys P hoto equipment R oasted coffee A udio equipment D ishes & flatware W omens outerwear M ens shirts/sweaters F ilm & photo sup. G irls apparel M ens footwear N ew cars W omens dresses R ice HH laundry equip.

38 Less-traded Products

39 Buy only from your self. 1. Food 2. Economic knowledge BUY Buy D-FW Buy D

40 [If we consumed only the goods & services we produced, we would toil long hours but remain dirt poor]

41 Japan – Land of the $30 pizzas, $30 lipstick, $50 melons, $100 jeans and $4,500 two-bedroom apts. Japan has been a closed economy [fewer choices, higher prices Japan has been a closed economy [fewer choices, higher prices] ItemN.Y.Tokyo $228$605 Shock Absorbers$228 $605 $120$600 Alternator$120 $600 $5$50 Watermelon $5 $50 $1$7 Cup of coffee $1 $7 $30$200 Cab to airport $30 $ Stamp $3.00$7.00 Gallon of gasoline $3.00 $ $2.00 Newspaper 1.50 $2.00 $14$20 Movie Ticket $14 $ cars per 1, per 1000 We have 550 cars per 1,000; Japan has only 240 per 1000 inhabitants. Japanese cameras aremore expensive in Tokyo Japanese cameras are more expensive in Tokyo than in New York. In Tokyo, you have to have a sizable inheritance to be able to afford a house. Japan decade-long economic tailspin interest rates less than 1%. has had a decade-long economic tailspin, even with interest rates less than 1%. The Japanese paid $28 billion per year in higher prices for rice because they would not buy from U.S. rice farmers. Japanese consumers pay $600,000 in higher prices for each job protected.

42 ChinaGermanyU.S.JapanNetherlandsFranceItalyBelgium Source: World Trade Organization The 8 largest export nations account for 46% of world exports. [Selected Nations] [Selected Nations] So, China & Germany are the leading export nations but the U.S. is the leading export and import [or trade]nation. Percentage Share of World Exports, 2009 Principal U.S. exports include chemicals, agricultural products, consumer durables, aircraft, and semiconductors.

43 Top Chinese Imports (percentage of all imports) 88% of all Radios 87 % Christmas & festive items 83% Toys 70% Leather goods 67% Shoes 67% Handbags 65% Lamps and lights 64% Cases for cameras, eyeglasses, etc. 60% Drills, power tools 56% Household plastics 54% Sporting goods 53% Ceramic Kitchenware $273 B. Wal-Mart T he U.S. trade deficit with China in 2009 was $273 B. Wal-Mart $20 B bought $20 B from China in 2010 & is their 8 th l argest trade partner. We import 54 million golf balls from China each year.

44 After a series of product recalls, from pet food to tires, American regulators are paying more attention to goods exported to the U.S. from China. Who Buys Chinese Goods? The U.S. accounts for 1/5 of all Chinese export destinations, FDA ordered recall after a poisonous ingredient was found in toothpaste. 1.5 mil imported toy trains were made using lead paint. 450,000 tires were recalled because of tire separation problems. More than 60 billion cans of cat and dog food were recalled. $56 billion In goods from U.S. to China 10 million toys including Big Bird were recalled because of lead or magnets that tear the intestines when swallowed by children. 675,000 Barbie doll accessories

45 The U.S. trade deficit with China China in 2010 $273 billion was $273 billion. X to China $92 B $ 365 B M from C hina $ 365 B

46

47 The US buys far more from (IMPORTS) than it sells (EXPORTS) to China - the US claims this is because China has kept its currency artificially weak. In fact trade with China accounts for 14.3% of all US trade - the States only does more trade with Canada. Feb 2011

48 Apples I phone… $1.9 billion trade deficit

49 more than Exports have more than Doubled Doubled as a percent 1975 of GDP since 1975 $ 498 billion $ 498 billion trade 2010 deficit in 2010 Export Goods & Services make 12% up about 12% of American GDP When I was born!

50 Per cent share of World Exports [billions] United States Germany Japan France United Kingdom China Canada Italy Netherlands Belgium-Lux. Mexico South Korea Taiwan Singapore Spain Shares of World EXPORTS Shares of World EXPORTS The 7 largest exports nations account for nearly 50% of world exports.

51

52 Write these into your notes!!!

53 best hitterpitcher Babe Ruth was the best hitter and pitcher on his team. He had been the best pitcher in the 94 American League for several years, winning 94 games and losing only 46He could produce games and losing only 46. He could produce the sameamount of home runsteammate the same amount of home runs as any teammate fewer at bats with fewer at bats. problem The problem was that if he pitched, he would bat fewer times because pitchers need rest after pitching. 1915, 1916, & 1918 The Babe had helped the Red Sox win the pennant in 1915, 1916, & He 29 scoreless innings had pitched 29 scoreless innings in the world series. As a pitcher for the Red 40 of the Red Sox 46 home runs Sox in 1918 & 1919, he hit 40 of the Red Sox 46 home runs. sold to the Yankees in 1920 After being sold to the Yankees in 1920, the coaches decided that the Babe comparative advantage in hitting had a comparative advantage in hitting. A few pitchers on the team could pitch almost as well as the Babe, but not one could touch the his hitting. In terms of opportunity costs, the Yankees would lose fewer games if the Babe specialized 714 home runs in hitting. So – the Babe ended up hitting 714 home runs even though he spent And the Red Sox dont win again – until 2004 seven years as a pitcher. And the Red Sox dont win again – until Hank Aaron had over 2,500 more at-bats than the Babe. Hitting a homerun every Hank Aaron had over 2,500 more at-bats than the Babe. Hitting a homerun every at-bats, the Babe would have had over 200 more homeruns, somewhere around 950. at-bats, the Babe would have had over 200 more homeruns, somewhere around 950. Hank Aaron had over 2,500 more at-bats than the Babe. Hitting a homerun every Hank Aaron had over 2,500 more at-bats than the Babe. Hitting a homerun every at-bats, the Babe would have had over 200 more homeruns, somewhere around 950. at-bats, the Babe would have had over 200 more homeruns, somewhere around 950.

54 Product Market [outputs] Product Market [outputs] Country Guns Butter Rabbit 40 units 120 units Wabbit 20 units 40 units Resource Market [inputs] Resource Market [inputs] Country Guns Butter Rabbit 40 hours 120 hours Wabbit 20 hours 40 hours W hat country has an absolute advantage in guns? W hat country has an absolute advantage in guns? Rabbit Wabbit Why does Rabbit have an absolute advantage in guns ? Why does Wabbit have an absolute advantage in guns ? Rabbit can produce absolutely more guns than Wabbit [40 units v. 20 units] Wabbit can produce guns absolutely faster than Rabbit [20 hours v. 40 hours] Rabbit Rabbit 1 G = 3 B 1 / 3 G=1B Wabbit 1 G = 2 B 1/2 G=1B Rabbit 1 B = 3 G 1 / 3 B=1G Wabbit 1 B = 2 G 1/2 B=1G Wabbit Rabbit Wabbit Terms of Trade: 1G = 2.5 B Terms of Trade: 1B = 2.5 G Output v. Input Comparative and Absolute Advantage

55 I Can do 8 push-ups. I Can do 42 push-ups. I have an absolute advantage in the production of push-ups. I can clean that house in 4 hours. Im more efficient. I can do the same work in 3 hours so I have an absolute advantage. Ole Miss guy MSU Bulldog F uture Rebel/Blackbear Maid F uture MSU Maid service owner!

56 Two Isolated Nations Constant Costs [Straight Line PPFs] Different Domestic Costs Different Technology and Resources in Each Nation Self-Sufficiency Output Mix Trading According to Comparative Advantage With trade, a few people lose a lot, a lot of people gain a little. [Freer trade is like improved technology]

57 We can produce 40 tons of corn. We can produce 60 tons of corn, so - we have an absolute advantage because we can produce more corn with the same resources

58 We can produce 40 tons of corn or we could grow 50 tons of wheat with the same resources. Maybe we should do wheat ? Because COMPARED to you, we are better at wheat and not as good at corn! We can produce 60 tons of corn, so - we have an absolute advantage because we can produce more corn with the same resources. OR we could produce 50 tons of Wheat with those same resources. We are Absolutely better at corn, and COMPARED to you we should do corn and you should do wheat

59 CountryComparative a dvantage d ue to natural resources & climate United StatesWheat, corn, and cereals CanadaTimber Saudi ArabiaOil FranceWine BrazilCoffee IsraelOranges and grapefruit MexicoTomatoes Comparative advantage largely due to physical capital, Countryhuman capital, and scientific knowledge United States Aircraft, computers, industrial chemicals, plastics, & chemicals JapanAutomobiles, steel, electronics GermanyMachine tools, scientific instruments, luxury automobiles U nited K ingdom Financial services TaiwanTextiles SwitzerlandWatches South KoreaShips Comparative Advantage and differences in opportunity costs are the basis for specialized production and trade.

60 Should Wisconsin grow oranges? Should Florida make cheese? No & No! [We dont want the Florida cheese heads ] –Wisconsin should specialize in cheese –Florida should specialize in orange production –Then trade cheese for oranges –More cheese and oranges for everyone! Disadvantages:Disadvantages: –Job losses among dairy farmers in Florida –Job losses among orange growers in Wisconsin Advantages:Advantages: - Job gains among dairy farmers in WI and job gains among orange growers in FL more than make up for the other job losses. - Trade is beneficial for both states as a whole … … though not for all residents. Florida Cheeseheads

61 PPC – PPC – before trade & specialization– prisoners of their own PPCs and CPCs FISH SHRIMP PPCCPC Before trade, Im a prisoner of my own PPC. Tom Hanks alone 40 [Consumption Possibilities Curve] 10 0 Toms D omestic C omparative C ost 1 shrimp = 4 fish ¼ shrimp = 1 fish

62 FISH SHRIMP PPCCPC Before trade, Im a prisoner of my own PPC. Bubba Gump alone 45 [Consumption Possibilities Curve] Bubbas D omestic C omparative C ost 1 shrimp = 6 fish 1/6 shrimp = 1 fish

63 Tomss DCC Bubbas DCC 1S = __ F 1S = __F __ S = 1F __ S = 1F Comparative and Absolute Advantage C omparative A dvantage can produce at a lower productive opportunity cost ] Comparative and Absolute Advantage [ C omparative A dvantage can produce at a lower productive opportunity cost ]4 6 1/4 1/ D o what you do best & trade for the rest. Bubba and Tom are better together- they can SHARE! Terms of Trade 1 Shrimp = __ fish World CC World CC 1 Shrimp =__ Fish 1 Shrimp =__ Fish __ Shrimp=1 Fish __ Shrimp=1 Fish 5 5 1/51/51/51/5 80 o Tom Bubba A prisoner of my own PPC. Shrimp Shrimp Fish I can consume only on my PPC costscosts Bubba should catch fish and Tom should catch Shrimp and share Separately they could have 90/15 or 80/20- together they can have 90/20! Fish

64 Trade Allows Nations to Consume Beyond Their PPCs While Producing On It 10 shrimp & 50 fish 12 shrimp & 40 fish We are suspending reality. CPC (after trade) CPC (before trade) PPC (before & after trade) FISH 0 11 shrimp and 45 fish 10 shrimp and 40 fish Shrimp Now with trade, you can escape your PPC and CONSUME more of both fish and shrimp. 45

65 Haitis DCC Cubas DCC 1B = __ C 1B = __ C __ B = 1C __ B = 1C Comparative and Absolute Advantage C omparative A dvantage can produce at a lower productive opportunity cost ] Comparative and Absolute Advantage [ C omparative A dvantage can produce at a lower productive opportunity cost ]4 6 1/4 1/ D o what you do best & trade for the rest. Absolute Advantage Absolute Advantage - more efficient, can produce more with the same number of inputs [who can produce absolutely more] Export what it can produce at a lower relative price import goods it can buy at a lower relative price. Export what it can produce at a lower relative price and import goods it can buy at a lower relative price. absolute advantage in coffee 1. (Haiti/Cuba) has an absolute advantage in coffee and (Haiti/Cuba) has an absolute advantage in bread. Haitiexport [ comparative advantage ] import 2. Haiti will export (bread/coffee) [ comparative advantage ] and import (bread/coffee). [comparative disadvantage ] Cuba exportimport [comparative disadvantage ] & Cuba will export (bread/coffee) & import (bread/coffee). advantageous trade1 bread 3. Mutually advantageous trade can occur between Haiti & Cuba when 1 bread is exchanged tons of coffee for (3/5/7) tons of coffee. Production in both is subject to (increasing/constant) opportunity costs. Trade is the free lunch of economics. Terms of Trade 1 bread = __ coffees World CC World CC 1 Bread =__ Coffees 1 Bread =__ Coffees __ Bread=1 Coffee __ Bread=1 Coffee 5 5 1/51/51/51/5 80 o Haiti Cuba A prisoner of my own PPC. Bread Bread Coffee Coffee I can consume only on my PPC costscosts

66 Brazils DCCChiles DCC 1 W = __ S___W = 1S Chilecomparative advantageabsolute advantage 4. Chile has a comparative advantage in (wheat/steel) & an absolute advantage Brazilcomparative advantage in (wheat/steel/both). Brazil has a comparative advantage in (wheat/steel). opportunity cost of one unit of wheat for Chile 5. The opportunity cost of one unit of wheat for Chile is (2/4/6) units of steel. opportunity cost of one unit of steel for Brazil The opportunity cost of one unit of steel for Brazil is (1/2 or ¼ ) wheat. Chileexport 6. If the 2 countries trade, Chile would export (wheat/steel) & import (wheat/steel). Brazilexport If the 2 countries traded, Brazil would export (wheat/steel) & import (wheat/steel). 4 2 ¼ ½ 30 4 Terms of Trade 1 W heat = ___ Steels 3 World CC World CC 1 Wheat = __ Steels __ Wheat = 1 Steel __ Wheat = 1 Steel 1/ Brazil Chile Steel Steel Wheat costs costs

67 Examples of comparative advantage CountryComparative a dvantage d ue to natural resources & climate United StatesWheat, corn, and cereals CanadaTimber Saudi ArabiaOil FranceWine BrazilCoffee IsraelOranges and grapefruit MexicoTomatoes Comparative advantage largely due to physical capital, Countryhuman capital, and scientific knowledge United States Aircraft, computers, industrial chemicals, plastics, & chemicals JapanAutomobiles, steel, electronics GermanyMachine tools, scientific instruments, luxury automobiles U nited K ingdom Financial services TaiwanTextiles SwitzerlandWatches South KoreaShips

68 DCC for U.S.DCC for Brazil DCC for U.S. DCC for Brazil 1 H = __ B ___H = 1B ___ H = 1B Brazil has a comparative advantage 8. Brazil has a comparative advantage in (bread/ham) and a comparative disadvantage comparative disadvantage in (bread/ham). opportunity cost of producing 1 unit of ham for the U.S. 9. The opportunity cost of producing 1 unit of ham for the U.S. is (10/12/14) breads. terms of trade 10. A cceptable terms of trade might be 1 ham for (8/12/16) breads. 14 1/14 1/ HamHam Bread Bread Terms of Trade 1 Ham = __ Bread Brazil costs costs

69 FuzzyA BC D EFDCC: FuzzyWuzzy A BCDEF DCC : Wuzzy Fuzzy A B C D E F DCC: Fuzzy Wuzzy A B C D E F DCC : Wuzzy Plums Plums Plums G = __ P Plums G = __ P Grapes Grapes Grapes __ G= 1P Grapes __ G = 1P Terms of Trade 1 Grape = __ Plums 1/3 5 1/5 1/ P C B Wuzzyopportunity cost of 1 grape 11. In Wuzzy, the opportunity cost of 1 grape is (1/2/3/4/5) plums. Fuzzycomparative advantage 12. Fuzzy has a comparative advantage in & should produce (plums/grapes). terms of trade1 grape 13. The terms of trade will be 1 grape for somewhere between (3&5/2&6) plums. Fuzzy did not specialize it would producecombo C and if Wuzzy 14. Assume that if Fuzzy did not specialize it would produce combo C and if Wuzzy did not specialize it would produce combo B gains from specialization did not specialize it would produce combo B. The gains from specialization and trade and trade are: (0/100/150) plums and (0/100/150) grapes G 3500 The countries of: The countries of: Fuzzy and Wuzzy Fuzzy and Wuzzy Plums: They were making 900(c) and 2500(b) separately- so a total of 3,400 plums working separately… but if we let Wuzzy focus completely on plums… (while fuzzy is making grapes) there will be 3,500! So that is 100 extra… to share! (and 150 extra grapes)

70 FroggyABCDEDCC: FroggyWoggy ABC DEDCC: Woggy Froggy A B C D E DCC: Froggy Woggy A B C D E DCC: Woggy PorkPork Pork (tons) P = __ BPork (tons) P = __ B BeansBeans Beans (tons) __ P = 1BBeans (tons) __ P = 1B Terms of Trade 1 Pork = __ Beans 15. Production in both countries is subject to (increasing/constant) opportunity cost opportunity cost. comparative advantage 16. If these 2 nations specialize in accordance with comparative advantage, FroggyWoggy Froggy will produce (pork/beans) & Woggy will produce (pork/beans). Froggy1 pork 17. In Froggy, the opportunity cost of 1 pork is (1/5 or 5 or 3) beans Froggy produced combo C 18. Assume that prior to specialization & trade, Froggy produced combo C and Woggy produced Bcomparative Woggy produced B. If these 2 nations now specialize according to comparative advantagetotal gains advantage, the total gains will be (4/2/0) tons of beans & (4/2/0) ton(s) of pork. terms of tradeporkbeans 19. Feasible terms of trade would be (1/6/4) ton of pork for (1/6/4) tons of beans. 5 1/5 3 1/ pork [10x1/4] 8 beans [2x4]

71 PiggyABCDEDCC: PiggyWiggyABCDEDCC: Wiggy Piggy A B C D E DCC: Piggy Wiggy A B C D E DCC: Wiggy FishFish Fish C = __ F Fish C = __F ChipsChip Chips __ C = 1F Chips __ C = 1F Terms of Trade Terms of Trade 1 Chip = __ Fish 1 Chip = __ Fish absolute advantage in bothfish & chips 20. (Piggy/Wiggy) has an absolute advantage in both fish & chips. Wiggyopportunity cost of producing 1 ton of chips 21. For Wiggy, the opportunity cost of producing 1 ton of chips is (1/4/6) tons of fish. Wiggy should specializeimport 22. Wiggy should specialize(export) in (fish/chips) and import (fish/chips). Piggychose comboCWiggy chose B 23. Before specialization and trade Piggy chose combo C and Wiggy chose B. gains from tradetons of fish After specialization, the gains from trade were (20/40/60) tons of fish and tons of chips (0/10/20) tons of chips. 4 1/4 6 1/ Fish [10x5] 12 chips [60x1/5] Fish: They were making 40(c) and 180(b) separately- so a total of 220 fish working separately… but if we let wiggy focus completely on fish… there will be 240! So that is 20 extra… to share! (piggy still makes an efficient 20 chips)

72 Doggyexport import 24. If trade occurs, Doggy will export (soup/peanuts) and import (soup/peanuts). Woggyexportimport Woggy will export (soup/peanuts) and import (soup/peanuts). Doggyopportunity cost of 1 soup 25. For Doggy, the opportunity cost of 1 soup is (1/2/3) peanuts. Woggyopportunity cost of 1 soup For Woggy, the opportunity cost of 1 soup is (1/2/3) peanuts. Doggy & Woggy chose combination C. 26. Prior to specialization, Doggy & Woggy chose combination C. comparative advantagegains Now each specializes according to comparative advantage. The gains from tradesouppeanuts from trade will be (0/20/40) units of soup & (0/20/40) units of peanuts. DoggyABC DEDCC: DoggyWoggyDCC: Woggy Doggy A B C D E DCC: Doggy Woggy A B C D E DCC: Woggy SoupSoup Soup S = __ P Soup S = __ P P eanuts nuts P eanuts Peanuts __ S = 1P 1 3 1/3 Terms of Trade Terms of Trade 1 Soup = __ Peanuts 1 Soup = __ Peanuts 2 60 Peanuts [30x2] 15 soups [30x1/2]

73 absolute advantage in both 27. (Djibouti/Canada) has an absolute advantage in both commodities. comparative advantage in producing wheat (Djibouti/Canada) has a comparative advantage in producing wheat. absolute disadvantage in both 28. (Djibouti/Canada) has an absolute disadvantage in both, but a comparative advantage in fish comparative advantage in fish. Advantageous trade 29. Advantageous trade can occur between the two when 1 wheat is exchanged 1 wheat is exchanged for (1/2.5/3) fish. Djibouti DCC: Djibouti Canada DCC: Canada Fish 10 hours 1W = __F Fish 20 hours 1 W = __ F Wheat 20 hours ___ W=1F W hea t 60 hours ___W = 1F Terms of Trade: 1 Wheat = __ Fish 2 1/2 3 1/ going to turn inputs into outputs We are going to turn inputs into outputs. 20 hoursDjiboutioutput of 1 wheat or 2 fish In 20 hours, Djibouti can produce an output of 1 wheat or 2 fish. 60 hoursCanadaoutput of 1 wheat or 3 fish In 60 hours, Canada can produce an output of 1 wheat or 3 fish. costs costs

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76 DCC: U.S. Russia DCC: R ussia DCC: U.S. Russia DCC: R ussia Caviar 6 hours 1C = __WCaviar 16 hours 1C = __ W Wheat 3 hours __ C = 1WWheat 4 hours __ C = 1W absolute disadvantage in both commodities 30. (Russia/U.S.) has an absolute disadvantage in both commodities. comparative advantage in wheat (Russia/U.S.) has a comparative advantage in wheat. absolute advantage in both commodities 31. (Russia/U.S) has an absolute advantage in both commodities. comparative advantage in caviar (Russia/U.S.) has a comparative advantage in caviar. Advantageous trade 31. Advantageous trade can occur between the two nations when 1 caviar is exchangedtons of wheat 1 caviar is exchanged for (1/3/5) tons of wheat. [lower # of hours gives absolute advantage]2 1/2 4 1/4 Terms of Trade Terms of Trade 1 Caviar = __ Wheats 1 Caviar = __ Wheats 3 turning inputs into outputs We are once again turning inputs into outputs. 6 hours the U.S.A.output of 1 caviar or 2 wheats In 6 hours, the U.S.A. can produce an output of 1 caviar or 2 wheats. 16 hours R ussia output of 1 caviar or 4 wheats In 16 hours, R ussia can produce an output of 1 caviar or 4 wheats.

77 inputshourssmaller numberabsolute And with inputs (hours), the smaller number indicates absolute advantagemore efficient advantage; that country is more efficient because it can produce absolutely fasterthan the other a good absolutely faster than the other with the same inputs. Absolute Advantage [Outputs v. Inputs outputsquantitylarger numberabsolute advantage absolutelymore Absolute Advantage [Outputs v. Inputs] Remember that with outputs or quantity, the larger number indicates absolute advantage; that country can produce absolutely more with the same inputs, and is more efficient.ProductMarket ResourceMarket

78 2 nd M ost M issed Q uestion On 95 AP E xam [26% correct] 2 nd M ost M issed Q uestion On 95 AP E xam [26% correct] CountryFoodClothing Ducky20 hours 50 hours Ducky 20 hours 50 hours Wucky10 hours20 hours Wucky 10 hours20 hours Ducky a. Ducky has a comparative advantage in the production of both food and clothing. Wucky b. Wucky has a comparative advantage in the production of both food and clothing. Ducky c. Ducky has a comparative advantage in food production, & W ucky W ucky has a comparative advantage in clothing production. Ducky d. Ducky has a comparative advantage in clothing production, Wucky & Wucky has a comparative advantage in food production. e.Neither country has a comparative advantage in the production of either good. Country Food Clothing Ducky 20 hrs 50 hrs 1C = 2.5F;.4C = 1F Wucky 10 hrs 20 hrs 1C = 2F;.5C = 1F Terms of Trade might be 1C = 2.2F Ducky Wucky

79 Product Market [outputs] Product Market [outputs] Country Guns Butter Rabbit 40 units 120 units Wabbit 20 units 40 units Resource Market [inputs] Resource Market [inputs] Country Guns Butter Rabbit 40 hours 120 hours Wabbit 20 hours 40 hours W hat country has an absolute advantage in guns? W hat country has an absolute advantage in guns? Rabbit Wabbit Why does Rabbit have an absolute advantage in guns ? Why does Wabbit have an absolute advantage in guns ? Rabbit can produce absolutely more guns than Wabbit [40 units v. 20 units] Wabbit can produce guns absolutely faster than Rabbit [20 hours v. 40 hours] Rabbit W hat country has a comparative advantage in guns? W hat country has a comparative advantage in guns? Wabbit Rabbit Wabbit can produce guns at a lower opportunity cost [2 butters v. 3 butters] Rabbit can produce guns at a lower opportunity cost [1/3 butter v. 1/2 butter] Rabbit 1 G = 3 B 1 / 3 G=1B Wabbit 1 G = 2 B 1/2 G=1B Rabbit 1 B = 3 G 1 / 3 B=1G Wabbit 1 B = 2 G 1/2 B=1G Wabbit Rabbit Wabbit Lets change inputs into outputs. Terms of Trade: 1G = 2.5 B Terms of Trade: 1B = 2.5 G Output v. Input Comparative and Absolute Advantage


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