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

Activator Chapter 17 – International Economics 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. Who is better at all activities in the scenario above? What is the opportunity cost for the younger man if he dedicates his hour to gathering coconuts? What is the opportunity cost for the older man if he dedicates his hour gathering coconuts Should they work separately or together on the island? Explain. Insert a map of your country.

Chapter 17 – International Economics Insert a map of your country.

Chapter 17 – International Economics Absolute Advantage – person or nation can produce more of a given product using a given amount of resources (I’m 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 Insert a map of your country. or 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 100 Iphones, it takes 6 workers, it takes 2 factories, etc.

Output vs. Input output input output input input output input output The United States manufactures 2000 airplane engines ___________________ 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 ________________ 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 output input input output input output

Coconuts or Fish? Output Question Productivity Coconuts Fish Young Man 50 150 Old Man 5 25 Insert a map of your country.

Coconuts or Fish? Output Question Productivity Coconuts Fish Young Man 50 150 Old Man 5 25 Young Man has absolute advantage because he can produce both items more efficiently than the old man Insert a map of your country.

Coconuts or Fish? Output Question Comparative Advantage Coconuts Fish Young Man 50 150 Old Man 5 25 150/50 = 3 F 150/50 50/150 = 1/3 C 50/150 25/5 = 5 F 25/5 5/25 = 1/5 C 5/25 OGO – “Other Goes Over” method shows the opportunity cost of production Young Man 1 Coconut = 3 Fish 1 Fish = 1/3 (.33) Coconut Old Man 1 Coconut = 5 Fish 1 Fish = 1/5 (.20) Coconut = = Insert a map of your country. = =

Coconuts or Fish? Output Question Comparative Advantage Coconuts Fish Young Man 50 150 Old Man 5 25 Comparative Advantage Coconuts Fish Young Man 50 150 Old Man 5 25 150/50 = 3 F 50/150 = 1/3 C 25/5 = 5 F 5/25 = 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. Insert a map of your country.

Coconuts or Fish? Input Question Productivity 1 Coconuts 1 Fish Young Man 1 hr. 2 hrs. Old Man 3 hrs. 12 hrs. Young Man has absolute advantage because he can produce both items more efficiently than the old man Insert a map of your country.

Coconuts or Fish? Input Question Absolute Advantage 1 Coconuts 1 Fish Young Man 1 hr. 2 hrs. Old Man 3 hrs. 12 hrs. Young Man has absolute advantage because he can produce both items more efficiently than the old man Insert a map of your country.

Coconuts or Fish? Input Question Comparative Advantage Coconuts Fish Young Man 1 hr. 2 hrs. Old Man 3 hrs. 12 hrs. 1/2 2/1 = 2 3/12 = 1/4 12/3 = 4 IOU – “Input - Other Goes Under” method shows the opportunity cost of production Insert a map of your country.

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 100 100/100 = 1 T 100 100/100 = 1 F Canada Mexico 50 200/50 = 4 T 200 50/200 = 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 Insert a map of your country. Therefore, Canada should specialize in the production of Fur, while Mexico should specialize in the production of trees

Determining Comparative Advantage Hours per Car/Cheese 1 Car 1 Ton of Cheese US 15 5 China 4 2 15/5 = 3 CH 5/15 = 1/3 CAR 4/2 = 2 CH 2/4 = 1/2 CAR China has comparative advantage in car production US has a comparative advantage in Cheese production Insert a map of your country.

Kate and Carl 1/3 3 1 1 1/3 3 1 1 Kate Carl Kate 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. Productivity Per Hour Opportunity cost of a T-Shirts Opportunity cost of a Birdhouse Kate 6 2/6 = _____ birdhouse 2 6/2 = ______ t-shirt Carl 1 1/1 = _____ birdhouse 1 1/1 = ______ t-shirt Productivity Per Hour Opportunity cost of a T-Shirts Opportunity cost of a Birdhouse Kate 6 2 Carl 1 1/3 3 1 1 1/3 3 1 1 Kate Insert a map of your country. Carl Kate Carl

Karateconomics

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

Coconuts or Fish? Terms of Trade Comparative Advantage Coconuts Fish Young Man 50 150 Old Man 5 25 150/50 = 3 F 150/50 50/150 50/150 = 1/3 C 25/5 = 5 F 25/5 5/25 = 1/5 C 5/25 Terms of Trade 1C = 4 Fish Coconuts Young Man 1 Coconut = 3 Fish 1 Fish = 1/3 (.33) Coconut Old Man 1 Coconut = 5 Fish 1 Fish = 1/5 (.20) Coconut Insert a map of your country. 1 YM OM 1 2 3 4 5 Fish

Coconuts or Fish? Terms of Trade Comparative Advantage Coconuts Fish Young Man 50 150 Old Man 5 25 150/50 150/50 = 3 F 50/150 = 1/3 C 50/150 25/5 = 5 F 25/5 5/25 5/25 = 1/5 C Terms of Trade 1F = 1/4 Cocunut 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 Insert a map of your country. 1 YM 1 OM 1/5 1/3 Coconuts

Japan 1 Steel = 1/2 TV 1 TV = 2 Steel S. Korea 1 Steel = 1/4 TV 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 Steel Televisions Japan S. Korea Output Steel Televisions Japan 6 3 S. Korea 8 2 3/6 = 1/2 TV 6/3 = 2 STL 2/8 = 1/4 TV 8/2 = 4 STL TVs Japan 1 Steel = 1/2 TV 1 TV = 2 Steel S. Korea 1 Steel = 1/4 TV 1 TV = 4 Steel Terms of Trade 1TV = 3 Steel 1 Steel = 1/3 TV 1 Japan S. Korea 1 2 3 4 5 Steel

Gains from trade +1/4 Steel Japan produces all TVs (3), exporting 1 for 3 units of steel. South Korea produces all steel (8), and exports 3 units for 1 television. Japan South Korea 12 11 10 9 8 7 6 5 4 3 2 1 12 11 10 9 8 7 6 5 4 3 2 1 Gains from trade +1/2 TV Steel Steel Gains from trade +1/4 Steel 1 2 3 4 5 6 7 8 Televisions 1 2 3 4 5 6 7 8 Televisions Productivity Steel Televisions Japan 6 3 S. Korea 8 2 Productivity Per Hour Steel Televisions Japan SKorea *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 6/3 = 2 STL 2/8 = 1/4 TV 8/2 = 4 STL

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.   Food First, Input the data to determine who has a comparative advantage in production. Productivity Food Clothing Slavia Lebos 1 10/10 = 1 C 10 10 10/10 = 1 F 9/3 = 3 C 3/9 = 1/3 F 3 9 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? _________________________________ 1 2 3 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 more than _________ clothing. If Lebos wants to experience gains from trade then they must agree to trade for less than ________ clothing for 1 food. 1 3

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 Food Slavia Lebos 10 9 8 7 6 5 4 3 2 1 10 9 8 7 6 5 4 3 2 1 Gains from trade +1 Clothing Gains from trade +1/3 Food 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 Clothing 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 6 1 Law Papers Productivity Per Year Economics Papers Law Papers Jane 4 6 John 3 1 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 5 6 1 Law Papers *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.*

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

Trade Barriers and Agreements Trade Barrier – a trade restriction, used to prevent a foreign product from freely entering a nation’s 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) Insert a map of your country. 28

Balance of Trade 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

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 Insert a map of your country. 30

International Cooperation and Agreements International Free Trade Agreement – results from trade blocs 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 Association of Southeast Asian Nations (ASEAN) - economic organization of ten countries located in Southeast Asia Insert a map of your country. 31

Measuring Trade Exchange Rate – the value of one foreign nation’s currency in relation to another nation’s 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 = $41.66 1/12 = .083 x 500 = $41.66 Insert a map of your country. 32

Absolute and Comparative Advantage Practice Productive Output Rice Beans India 20 10 United Kingdom 5 15 Which country enjoys an absolute advantage in beans? United Kingdom Which country enjoys an absolute advantage in rice? India

Absolute and Comparative Advantage Practice Productive Output Rice Beans India 20 10 United Kingdom 5 15 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 Productive Output Fish Vegetables Country X 14 10 Country Y 15 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 Productive Output Guns Butter Russia 60 20 Cuba 30 10 Which country enjoys an absolute advantage? Russia

Absolute and Comparative Advantage Practice Productive Output Guns Butter Russia 60 20 Cuba 30 10 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 Cars Bikes Italy 4 2 Morocco 5 1 Which country enjoys an absolute advantage in cars? Italy Which country enjoys an absolute advantage in bikes? Morocco

Absolute and Comparative Advantage Practice Cars Bikes Italy 4 2 Morocco 5 1 4/2 = 2 Bikes 2/4 = 1/2 Cars 5/1 = 5 Bikes 1/5 Cars 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.

Exchange Rate 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 1 266.67 .75 1.333 _________ Dollar ÷ _________ Euro = _________ Euro per dollar x 200 = _________ 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 = 1953.40 Pesos 1 1953.40 .0005 .15 _________ Dollar ÷ _________ Peso = _________ Peso per dollar x 300 = _________

Due Tuesday 11 – 24 (Open Notes Test) Do Now Chapter 17 Section 1 Notes Chapter 17 Section 1 Guided Reading Activity Section 1 and 2 Comparative Advantage Practice Chapter Articles (NAFTA, Economic Profile) Exchange Rate Webquest Study Guide Chapter 17 Crossword Puzzle Chapter 17 VIS Terms Insert a map of your country.

Due Tuesday 11 – 24 (Open Notes Test) Do Now Chapter 17 Section 1 Notes Chapter 17 Section 1 Guided Reading Activity Section 1 and 2 Comparative Advantage Practice Chapter Articles (NAFTA, Debating Current Issues) Article – Comparative Advantage Exchange Rate Webquest Comparative Advantage Webquest Study Guide Chapter 17 Crossword Puzzle Chapter 17 VIS Terms Insert a map of your country.

Specialization and Trade Carl Specialization Trade Net 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 Specialization Trade Net 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 birdhouses and 1 more t-shirt Insert a map of your country.

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 Insert a map of your country.

South Africa and Japan Application 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. Step 1 – Input the Data Productive Output Wheat DVDs South Africa 40 8 Japan 8 4 Step 2 – Find the Opportunity Cost of Production Opportunity Cost Wheat DVDs 8/40 = 1/5 DVD 40/8 = 5 W South Africa Insert a map of your country. Japan 4/8 = 1/2 DVD 8/4 = 2 W Step 3 – Analyze the Data to Determine Comparative Advantage It costs S.A. ______ DVDs for every Wheat it produces. It costs Japan ______ DVD’s 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 Therefore, South Africa should produce the wheat and Japan should produce the DVDs. 1/4 1 4

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

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

Application Questions – pgs. 58 – 59 Should Tiger Woods Mow His Own Lawn? What does Tiger Woods hold an absolute advantage in? What does Forrest Gump have a comparative advantage in? What is the opportunity cost for both Tiger and Forrest for mowing the lawn? Why are the gains from trade beneficial in this scenario? Should The United States Trade With Other Countries? Define imports and exports. Create a chart to show the production of cars and food in the U.S. and Japan. What is the opportunity cost for both countries production of cars and food? Who has a comparative advantage in the production of each? Answer the question to the “Quick Quiz” Productivity Per Month Food Cars U.S. 2 = ½ 1 = 2 Japan 1 = 1 Insert a map of your country.

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 Productivity Per Year Economics Papers Law Papers Jane John

Japan South Korea Steel Steel Televisions Televisions 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. Create two graphs that summarize all the possible choices that they can produce. Determine opportunity cost for each country using the table below. Indicate the absolute and comparative advantage based on the table below. What should be the range of prices at which each country would be willing to exchange? 12 11 10 9 8 7 6 5 4 3 2 1 12 11 10 9 8 7 6 5 4 3 2 1 Japan South Korea Steel Steel 1 2 3 4 5 6 7 8 Televisions 1 2 3 4 5 6 7 8 Televisions Productivity Per Hour Steel Televisions Japan 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.*

Gains from trade +1 Steel 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 Japan produces 3 TVs, exporting 1 for 3 units of steel. 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. Create two graphs that summarize all the possible choices that they can produce. Determine opportunity cost for each country using the table below. Indicate the absolute and comparative advantage based on the table below. What should be the range of prices at which each country would be willing to exchange? 12 11 10 9 8 7 6 5 4 3 2 1 12 11 10 9 8 7 6 5 4 3 2 1 Japan South Korea Steel Steel Gains from trade +1/4 TV Gains from trade +1 Steel 1 2 3 4 5 6 7 8 Televisions 1 2 3 4 5 6 7 8 Televisions Productivity Per Hour Steel Televisions Japan 6 3 SKorea 8 2 Productivity Per Hour Steel Televisions Japan SKorea *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 6/3 = 2 STL 2/8 = 1/4 TV 8/2 = 4 STL

Gains from Trade: Tom – 1500 (Cases) Nancy – 1500 (Tapes) = 4 Tapes Cases (in the thousands) 3 4 2 1 Tapes (in the thousands) Cases (in the thousands) 3 4 2 1 Tapes (in the thousands) Production without trade Production without trade Tom Nancy Production with trade Production with trade Productivity Per Hour Cases Tapes Tom 1000 4000 Nancy = 4 Tapes = ¼ Case = ¼ Tape = 4 Cases Gains from Trade: Tom – 1500 (Cases) Nancy – 1500 (Tapes)

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 6 1 Law Papers Productivity Per Year Economics Papers Law Papers Jane 4 6 John 3 1 6/4 = 1.5 LP 4/6 = 2/3 EP 1/3 LP 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 3 Economics Papers Economics Papers Law Papers 6 1 Law Papers Productivity Per Year Economics Papers Law Papers Jane 4 6 John 3 1 6/4 = 1.5 LP 4/6 = 2/3 EP 1/3 LP 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 5 6 1 Law Papers *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.*

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

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.

Chapter 17 – International 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, 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. Who is better at all activities in the scenario above? What is the opportunity cost for the younger man if he dedicates his hour to gathering coconuts? What is the opportunity cost for the older man if he dedicates his hour gathering coconuts Should they work separately or together on the island? Explain. Insert a map of your country.

Chapter 17 – International Trade 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. Insert a map of your country. or or

Coconuts or Fish? Absolute Advantage Coconuts Fish Young Man 50 150 Old Man 5 25 Insert a map of your country.

Coconuts or Fish? Absolute Advantage Coconuts Fish Young Man 50 150 Old Man 5 25 Young Man has absolute advantage because he can produce both items more efficiently than the old man Insert a map of your country.

Coconuts or Fish? Comparative Advantage Coconuts Fish Young Man 50 150 Old Man 5 25 Insert a map of your country.

Coconuts or Fish? Comparative Advantage Coconuts Fish Young Man 50 150 Old Man 5 25 150/50 150/50 = 3 F 50/150 = 1/3 C 50/150 25/5 25/5 = 5 F 5/25 = 1/5 C 5/25 OGO – Other goes over method shows the opportunity cost of production Insert a map of your country.

Coconuts or Fish? Comparative Advantage Coconuts Fish Young Man 50 150 Old Man 5 25 Comparative Advantage Coconuts Fish Young Man 50 150 Old Man 5 25 150/50 = 3 F 50/150 = 1/3 C 25/5 = 5 F 5/25 = 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. Insert a map of your country.

Steps for 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. Step 1 – Input the Data Productive Output Fur Trees Canada 100 100 Mexico 50 200 Step 2 – Find the Opportunity Cost of Production Opportunity Cost Fur Trees 100/100 = 1 T 100/100 = 1 F Canada Insert a map of your country. Mexico 200/50 = 4 T 50/200 = 1/4 F 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 Therefore, Canada should specialize in the production of Fur, while Mexico should specialize in the production of trees 1/4 1 4

Kate and Carl 1/3 3 6/2 1/1 1 1 1/1 1/3 3 1 1 Kate Carl Kate Carl Productivity Per Hour T-Shirts per hour Birdhouses per hour Kate 6 2 Carl 1 Who has absolute advantage in this situation? 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. Productivity Per Hour Opportunity cost of a T-Shirts Opportunity cost of a Birdhouse Kate = _____ birdhouse = ______ t-shirt Carl 1/3 3 2/6 6/2 1/1 1 1 1/1 1/3 Insert a map of your country. 3 1 1 Kate Carl Kate Carl