1. Senior Cut Day

2. Why Trade?

3. Why is Trade Controversial?

4. Free Trade Theory Why Nations Trade

5. Basics of Trade Exports: goods/services leave country Imports: goods/services enter country Trade Surplus: Export more than import Trade Deficit: Import more than export

6. Ways to Limit Trade Tariffs– taxes on imports Quotas- limits on quantity imported Protectionism: Gov’t policy which seeks to limit trade Globalization: the “global” movement away from protectionism and towards free trade –Trade without Tariffs & Quotas –Worldwide movement towards free market capitalism

7. Introduction to free trade theory example Betty- types 120 w.p.m. Jim- types 60 w.p.m. Who should do the typing: Betty or Jim? Assumption: No errors Betty & Jim Additional knowledge: Betty is a brain surgeon Jim operates a forklift at the warehouse of a large store A handwritten 90-page Master’s Thesis needs to be typed

8. David Ricardo In 1816 David Ricardo developed the theory of free trade based on comparative advantage His theory is still the basis of free trade theory today

9. Ricardo Trade Terms Absolute Advantage: when a country can outright produce more of a good than another country Comparative Advantage: when a country can produce a good at a lower opportunity cost

10. 1000 500 1000 Wheat Coffee Wheat BRAZIL MEXICO Production Possibilities Frontier (PPF): Any point on the line is efficient Below line is inefficient Above the line is not obtainable in short run Production Possibilities Frontier (PPF) Curve Review

11. End Trade Theory Part I Review with partner

12. 1000 500 1000 Wheat Coffee Wheat BRAZIL MEXICO Trade Analysis: 1)Build an opportunity cost table 2)Determine who has a comparative advantage in each good 3)Country will produce only this product 4)Trade will benefit BOTH countries (end up above their own PPF curve) 4-Step Trade Process

13. 1000 500 1000 Wheat Coffee Wheat BRAZIL MEXICO (gain) (give up/opp. Cost) 1 Coffee = ____ Wheat 1 Coffee = _____ Wheat 1 Wheat = ____ Coffee Opportunity Cost Table BRAZIL MEXICO 1 2 1/2 1 Build Opportunity Cost Table

14. BRAZIL MEXICO 1 Coffee = ____Wheat 1 Coffee = _____ Wheat 1 Wheat = ____ Coffee 1 Wheat = ____Coffee 1/2 2 1 1 Wheat : BRAZIL has comparative advantage---produce only WHEAT Coffee : MEXICO has comparative advantage---produce only COFFEE coffee wheat 1000 500 1000 Wheat Coffee Wheat BRAZIL MEXICO Determining Comparative Advantage

15. BRAZIL MEXICO 1000 500 1000 Wheat Coffee Wheat * (500,500) * (250,500) 400 Coffee 300 Wheat BRAZIL 0 Coffee 1,000 Wheat 1,000 Coffee 0 Wheat MEXICO. (700, 400). (300, 600) after trade Trade Example: Theoretical Benefits of Free Trade

16. Summary: In Theory Countries produce goods where they have a comparative advantage Trade is mutually beneficial –End up at a point above their own PPF curve Review Sheet #6-11

17. Brazil Mexico Coffee 2000 900 Wheat 2000 300 BRAZIL MEXICO BRAZIL Mexico (gain) (give up/opp. Cost) 1 Coffee = ____ Wheat 1 Coffee = _____ Wheat 1 Wheat = ____ Coffee 1 Wheat = _____ Coffee Coffee Wheat 2000 900 300 1 1 1/3 3

18. Brazil Nicaragua Coffee 200 40 Wheat 20020 BRAZIL NICARAGUA (gain) (give up/opp. Cost) 1 Coffee = ____ Wheat 1 Coffee = _____ Wheat 1 Wheat = ____ Coffee 1 Wheat = _____ Coffee Coffee Wheat 200 40 20 1 1 ½ 2

19. UNITED STATES FRANCE (gain) (give up/opp. Cost) 1 Corn = ____ Wine 1 Corn = _____ Wine 1 Wine = ____ Corn 1 Wine = ____ Corn U.S. France Corn 1600 300 Wine 800 600 UNITED STATES FRANCE Corn Wine 1600 800 600 300 ½ 2 2 ½

20. TAIWAN UNITED STATES (gain) (give up/opp. Cost) 1 DVD Player = ____ Comp. Software 1 Comp. Software = ____ DVD Player Taiwan U.S. DVD players 200 300 Computer software 100 900 TAIWAN UNITED STATES DVD Comp.Software 100 200 300 900 ½ 2 3 1/3