Why People Trade, Domestically
and Internationally
Focus: Globalization
Lesson Two
Concepts
Absolute advantage
 Comparative advantage
 Opportunity cost
 Production possibilities table

Content Standards
•
•
Voluntary exchange occurs only when all
participating parties expect to gain. This is
true for trade among individuals or
organizations within a nation, and among
individuals or organizations in different
nations.
When individuals, regions, and nations
specialize in what they can product at the
lowest cost and then trade with others, both
production and consumption increase.
Benchmarks
People voluntarily exchange goods and services
because they expect to be better off.
 Voluntary exchange gives people a wider range of
choices.
 International trade promotes specialization and
division of labor.
 Individuals and nations have a comparative advantage
in the production of goods or services if they can
produce a product at a lower opportunity cost than
other individuals and nations.

Trade
What have you traded?
 Why did you trade?


Explain that we will now participate in a
trading activity.

Divide students into groups of 10.
Trading Activity
Distribute bags with colored stickers.
 Have students group according to stickers.
 Rate satisfaction or utility from 0 to 5 (high).
 Explain that they get to keep or trade the
item with someone in their group.
 Calculate group satisfaction.
 Conduct one more trading round with anyone
in the class.
 Again calculate group utility and # of trades.

Visual 1: Utility
Number of Trades
Before Trading
After trade within group
After international trade
0
Utility
Trade Discussion
Did more people trade in Round 1 or Round 2?
 Were you required to trade?
 Number of items to trade was the same. Why
were people happier?
 Why did you trade?
 Should people and businesses in U.S. trade with
other countries?
 To answer this question, we’ll look at
production in two countries

Comparative Advantage
Occurs when people or firms specialize in
the production of a good or service for
which they have a lower opportunity cost
 Opportunity cost – highest valued
alternative that is given up when a choice
is made
 Pass out Visual 3: Have students work
through the questions.

Nino’s Pizza Shop (from visual 3)
A.
B.
C.
D.
Nino’s opp cost of producing 9 pizzas is
36 salads – of 1 pizza is 4 salads.
Tony’s opp cost of producing 6 pizzas is
12 salads – 1 pizza is 2 salads.
Nino’s opp cost of 36 salads is 9 pizzas –
1 salad is ¼ pizza.
Tony’s 12 salads is 6 pizzas –
1 salad is ½ pizza.
Nino’s Pizza Shop Cont.
Who has lowest opp cost for making
pizza? Tony
F. Who has the lowest opp cost for making
salad? Nino
G. Who has the comp adv in pizzas? Tony
In salad? Nino
H. How does specialization affect the
running of the pizza shop?
E.
Country Comp Adv
Country A & Country B – 2 sides of board
– six volunteers for each – distribute
production cards
 In one day each worker in country A can
produce 8 cell phones OR 4 microwave
ovens
 Show all cell phones and all ovens
 Have one student flip from phones to
ovens – record on the table – continue
until 0 phones

Production Possibilities (Visual 4)
Country A
A
B
C
D
E
F
G
A
B
C
D
E
F
G
# cell phones
# of ovens
Country B
# cell phones
# of ovens
Discussion – A Production
1.
2.
3.
4.
5.
How does # of phones change as more
ovens are produced?
How does the # of ovens change as
more cell phones are produced?
What does overall chart show?
This is called production possibilities
table.
Why is there a trade off in producing
more of either good?
Country B - Production
Six volunteers to stand by Country B
 In one day each worker in country B can
produce 1 cell phone OR 2 microwave
ovens
 Show all cell phones and all ovens
 Have one student flip from phones to
ovens – record on the table – continue
until 0 phones

Production Possibilities
Country A
A
B
C
D
E
F
G
# cell phones
48
40
32
24
16
8
0
# of ovens
0
4
8
12
16
20
24
Country B
A
B
C
D
E
F
G
# cell phones
0
1
2
3
4
5
6
# of ovens
12
10
8
6
4
2
0
Country B Production Discussion
1.
2.
3.
4.
5.
What does the production possibilities table show
you about making cell phones and microwave ovens
in Country B?
Why does this occur?
If each country produces cell phones, which country
can produce more?
If each country produces ovens, which country can
produce more?
Country A had an absolute advantage in the
production of both goods.
Trade
Should Country A trade cell phones or
microwaves with Country B since they
have an absolute advantage?
 To determine, we must calculate the
opportunity cost of each.
 Distribute Visual 4 to each student. Work
in pairs to complete.

Opportunity Cost – A (Visual 4 part A)
Country A
1. OC of 8 cell phones?
2. OC of 1 cell phone?
3. OC of 4 microwaves?
4. OC of 1 microwave?
Opportunity Cost B - (Visual 4 part B)
Country B
1. OC of 1 cell phone?
2. OC of 2 microwaves?
3. OC of 1 microwave?
4. Which country has the lowest
opportunity cost of producing cell
phones?
5. Microwaves?
Total Production
Country A
A
B
C
D
E
F
G
# cell phones
48
40
32
24
16
8
0
# of ovens
0
4
8
12
16
20
24
Country B
A
B
C
D
E
F
G
# cell phones
0
1
2
3
4
5
6
# of ovens
12
10
8
6
4
2
0
Before trade, Country A was producing at B combination and
Country B at D.
•What is total production of cell phones?
•Of microwave ovens?
Total Production Discussion
1.
2.
3.
4.
5.
6.
7.
If Country A produces all phones, how many more
will be produced?
How many ovens will be given up?
Country B puts all workers into production of
ovens, how many will be produced?
How many lost?
What would be the total output of cell phones with
specialization?
Of microwave ovens?
What were the affects of specialization and trade?
Disadvantages of Trade
Countries are more interdependent
 Rely on others to produce what we
consume
 Wars and trade barriers can interrupt
trade
 Not trading means paying higher
opportunity costs and decreasing overall
level of production and consumption --living standards will fall.

Closure
Why do individuals and nations trade?
 How does overall satisfaction levels
change?
 How does specialization affect production
and consumption?
 What is absolute advantage?
 What is comparative advantage?
