Transcript trade - Churchill High School

I
will give every student in the room $10.
 Sarah
 Will
has to pay me $300.
you play?
 Economies
are defined by scarcity.
 Scarcity
forces people to make choices.
 Choices
involve costs.
 Since
we all face different costs, by
specializing and trading we can create
wealth.
 Markets
form to facilitate trade.
 We
consider the simplest possible
economy.
 There

is one actor, Robinson Crusoe.
There is one resource, Time.
 Since
Robinson can only work eight hours in
a day, he is faced with scarcity.

Scarcity forces Robinson to make costly
choices.
 Since
Robinson has limited resources, he
cannot have unlimited amounts of fish or
palms.
 If Robinson spends time fishing it is time he
cannot spend palming.
 In an hour Robinson can catch two fish or cut
four palm leaves.
 So, two fish cost four palms.
 The opportunity cost of one fish is two
palms.
 Let’s put it in a table.
 We
can see that scarcity forces people to
make choices.
 Since choosing is refusing, choices are
costly.
 The “true” cost of any choice is the
opportunity cost.
 For
Friday
◦ Food
• Every hour Friday spends fishing yields two fish.
◦ Shelter
• Every hour Friday spends cutting down palm
leaves yields eight leaves.
• Friday is a better palmer because of a superior
tree climbing technique.
tree climbing
 In
an hour Friday can catch two fish or cut
eight palm leaves.
 So, two
fish cost eight palms.
 The
opportunity cost of one fish is four
palms.

Let’s put it in a table.
 We
can see that scarcity forces people to
make choices.
 Since choosing is refusing, choices are
costly.
 The “true” cost of any choice is the
opportunity cost.
 Although
Robinson and Friday have
similar resources, they face different
costs.
 Robinson is the low cost producer of Fish.
 Friday is the low cost producer of Palms.
• Remember, cost is always measured in terms of
Opportunity Costs.
 We
say someone has a “Comparative
Advantage” if they can produce a good at
a lower relative cost compared to
someone else.
 Robinson, offers
to trade fish for palms: 1F for 3P
 Will
Robinson Trade?
 Will
Friday Trade?
 What
effect does this trade have on
Robinson’s and Friday’s level of
consumption?
 BOTH
PPF.
Robinson and Friday are OUTSIDE their
 When
people specialize in their
comparative advantage, and trade in
markets for other goods, wealth increases.
 Notice that no extra resources are used.
 Using the Low-Cost Producer conserves
scarce resources.
 Specialization and Trade REDUCES
scarcity!
Do what you do best,
trade for the rest!
Is expanding international trade a good
thing or a bad thing?
It Depends!
Opportunity Cost
Opening Markets Creates Wealth
World map showing countries above and below the world GDP (PPP) per
capita, currently $10,500. Source: CIA World Factbook.
██ above world GDP (PPP) per capita
██ below world GDP (PPP) per capita
Choose a bright future!
• Most nations are not self-sufficient.
• It is actually better for countries to specialize
in some products and trade for others. This
can be understood by looking at absolute
and comparative advantage.
– A person or nation has an absolute advantage
when it can produce more of a given product than
another person or nation using a given amount of
resources.
• Carlos has an
absolute
advantage over
Jenny in producing
both T-shirts and
birdhouses.
However, their
opportunity costs
are different.
– How many T-shirts
can Carlos make in
the time it takes
Jenny to make 5 Tshirts?
• A country has a comparative advantage in
the product that it can produce most
efficiently given all the products it could
choose to produce.
• According to the law of comparative
advantage, each person should produce the
good for which he or she has a lower
opportunity cost.
– Comparative advantage also mutually benefits
both parties.
Barbie
Ken
Cooking
10 min
40 min
Cleaning
20 min
30 min
Totals
30 min
70 min
 Working
Independently
• Barbie Produces a Meal in 30 Minutes
• Ken Produces a Meal in 70 Minutes
 Barbie
Has An Absolute Advantage
 Would
Barbie Produce Two Meals?
 With
Trade/Cooperation
• Barbie Spends 20 Minutes Cooking
• Ken Spends 60 Minutes Cleaning
• They Both Gain!

Goods are Produced at Least Cost When People Specialize
According to the Principle of Comparative Advantage

Lesson - Don’t Try to Do Everything; It is Not Efficient

Trade Between Countries Creates Wealth
• Ex. Ken and Barbie Have Time for Other Activities
1. Which nation has an absolute advantage in producing CDs?
2. Which nation has an absolute advantage in producing beef?
3. Which nation has a comparative advantage in producing CDs?
4. Which nation has a comparative advantage in producing beef?
5. Should Japan specialize in CDs or beef?
6. Should Canada specialize in CDs or beef?
Massage Kobe beef