1. International Trade Trade between China and Italy ◦ China  makes everything cheaper, faster, better  why trade with Italy? Continuing growth of international trade Important theory in international trade: Comparative Advantage

2. What is Comparative Advantage? You need to know the meaning of two terms: 1.opportunity cost 2.absolute advantage

3. Opportunity Cost the opportunities given up in the choice of one expenditure over others If you had $50 to entertain yourself, and you could either go to an amusement park or buy two DVDs, which would you do? What is the opportunity cost of selecting the amusement park? the two DVDs?

4. Absolute Advantage the ability of a country to produce more of a good or service than competitors, using the same amount of resources theory  no trade occurs China has absolute advantage in car and computer production. 1 car1 computer U.S. China 15 hours5 hours 4 hours2 hours

5. Comparative Advantage the ability of a country to produce a particular good or service at a lower opportunity cost than another country theory  trade is beneficial

6. Comparative Advantage To make 1 car, the U.S. gives up 3 computers. To make 1 car, China gives up 2 computers. China has a low opportunity cost; therefore, China has the comparative advantage in car production. 1 car1 computer U.S. China 15 hours 5 hours 4 hours2 hours 15/5 =3 4/2 =2

7. Comparative Advantage To make 1 computer, the U.S. gives up 1/3 of a car. To make 1 computer, China gives up ½ of a car. The U.S. has a low opportunity cost; therefore, the U.S. has the comparative advantage in computer production. 1 car1 computer U.S. China 15 hours 5 hours 4 hours2 hours 5/15 =1/3 2/4 =1/2

8. Comparative Advantage China can specialize in car production. The U.S. can specialize in computer production. GAINS IN TRADE GAINS IN TRADE: ◦ China can import computers from the U.S. and export cars. ◦ The U.S. can import cars from China and export computers.