Why People Trade Domestically and Internationally

1. Why People Trade Domestically and Internationally

3. What would you trade? • If you could produce anything for trade, what would it be? Why? • What human resources do you have available? • What natural resources do you have available? • What capital would you need? If you could produce anything, what would it be? What is comparative advantage?

4. Trade? • What is it? • Why trade? • What is comparative advantage?

5. Trade is… • The voluntary exchange of goods and services • Occurs when the expected gains outweigh the costs

6. Comparative Advantage

7. Comparative Advantage • Specializing in the production of goods and services that can be produced at a lower opportunity cost than the cost a trading partner would have to pay to produce the same products. Specialization Comparative Advantage

8. Specialization • Based on comparative advantage increases the total output and consumption of the goods that are traded. • What happens to the quantity of products with specialization based on comparative advantage? Specialization Comparative Advantage

10. What trades have you made recently and why you traded? Which were domestic? Which were international?

11. Activity 1: Would you keep or trade an article of clothing? On a scale of 1 to 5, how happy are you with the item? Record on sheet. You have two minutes to trade within your group if you want. You may now show cards.

12. How many trades were made? What are examples of trades you made? Rate your happiness with the items now and record.

13. Round 2: Will you trade with others in the class?

14. Activity 2: Would you keep or trade an article of clothing within the class?? Time: 3 to 4 minutes You do not have to trade

15. Activity 2: How many trades were made? What are examples of trades you made? Rate your happiness with the items now and record.

16. Activity 2: How many trades were made? • Did more people trade in round 1 or 2? Why? • Were you required to trade? • Did anyone have a higher rating in round one than 2? If so, how did that happen? • The number of items to trade remained the same, but people were happier at the end of which round ___? Why? • Why were you willing to trade? Relate activity to the real world…what parallels do you see? Should the U. S. trade with other countries? Why or why not?

17. Opportunity Cost • 1. The opportunity cost is the highest valued alternative that is given up when a choice is made • For example: • Meat pizza, veggie pizza, cheese pizza, salad-What are your first and second choices? • How do you relate to the pizza shop? What is your choice? What is the opportunity cost of your choices?

18. Domestic & International Issues: To Specialize & Trade or Not • 1. Two workers in a pizza shop and then • two countries • 2. Decide for each if they should specialize and trade • 3. Key effect for each is to increase the amount of goods produced and consumed Work individually on Visual 3 Discuss Visual 3

19. Comparative Advantage • 1. Comparative Advantage occurs when people or firms specialize in the production of a good or service for which they have a lower opportunity cost. • For example: • Meat pizza, veggie pizza, cheese pizza, salad-What are your first and second choices? What is your choice? What is the opportunity cost of your choices?

20. A: Comparative Advantage: Cell phones or microwave ovens • Display visual 4 What is the opportunity cost of producing - A. 8 cell phones? B. 1 cell phone? C. 4 microwave ovens? D. 1 microwave oven? • 1. Country A • 2. 6 volunteers • 3. Receive Activity 2, Production Card, Country A • 4. This is a small country with six workers • 5. Production in one day: • Each worker 8 cells or 4 microwave ovens Show cell phones Show microwave ovens

21. Analysis of Country A’s Production How does the number of cell phones that can be produced change as Country A produces more microwave ovens? How does the number of microwaves Country A can produce change as more cell phones are produced? What does the overall chart show? What is this type of chart called? What is the trade-off in producing more of either good?

22. B: Comparative Advantage: Cell phones or microwave ovens • Display visual 4 What is the opportunity cost of producing - A. 1 cell phone? B. 2 cell phone? C. 1 microwave oven? D. 2 microwave oven? • 1. Country B • 2. 6 volunteers • 3. Receive Activity 2, Production Card, Country B • 4. This is a small country with six workers • 5. Production in one day: • Each worker 1 cell phone or 2 microwave ovens Show cell phones Show microwave ovens

23. Analysis of Country B’s Production What does the production possibility curve show you about making cell phones and microwaves ovens in Country B? Why does this occur? If each country only produces cell phones, which country can produce more cell phones? If each country only produces microwave ovens, which country can produce more microwave ovens?

24. Absolute Advantage • When a worker can produce more of a good than a worker in another country, the worker in the first country has an absolute advantage in producing that good. Who has an absolute advantage in producing microwaves? Who has an absolute advantage in producing cell phones?

25. Absolute Advantages? • Divide into pairs • Use Visual 4 to determine which country has a comparative advantage in the production of cell phones and microwave ovens. • At B and D combination, what is the total output of cell phones and microwaves? • If the two countries specialize and trade, what is the total output and production? Consumption? • What are disadvantages of S and T? Country A produced at Combination B. Please circle Country B produced at Combination D. Circle D.

26. Visual 5 1. Why do individuals, organizations and nations trade? How does overall level of satisfaction increase when people trade? How does specialization and trade affect production and consumption? What is absolute advantage? What is comparative advantage? View Visual 5

27. Closure 1. Why do individuals, organizations and nations trade? How does overall level of satisfaction increase when people trade? How does specialization and trade affect production and consumption? What is absolute advantage? What is comparative advantage? View Visual 5

28. Assessment: Activity 4