Why People Trade, Domestically and Internationally Focus: Globalization Lesson Two

Concepts Absolute advantage Comparative advantage Opportunity cost Production possibilities table

Content Standards Voluntary exchange occurs only when all participating parties expect to gain. This is true for trade among individuals or organizations within a nation, and among individuals or organizations in different nations. When individuals, regions, and nations specialize in what they can product at the lowest cost and then trade with others, both production and consumption increase.

Benchmarks People voluntarily exchange goods and services because they expect to be better off. Voluntary exchange gives people a wider range of choices. International trade promotes specialization and division of labor. Individuals and nations have a comparative advantage in the production of goods or services if they can produce a product at a lower opportunity cost than other individuals and nations.

Trade What have you traded? Why did you trade? Explain that we will now participate in a trading activity. Divide students into groups of 10. Modified from lesson. Lesson uses cards with items. Make 6 groups of 10 – each group should have a similar item – paper goods, pens, candy, etc. Use the colored stickers to identify groups.

Trading Activity Distribute bags with colored stickers. Have students group according to stickers. Rate satisfaction or utility from 0 to 5 (high). Explain that they get to keep or trade the item with someone in their group. Calculate group satisfaction. Conduct one more trading round with anyone in the class. Again calculate group utility and # of trades.

Visual 1: Utility Number of Trades Utility Before Trading After trade within group After international trade

Trade Discussion Did more people trade in Round 1 or Round 2? Were you required to trade? Number of items to trade was the same. Why were people happier? Why did you trade? Should people and businesses in U.S. trade with other countries? To answer this question, we’ll look at production in two countries After trade items where held by students who valued them more highly. Traded because they expected to be better off.

Comparative Advantage Occurs when people or firms specialize in the production of a good or service for which they have a lower opportunity cost Opportunity cost – highest valued alternative that is given up when a choice is made Pass out Visual 3: Have students work through the questions.

Nino’s Pizza Shop (from visual 3) Nino’s opp cost of producing 9 pizzas is 36 salads – Tony’s opp cost of producing 6 pizzas is 12 salads – Nino’s opp cost of 36 salads is 9 pizzas – Tony’s 12 salads is 6 pizzas – of 1 pizza is 4 salads. 1 pizza is 2 salads. 1 salad is ¼ pizza. 1 salad is ½ pizza.

Nino’s Pizza Shop Cont. Who has lowest opp cost for making pizza? Who has the lowest opp cost for making salad? Who has the comp adv in pizzas? In salad? H. How does specialization affect the running of the pizza shop? Tony Nino Tony Nino Increases output and lowers the cost of making pizzas and salads

Country Comp Adv Country A & Country B – 2 sides of board – six volunteers for each – distribute production cards In one day each worker in country A can produce 8 cell phones OR 4 microwave ovens Show all cell phones and all ovens Have one student flip from phones to ovens – record on the table – continue until 0 phones

Production Possibilities (Visual 4) Country A A B C D E F G # cell phones # of ovens Country B A B C D E F G # cell phones # of ovens A –-- 48-0;40-4;32-8;24-12;16-16;8-20;0-24; B--- 0-12;1-10;2-8;3-6;4-4;5-2;6-0;

Discussion – A Production How does # of phones change as more ovens are produced? How does the # of ovens change as more cell phones are produced? What does overall chart show? This is called production possibilities table. Why is there a trade off in producing more of either good?

Country B - Production Six volunteers to stand by Country B In one day each worker in country B can produce 1 cell phone OR 2 microwave ovens Show all cell phones and all ovens Have one student flip from phones to ovens – record on the table – continue until 0 phones

Production Possibilities Country A A B C D E F G # cell phones 48 40 32 24 16 8 # of ovens 4 12 20 Country B A B C D E F G # cell phones 1 2 3 4 5 6 # of ovens 12 10 8

Country B Production Discussion What does the production possibilities table show you about making cell phones and microwave ovens in Country B? Why does this occur? If each country produces cell phones, which country can produce more? If each country produces ovens, which country can produce more? Country A had an absolute advantage in the production of both goods. Country A on both.

Trade Should Country A trade cell phones or microwaves with Country B since they have an absolute advantage? To determine, we must calculate the opportunity cost of each. Distribute Visual 4 to each student. Work in pairs to complete.

Opportunity Cost – A (Visual 4 part A) Country A OC of 8 cell phones? OC of 1 cell phone? OC of 4 microwaves? OC of 1 microwave? 4 – ½ - 8 - 2

Opportunity Cost B - (Visual 4 part B) Country B OC of 1 cell phone? OC of 2 microwaves? OC of 1 microwave? Which country has the lowest opportunity cost of producing cell phones? Microwaves? 2 – 1- ½ - Country A – Country B

Total Production Country A A B C D E F G # cell phones 48 40 32 24 16 # of ovens 4 12 20 Country B A B C D E F G # cell phones 1 2 3 4 5 6 # of ovens 12 10 8 43 & 10 Before trade, Country A was producing at B combination and Country B at D. What is total production of cell phones? Of microwave ovens?

Total Production Discussion If Country A produces all phones, how many more will be produced? How many ovens will be given up? Country B puts all workers into production of ovens, how many will be produced? How many lost? What would be the total output of cell phones with specialization? Of microwave ovens? What were the affects of specialization and trade? 8 – 4 given up; 3. 6 – 3 lost; 5. 5; 6. 2; 7. Overall production levels increased.

Disadvantages of Trade Countries are more interdependent Rely on others to produce what we consume Wars and trade barriers can interrupt trade Not trading means paying higher opportunity costs and decreasing overall level of production and consumption --- living standards will fall.

Closure Why do individuals and nations trade? How does overall satisfaction levels change? How does specialization affect production and consumption? What is absolute advantage? What is comparative advantage? Expect to be better off by increasing production levels, reducing production costs, and transferring goods and services to the people who value them the most – and are willing and able to pay for them.