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

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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.

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Presentation on theme: "Daily Ten #1 - Shirts and Shoes Article Shirts Shoes Identify the country of origin for your shirts and shoes."— Presentation transcript:

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

3 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, strong, and educated. He is also, faster, better, more productive at everything. The second man is old, weak, and uneducated. He produces less than the younger man. In some activities the difference between the two is great; in others it is small. For instance, the younger man can gather 50 coconuts every hour, or catch 150 fish. While the older man can only gather 5 coconuts or catch 25 fish every hour. 1.Who is better at all activities in the scenario above? 2.What is the opportunity cost for the younger man if he dedicates his hour to gathering coconuts? 3.What is the opportunity cost for the older man if he dedicates his hour gathering coconuts 4.Should they work separately or together on the island? Explain. Activator Chapter 17 – International Economics

4 Chapter 17 – International Economics

5 Absolute Advantage – person or nation can produce more of a given product using a given amount of resources (Im better than you) Comparative Advantage – the ability to produce a product with less opportunity cost (I can do something 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 Chapter 17 – International Economics

6 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 100 Iphones, it takes 6 workers, it takes 2 factories, etc. Output vs. Input

7 1.The United States manufactures 2000 airplane engines ___________________ 2.It takes the average worker 3 hours to produce a textile in China __________________ 3.Saudi Arabia can produce up to 11 million barrels of crude oil ________________ 4.It takes 1 machine to cultivate a farm (it used to take 10 people) __________________ 5.McDonalds requires 2 acres of property to build a restaurant ______________________ 6.McDonalds has the capability of producing 8500 burgers per minute ________________ 7.It takes 2 hours and four workers to unload a truck at Wal-Mart ____________________ 8.The United States produced 2000 tons of soybeans last year ____________________ Output vs. Input output input output input output input output

8 Productivity CoconutsFish Young Man50150 Old Man525 Coconuts or Fish? Output Question

9 Productivity CoconutsFish Young Man50150 Old Man525 Young Man has absolute advantage because he can produce both items more efficiently than the old man Coconuts or Fish? Output Question

10 Comparative Advantage CoconutsFish Young Man50150 Old Man /5050/150 25/55/25 OGO – Other Goes Over method shows the opportunity cost of production 150/50 = 3 F50/150 = 1/3 C 25/5 = 5 F5/25 = 1/5 C Coconuts or Fish? Output Question Young Man 1 Coconut = 3 Fish 1 Fish = 1/3 (.33) Coconut Old Man 1 Coconut = 5 Fish 1 Fish = 1/5 (.20) Coconut = = = =

11 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. Comparative Advantage CoconutsFish Young Man50150 Old Man525 Comparative Advantage CoconutsFish Young Man50150 Old Man /50 = 3 F50/150 = 1/3 C 25/5 = 5 F5/25 = 1/5 C Coconuts or Fish? Output Question

12 Productivity 1 Coconuts1 Fish Young Man1 hr.2 hrs. Old Man3 hrs.12 hrs. Young Man has absolute advantage because he can produce both items more efficiently than the old man Coconuts or Fish? Input Question

13 Absolute Advantage 1 Coconuts1 Fish Young Man1 hr.2 hrs. Old Man3 hrs.12 hrs. Young Man has absolute advantage because he can produce both items more efficiently than the old man Coconuts or Fish? Input Question

14 Comparative Advantage CoconutsFish Young Man1 hr.2 hrs. Old Man3 hrs.12 hrs. 1/22/1 = 2 3/12 = 1/4 12/3 = 4 IOU – Input - Other Goes Under method shows the opportunity cost of production Coconuts or Fish? Input Question

15 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. Productivity Fur Trees Canada Mexico 100/ /50 100/100 50/200 = 1 T = 4 T = 1 F = 1/4 F 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 1/4 1 4 Therefore, Canada should specialize in the production of Fur, while Mexico should specialize in the production of trees

16 China has comparative advantage in car production US has a comparative advantage in Cheese production Determining Comparative Advantage Hours per Car/Cheese 1 Car1 Ton of Cheese US155 China42 15/5 = 3 CH5/15 = 1/3 CAR 4/2 = 2 CH2/4 = 1/2 CAR

17 Kate and Carl 1.It costs Kate ________ birdhouses to produce 1 t-shirt. 2.It costs Kate ________ shirts to produce 1 birdhouse. 3.It costs Carl ________ to produce 1 t-shirt. 4.It costs Carl ________to produce 1 birdhouse. 5.________ has a comparative advantage when producing t-shirts. 6.________ has a comparative advantage when producing birdhouses. 7.Therefore, ___________ should produce t-shirts and __________ should produce birdhouses. Productivity Per Hour Opportunity cost of a T- Shirts Opportunity cost of a Birdhouse Kate 62 Carl11 1/ Kate Carl Kate Carl Productivity Per Hour Opportunity cost of a T- Shirts Opportunity cost of a Birdhouse Kate 6 2/6 = _____ birdhouse 2 6/2 = ______ t-shirt Carl1 1/1 = _____ birdhouse 1 1/1 = ______ t-shirt 1/

18 Karateconomics

19 Terms of Trade Terms of trade – rate of exchange wherein both parties 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 Comparative Advantage CoconutsFish Young Man50150 Old Man /5050/150 25/55/25 150/50 = 3 F50/150 = 1/3 C 25/5 = 5 F5/25 = 1/5 C Coconuts or Fish? Terms of Trade YM OM Terms of Trade 1C = 4 Fish Young Man 1 Coconut = 3 Fish 1 Fish = 1/3 (.33) Coconut Old Man 1 Coconut = 5 Fish 1 Fish = 1/5 (.20) Coconut Coconuts Fish

21 Comparative Advantage CoconutsFish Young Man50150 Old Man /5050/150 25/55/25 150/50 = 3 F50/150 = 1/3 C 25/5 = 5 F5/25 = 1/5 C Coconuts or Fish? Terms of Trade 1 1 YM OM Terms of Trade 1F = 1/4 Cocunut Young Man 1 Coconut = 3 Fish 1 Fish = 1/3 (.33) Coconut Old Man 1 Coconut = 5 Fish 1 Fish = 1/5 (.20) Coconut Coconuts Fish 1/31/5

22 Output SteelTelevisions Japan S. Korea Application Question Comparative Advantage A Japanese worker can produce 6 units of steel or 3 televisions. A South Korean worker can produce 8 units of steel or 2 televisions. Output SteelTelevisions Japan63 S. Korea82 TVs 3/6 = 1/2 TV 2/8 = 1/4 TV 6/3 = 2 STL 8/2 = 4 STL Terms of Trade 1TV = 3 Steel 1 Steel = 1/3 TV Steel Japan 1 Steel = 1/2 TV 1 TV = 2 Steel S. Korea 1 Steel = 1/4 TV 1 TV = 4 Steel Japan S. Korea 1

23 Productivity Per Hour SteelTelevisions Japan SKorea Productivity SteelTelevisions Japan63 S. Korea82 Steel 00 Televisions JapanSouth Korea *Important Point: The production possibilities frontier is linear in these cases because the labor resource can be moved from the production of one good to the other at a constant rate.* 3/6 = 1/2 TV 2/8 = 1/4 TV 6/3 = 2 STL 8/2 = 4 STL Gains from trade +1/2 TV Gains from trade +1/4 Steel Japan produces all TVs (3), exporting 1 for 3 units of steel. 2.South Korea produces all steel (8), and exports 3 units for 1 television.

24 Gains From Trade ExampleGains 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. Productivity FoodClothing Slavia Lebos 10/10 = 1 C 9/3 = 3 C 10/10 = 1 F 3/9 = 1/3 F First, Input the data to determine who has a comparative advantage in production. Indicate Per Unit Opportunity Cost: Slavia 1 F = _______ C 1C = _______F Lebos 1 F = _______ C 1C = _______F Who has the comparative advantage in the production of food? _________________________________ Who has the comparative advantage in the production of clothing? _________________________________ Slavia Lebos Term of Trade If Slavia wants to experience gains from trade then they must agree to trade 1 food for more than _________ clothing. If Lebos wants to experience gains from trade then they must agree to trade for less than ________ clothing for 1 food. 3 1/ Food Clothing

25 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). Slavia produces all food (10) and trades 1 food for 2 clothing. Therefore ending up with 9 food and 2 clothing. Lebos produces all clothing (9) and trades 2 clothing to Slavia for 1 food. Therefore, Lebos ends up with 7 clothing and 1 food. Food 0 Clothing Slavia Gains from trade +1/3 Food Lebos Food Clothing Gains from trade +1 Clothing

26 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 6 Economics Papers Productivity Per Year Economics PapersLaw Papers Jane46 John31 Law Papers 6/4 = 1.5 LP 1/3 =.33 LP 4/6 = 2/3 EP 3/1 = 3 EP JaneJohn

27 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. 5 6 Economics Papers Law Papers JaneJohn *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.*

28 Closed economy - does not interact with other economies in the world Open economy - interacts freely with other economies around the world Closed and Open Economies

29 Trade Barriers and Agreements Trade Barrier – a trade restriction, used to prevent a foreign product from freely entering a nations territory Tariffs – a tax on imported goods Embargo - partial or complete prohibition of commerce and trade with a particular country, in order to isolate it. Customs Duty – a tax on items purchased abroad Import Quotas – a limit on the amount of a good that can be imported Voluntary Export Restraint – a self-imposed limitation on the number of products shipped to a particular country (exports)

30 Balance of Trade Trade surplus - excess of exports over imports Exports > Imports Trade deficit - excess of imports over exports Exports < Imports Balanced trade - exports equal imports Exports = Imports Balance of Trade

31 Arguments for Protectionism Protectionism – the use of trade barriers to protect industries from competition Infant industry – a newly founded industry in the early stages of development

32 International Cooperation and Agreements International Free Trade Agreement – results from trade blocs between countries to reduce trade barriers and tariffs to promote trade 1.North American Free Trade Agreement (NAFTA) – agreement between Canada, Mexico and the U.S. to eliminate tariffs and other trade barriers 2.European Union (EU) – a regional trade organization of European nations 3.Association of Southeast Asian Nations (ASEAN) - economic organization of ten countries located in Southeast Asia

33 Measuring Trade Exchange Rate – the value of one foreign nations currency in relation to another nations currency Fixed exchange rate system – a currency system in which governments try to keep the value of their currencies constant against one another Flexible exchange rate system – a currency system that allows the exchange rate to be determined by supply and demand (most major currencies have this) Determining the Rate of Exchange 1 Dollar = 12 Mexican Pesos Hotel room costs 500 Pesos per night 500/12 = $ /12 =.083 x 500 = $41.66

34 Absolute and Comparative Advantage Practice Productive Output RiceBeans India2010 United Kingdom515 Which country enjoys an absolute advantage in beans? United Kingdom Which country enjoys an absolute advantage in rice? India

35 Absolute and Comparative Advantage Practice Productive Output RiceBeans India2010 United Kingdom515 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 10/20 = 1/2 Beans20/10 = 2 Rice 15/5 = 3 Beans5/15 = 1/3 Rice

36 Absolute and Comparative Advantage Practice Productive Output FishVegetables Country X1410 Country Y1415 Which of the following is true? a.Country Y has absolute advantage in producing both fish and vegetables, but comparative advantage in fish. b.With trade, country X will import fish. c.Country Y has comparative advantage in producing fish. d.These countries will not be able to benefit from specialization and trade. e.Country X will export fish to country Y. Answer: _____e________ 10/14 =.71 Vegs14/10 = 1.4 Fish 15/14 = 1.07 Vegs14/15 =.93 Fish

37 Absolute and Comparative Advantage Practice Productive Output GunsButter Russia6020 Cuba3010 Which country enjoys an absolute advantage? Russia

38 Absolute and Comparative Advantage Practice Productive Output GunsButter Russia6020 Cuba For every Gun that Russia produces, they give up _____1/3________ Butter. 10.For every Butter that Russia produces they give up ____3________ Guns. 11.For every Gun that Cuba produces they give up ______1/3_____ Butter. 12.For every Butter that Cuba produces they give up _____3_______ Guns. 13.Why is there no comparative advantage? Opportunity Cost is the same 14.Therefore, the two countries should not trade is when their opportunity cost is__________equal/the same____________________ 20/60 = 1/3 Butter60/20 = 3 Guns 10/30 = 1/3 Butter30/10 = 3 Guns

39 Absolute and Comparative Advantage Practice CarsBikes Italy42 Morocco51 Which country enjoys an absolute advantage in cars? Italy Which country enjoys an absolute advantage in bikes? Morocco

40 Absolute and Comparative Advantage Practice CarsBikes Italy42 Morocco51 9.For every Gun that Russia produces, they give up _____1/3________ Butter. 10.For every Butter that Russia produces they give up ____3________ Guns. 11.For every Gun that Cuba produces they give up ______1/3_____ Butter. 12.For every Butter that Cuba produces they give up _____3_______ Guns. 4/2 = 2 Bikes2/4 = 1/2 Cars 5/1 = 5 Bikes1/5 Cars

41 Exchange Rate _________ Dollar ÷ _________ Euro = _________ Euro per dollar x 200 = _________ You and your family decide to go to Italy for a vacation. You find out that a hotel room in Italy costs 200 Euros per night. Determine the how much it would cost in American dollars for you and your family to stay each night. Use the information below. - 1 US Dollar =.75 Euro You and your family decide to go to the Colombia for a vacation. You find out that a hotel room in Colombia costs 300 Pesos per night. Determine the how much it would cost in American dollars for you and your family to stay each night. Use the information below. - 1 US Dollar = Pesos _________ Dollar ÷ _________ Peso = _________ Peso per dollar x 300 = _________.0005

42 Due Tuesday 11 – 24 (Open Notes Test) 1.Do Now Chapter 17 Section 1 2.Notes Chapter 17 Section 1 3.Guided Reading Activity Section 1 and 2 4.Comparative Advantage Practice 5.Chapter Articles (NAFTA, Economic Profile) 6.Exchange Rate Webquest 7.Study Guide Chapter 17 8.Crossword Puzzle Chapter 17 9.VIS Terms

43 Due Tuesday 11 – 24 (Open Notes Test) 1.Do Now Chapter 17 Section 1 2.Notes Chapter 17 Section 1 3.Guided Reading Activity Section 1 and 2 4.Comparative Advantage Practice 5.Chapter Articles (NAFTA, Debating Current Issues) 6.Article – Comparative Advantage 7.Exchange Rate Webquest 8.Comparative Advantage Webquest 9.Study Guide Chapter Crossword Puzzle Chapter VIS Terms

44 Specialization and Trade Carl SpecializationTradeNet Effect Carl Specializes, switching 2 hours from t- shirt production to birdhouse production Carl trades 1 birdhouse for 2 t-shirts Net effect is same number of t-shirts and 1 more birdhouse Kate SpecializationTradeNet Effect Kate specializes, switching one half-hour from birdhouse production to t-shirt produciton Kate trades 2 t- shirts for 1 birdhouse Net effect is the same number of birdhouse s and 1 more t- shirt

45 Specialization and Trade Agree to trade 1 C for 4 Fish Young man collects 1 coconut costing himself 3 fish The Old Man collects 5 fish costing himself 1 coconut

46 South Africa and Japan Application Productive Output Scenario: South Africa and Japan are considering the trade of two goods. Japan can produce 40 Wheat or 8 DVDs. Japan can produce 8 Wheat or 4 DVDs. Wheat DVDs South Africa Japan Opportunity Cost Wheat DVDs South Africa Japan 8/40 4/8 40/8 8/4 = 1/5 DVD = 1/2 DVD = 5 W = 2 W Step 1 – Input the Data Step 2 – Find the Opportunity Cost of Production Step 3 – Analyze the Data to Determine Comparative Advantage It costs S.A. ______ DVDs for every Wheat it produces. It costs Japan ______ DVDs for every Wheat it produces. It costs S.A. ______ Wheat for every DVD it produces. It costs Japan ______ Wheat for every DVD it produces. 1 1/4 1 4 Therefore, South Africa should produce the wheat and Japan should produce the DVDs.

47 Application Questions – pgs. 58 – 59 Should Tiger Woods Mow His Own Lawn? 1.What does Tiger Woods hold an absolute advantage in? 2.What does Forrest Gump have a comparative advantage in? 3.What is the opportunity cost for both Tiger and Forrest for mowing the lawn? 4.Why are the gains from trade beneficial in this scenario? Should The United States Trade With Other Countries? 1.Define imports and exports. 2.Create a chart to show the production of cars and food in the U.S. and Japan. 3.What is the opportunity cost for both countries production of cars and food? 4.Who has a comparative advantage in the production of each? Answer the question to the Quick Quiz

48 Application Questions – pgs. 58 – 59 Should Tiger Woods Mow His Own Lawn? 1.What does Tiger Woods hold an absolute advantage in? 2.What does Forrest Gump have a comparative advantage in? 3.What is the opportunity cost for both Tiger and Forrest for mowing the lawn? 4.Why are the gains from trade beneficial in this scenario? Should The United States Trade With Other Countries? 1.Define imports and exports. 2.Create a chart to show the production of cars and food in the U.S. and Japan. 3.What is the opportunity cost for both countries production of cars and food? 4.Who has a comparative advantage in the production of each? Answer the question to the Quick Quiz Productivity Per Month FoodCars U.S. Japan

49 Application Questions – pgs. 58 – 59 Should Tiger Woods Mow His Own Lawn? 1.What does Tiger Woods hold an absolute advantage in? 2.What does Forrest Gump have a comparative advantage in? 3.What is the opportunity cost for both Tiger and Forrest for mowing the lawn? 4.Why are the gains from trade beneficial in this scenario? Should The United States Trade With Other Countries? 1.Define imports and exports. 2.Create a chart to show the production of cars and food in the U.S. and Japan. 3.What is the opportunity cost for both countries production of cars and food? 4.Who has a comparative advantage in the production of each? Answer the question to the Quick Quiz Productivity Per Month FoodCars U.S.2 = ½1 = 2 Japan1 = 1

50 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 Economics Papers 00 Productivity Per Year Economics PapersLaw Papers Jane John Law Papers JaneJohn

51 Steel 00 Productivity Per Hour SteelTelevisions Japan Korea Televisions JapanSouth Korea *Important Point: The production possibilities frontier is linear in these cases because the labor resource can be moved from the production of one good to the other at a constant rate.* Application Question Comparative Advantage A Japanese worker can produce 6 units of steel or 3 televisions per hour. A South Korean worker can produce 8 units of steel or 2 televisions per hour. 1.Create two graphs that summarize all the possible choices that they can produce. 2.Determine opportunity cost for each country using the table below. 3.Indicate the absolute and comparative advantage based on the table below. 4.What should be the range of prices at which each country would be willing to exchange?

52 Suppose that Japan and South Korea settle on a trading price of 3 units of steel for 1 television (or 1/3 of a television for 1 unit of steel). Plot the new points based on gains from trade 1.Japan produces 3 TVs, exporting 1 for 3 units of steel. 2.South Korea produces 8 units of steel, and exports 3 units for 1 television, this allows them to consume 5 units of steel and 1 television. Application Question Comparative Advantage A Japanese worker can produce 6 units of steel or 3 televisions per hour. A South Korean worker can produce 8 units of steel or 2 televisions per hour. 1.Create two graphs that summarize all the possible choices that they can produce. 2.Determine opportunity cost for each country using the table below. 3.Indicate the absolute and comparative advantage based on the table below. 4.What should be the range of prices at which each country would be willing to exchange? Productivity Per Hour SteelTelevisions Japan SKorea Productivity Per Hour SteelTelevisions Japan63 SKorea82 Steel 00 Televisions JapanSouth Korea *Important Point: The production possibilities frontier is linear in these cases because the labor resource can be moved from the production of one good to the other at a constant rate.* /6 = 1/2 TV 2/8 = 1/4 TV 6/3 = 2 STL 8/2 = 4 STL Gains from trade +1 Steel Gains from trade +1/4 TV

53 Productivity Per Hour CasesTapes Tom Nancy = 4 Tapes = ¼ Tape = ¼ Case = 4 Cases Tom Cases (in the thousands) Tapes (in the thousands) Cases (in the thousands) Tapes (in the thousands) Nancy Production without trade Production with trade Production without trade Production with trade Gains from Trade: Tom – 1500 (Cases) Nancy – 1500 (Tapes)

54 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 6 Economics Papers Productivity Per Year Economics PapersLaw Papers Jane46 John31 Law Papers 6/4 = 1.5 LP 1/3 LP 4/6 = 2/3 EP 3 EP JaneJohn

55 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. 6 Economics Papers Productivity Per Year Economics PapersLaw Papers Jane46 John31 Law Papers 6/4 = 1.5 LP 1/3 LP 4/6 = 2/3 EP 3 EP JaneJohn

56 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. 5 6 Economics Papers Law Papers JaneJohn *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.*

57 Economics Papers Productivity Per Year Economics PapersLaw Papers Jane46 John31 Law Papers 6/4 = 1.5 LP 1/3 LP 4/6 = 2/3 EP 3 EP Tom John Cases (in the thousands) Tapes (in the thousands

58 Essential Questions What is the difference between absolute and comparative advantage? Absolute advantage, a country can produce _________ of a good. Comparative advantage, a country can produce _________ opportunity cost.

59 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, strong, and educated. He is also, faster, better, more productive at everything. The second man is old, weak, and uneducated. He produces less than the younger man. In some activities the difference between the two is great; in others it is small. For instance, the younger man can gather 50 coconuts every hour, or catch 150 fish. While the older man can only gather 5 coconuts or catch 25 fish every hour. 1.Who is better at all activities in the scenario above? 2.What is the opportunity cost for the younger man if he dedicates his hour to gathering coconuts? 3.What is the opportunity cost for the older man if he dedicates his hour gathering coconuts 4.Should they work separately or together on the island? Explain. Chapter 17 – International Trade

60 Absolute Advantage – a nation can produce more of a given product using a given amount of resources Comparative Advantage – the ability to produce a product most efficiently given all the other products that could be produced (less opportunity cost) Law of comparative advantage – a nation or person is better off when it produces goods and services for which it has a comparative advantage Globalization - the process by which regional economies, societies, and cultures have become integrated through communication, transportation, and trade. or

61 Coconuts or Fish? Absolute Advantage CoconutsFish Young Man50150 Old Man525

62 Coconuts or Fish? Absolute Advantage CoconutsFish Young Man50150 Old Man525 Young Man has absolute advantage because he can produce both items more efficiently than the old man

63 Coconuts or Fish? Comparative Advantage CoconutsFish Young Man50150 Old Man525

64 Coconuts or Fish? Comparative Advantage CoconutsFish Young Man50150 Old Man /5050/150 25/55/25 OGO – Other goes over method shows the opportunity cost of production 150/50 = 3 F50/150 = 1/3 C 25/5 = 5 F5/25 = 1/5 C

65 Coconuts or Fish? Comparative Advantage CoconutsFish Young Man50150 Old Man525 Comparative Advantage CoconutsFish Young Man50150 Old Man /50 = 3 F50/150 = 1/3 C 25/5 = 5 F5/25 = 1/5 C 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.

66 Steps for Determining Comparative Advantage Productive Output 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 Canada Mexico Opportunity Cost Fur Trees Canada Mexico 100/ /50 100/100 50/200 = 1 T = 4 T = 1 F = 1/4 F Step 1 – Input the Data Step 2 – Find the Opportunity Cost of Production Step 3 – Analyze the Data to Determine Comparative Advantage 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 1/4 1 4 Therefore, Canada should specialize in the production of Fur, while Mexico should specialize in the production of trees

67 Kate and Carl Productivity Per Hour T-Shirts per hourBirdhouses per hour Kate62 Carl11 1.Who has absolute advantage in this situation? 2.It costs Kate ________ birdhouses to produce 1 t-shirt. 3.It costs Kate ________ shirts to produce 1 birdhouse. 4.It costs Carl ________ to produce 1 t-shirt. 5.It costs Carl ________to produce 1 birdhouse. 6.________ has a comparative advantage when producing t-shirts. 7.________ has a comparative advantage when producing birdhouses. 8.Therefore, ___________ should produce t-shirts and __________ should produce birdhouses. Productivity Per Hour Opportunity cost of a T-Shirts Opportunity cost of a Birdhouse Kate = _____ birdhouse = ______ t-shirt Carl = _____ birdhouse = ______ t-shirt 1/ / Kate Carl Kate Carl 2/6 6/2 1/1


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