Competition & Stock Challenge Wrap-Up

Today, our goal is to learn about: Rationalization Competitive Advantage Absolute Advantage Opportunity Cost Comparative Advantage

Advantages to International Trade Increase in jobs Opening new markets Different technologies Varying products Competition (decreasing prices)

Rationalization Includes any attempt to increase a company’s effectiveness or efficiency. –downsizing –layoffs –relocations –‘offshoring’ (getting goods or services from abroad!)

Why did we buy from China?

Competitive Advantage

Is the ability of one company to produce a product more cheaply than another company.

China’s Competitive Advantage Lower costs of production. –Lower labour costs.

Isn’t China a communist economy?

Absolute Advantage Let’s say Canada uses $1 million of its resources (labour, machinery, raw materials, etc) to produce maple syrup. –With that investment, it can produce one million litres of syrup.

Absolute Advantage (cont’d) Mexico also invests $1 million in maple syrup production. –It is able to produce five-hundred thousand litres.

Absolute Advantage In this case, Canada has the Absolute Advantage in producing Maple Syrup. It would therefore make more sense to invest your $1 million in Canadian maple syrup manufacturing, than it would in Mexico maple syrup manufacturing!

but what is canada giving up?

What are you giving up? What do you give up if you produce an item? What if Canada could produce two million units of corn instead of one million units of maple syrup with the same investment? 1 unit of maple syrup costs: 2,000,000 / 1,000,000 = 2 units of corn

Opportunity Cost Opportunity cost is the value of what is not done. (what is ‘forgone’) –Opportunity cost of you being in class is the amount of money you could be making working at a job.

Opportunity Cost: The opportunity cost of a unit of syrup was two units of corn. What if we could produce 800 cars or 1200 motor bikes? What would be the opportunity cost of producing the cars? (or 1200/800) = 1.5 motor bikes

Gains on Trade Let’s say that Canada can could produce one million bags of corn with an investment of $1 million.

Opportunity Cost In Canada, each unit of maple syrup cost the same as a unit of corn. So, if we took a unit of maple syrup, we couldn’t have a unit of corn. –The opportunity cost of that unit of syrup is thus one unit of corn.

Let’s now say that Mexico can produce 800,000 units of corn for the same investment. (Canada can produce one million.)

Gains on Trade Canada still has the absolute advantage in both corn and maple syrup. (It can produce more of both with a million dollar investment.) But should the countries still trade? Is there any benefit to doing this?

‘Comparative Advantage’: Gains on Trade If both countries were to invest $2 million in their own Maple Syrup and Corn, they would have:

Comparative Advantage Yet, if Canada was to only produce syrup, and Mexico only corn: (Specialization)

Comparitive Advantage There would be a ‘comparitive advantage’ to this trade, making both countries better off.

How do we figure that out? Opportunity Cost! –In Canada, 1m syrup costs 1m units of corn. Thus, the opportunity cost of 1 unit of syrup is 1 unit of corn. In Mexico, 500k syrup cost 800k units of corn. Thus, the opportunity cost of 1 unit of syrup is (800/500) 1.6 units of corn. ** The opportunity cost of producing syrup is lower in Canada, so that is where it should be produced. **

How do we figure that out? Opportunity Cost! –In Canada, 1m corn costs 1m units of syrup. Thus, the opportunity cost of 1 unit of corn is 1 unit of syrup. In Mexico, 800k corn cost 800k units of syrup. Thus, the opportunity cost of 1 unit of corn is (500/800).625 units of syrup. ** The opportunity cost of producing corn is lower in Mexico, so that is where it should be produced. **

It might be easier to see in a table… 500k / 800k

The comparitive advantage belongs to the country with the lower opportunity cost..

Specialization & Gains on Trade Thus, when countries specialize there are ‘gains on trade’ (countries are better off) because of their comparative advantages.

Copy the following chart….

Exercise Canada is able to produce either 1,000 apples of 500 peaches. The United States can produce either 1,200 apples or 800 peaches. –Who has the absolute advantage in apples? In peaches? –Where is the opportunity cost of peaches lowest? Of apples? –According to Comparative Advantage, which country should produce which items?

Your Stocks…

A company’s bottom line success is the primary goal of corporations and the shareholders that own it.

Stock Market Challenge What was the starting value of your portfolio? What was the ending value? What was the return on your investment? How is that calculated? How could you make an ROI projection for a full year? Make one. What changes would you make (different stocks, different trading practices, etc) if you had to do the challenge again?