1. Why Nations Trade?
If we are better at making everything, why would we trade with anyone else?

2. Resource Distribution
The Factors of Production
Land
All natural resources
Labor
Work and skills of people
Capital
Objects used to produce other goods
Entrepreneurs
The people who put it all together

3. Resource Distribution
As you would expect resources are not distributed equally between countries.
This is true of ALL Factors of Production
Because of this countries should trade

4. Absolute Advantage Absolute advantage
The ability to produce more of a product using a given amount of resources
For example: We have Todd and Wendy

5. Absolute Advantage Given more than enough supplies
And one hour in which to build birdhouses

6. Absolute Advantage Todd can build 2 Birdhouse
Wendy can build 8 Birdhouses

7. Absolute Advantage
Thus we say that Wendy has an Absolute Advantage over Todd when it comes to making Birdhouses.
Things to Remember:
Time is a resource
(It is a part of “labor”)
Absolute Advantage is an advantage over someone else at making that one product
A product can be a good or service

8. Comparative Advantage
The ability to produce a product most efficiently given all the other products that could be produced (w/ lowest opportunity cost)
Example: Given more than enough supplies and given one hour to work . . .

9. Comparative Advantage
Todd can make two kites
Wendy can make four kites

10. Comparative Advantage
What is Todd’s opportunity costs?
1 hour = 2 birdhouses
1 hour = 2 kites
2 birdhouses = 2 kites
1 birdhouse = 1 kite
Opportunity cost of 1 birdhouse
1 Kite
Opportunity cost of 1 kite
1 birdhouse

11. Comparative Advantage
What is Wendy’s opportunity costs?
1 hour = 8 birdhouses
1 hour = 4 kites
8 birdhouses = 4 kites
1 birdhouse = ½ kite
Opportunity cost of 1 birdhouse
½ Kite
Opportunity cost of 1 kite
2 birdhouses

12. Comparative Advantage
Thus Wendy has a comparative advantage of building birdhouses over kites.
For an hour of work she can make more birdhouses than kites
Todd does not have an absolute advantage for either product
One hour of work produces an equal number of products

13. Comparative Advantage
Things to remember:
Comparative advantage is an advantage in producing one product over another for ONE person or country.
It is NOT a comparison between people or countries.
This example assumes birdhouses and kites are worth the same amount.

14. Why Trade is Good In a trade, both sides can benefit.
In a good trade, both sides end up better off than they were
Wendy has an absolute advantage over Todd in producing Kites and Birdhouses.
Given that Wendy is better at making both kites and birdhouses, why would she trade with Todd?

15. Why Trade is Good Suppose Wendy and Todd agree to trade.
She will give him three birdhouses
And he will give her two kites

16. Why Trade is Good For Todd two kites represent how much work?
1 hour
If Todd had spent that hour making birdhouses instead of kites how many birdhouses would he have?
2 birdhouses
Because of the trade, how many birdhouses does Todd have for that 1 hour of work?
3 birdhouses
Thus Todd is better off because of the trade

17. Why Trade is Good For Wendy four birdhouses represent how much work?
½ hour (30 minutes)
If Wendy had spent 30 minutes making kites instead of birdhouses how many kites would she have?
2 kites
Because of the trade, what does Wendy have for that ½ hour of work?
2 kites AND 1 birdhouse
Thus Wendy is better off because of the trade

18. Why Trade is Good Notice how both people are better off.
Since Todd is worse at making both products, it makes sense that by trading with Wendy he is better off.
Even though Wendy is better at making both products, by trading with Todd she is better off too.
This is why international trade is good
This is also why all countries should produce those products that they have a comparative advantage over, even if they don’t have an absolute advantage over other countries

19. The U.S. The U.S. is the world’s 2nd leading exporter
We export a wide range of goods and services
Germany and Japan are 3rd and 4th
The U.S. is the world’s leading importer
$1.4 trillion dollars worth every year (17.3% of the world’s total)
Germany and Japan are also top importers (but the U.S. imports more than both of them combined

20. Trade and Unemployment
Making sure we produce those goods that we have a Comparative Advantage in producing causes unemployment
Can you see why?
Because as technology and new inventions are created, the products we have a comparative advantage on change
Thus what we should be producing changes and this creates what types of unemployment?
Structural