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

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

Coconuts or Fish? Absolute Advantage CoconutsFish Young Man50150 Old Man525

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

Coconuts or Fish? Comparative Advantage CoconutsFish Young Man50150 Old Man525

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

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.

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

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

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

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)

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

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

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

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 1/12 = x 500 = $41.66 Hotel room costs 500 Pesos per night 500/12 = $41.66

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

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

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

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

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

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

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

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

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

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

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.

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

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

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

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

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?

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

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)

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

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

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.*

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