No, it is comparative advantage that
matters, not absolute advantage.
Nations should specialize and trade
based on absolute advantage.
David Ricardo
“Euro”
“Loonie”
Adam Smith
Exports equal 32% of global economic output, but
only 13% of U.S. output. [U.S. supplies 1/8 of world’s exports]
In 2010, American imports & exports totaled over $4.1 trillion.
[$1.832 trillion in exports & $2,330 trillion in imports][Deficit $498 B]
• Joe Smith started the day early having set his alarm clock
(MADE IN JAPAN) for 6 a.m.
• While his coffeepot (MADE IN CHINA) was perking, he
shaved with his electric razor (MADE IN HONG KONG).
•
He put on a dress shirt (MADE IN SRI LANKA), designer jeans (MADE
IN SINGAPORE) and tennis shoes (MADE IN KOREA).
• After cooking his breakfast in his new electric skillet
(MADE IN INDIA) he sat down with his calculator (MADE
IN MEXICO) to see how much he could spend today.
• After setting his watch (MADE IN TAIWAN ) to the radio (MADE IN
INDIA) he got in his car (MADE IN GERMANY) filled it with GAS from
Saudi Arabia & continued his search for a good paying AMERICAN JOB.
• At the end of yet another discouraging and fruitless day
checking his computer (MADE IN MALAYASIA), Joe
decided to relax for a while.
• He put on his sandals (MADE IN BRAZIL) poured himself
a glass of wine (MADE IN FRANCE) and turned on his TV
(MADE IN INDONESIA), and then wondered why he can't
find a good paying job in America.....
Actually this is a good thing. We get more choices, lower
prices, & because more is bought, more jobs are created.
• Question: What is the definition of Globalization?
• Answer: Princess Diana’s death
• Question: How Come?
• Answer: An English princess with an Egyptian boyfriend
crashed in a French tunnel, driving a German car with a
Dutch engine, driven by a Belgian who was drunk on
Scottish whisky, followed closely by Italian Paparazzi,
on Japanese motorcycles; treated by an American doctor,
using Brazilian medicines.
• This is sent to you by a Canadian, using Bill Gates’
technology, and you’re probably reading this on your
computer, that uses Taiwanese chips, and a Korean
monitor, assembled by Bangladeshi workers in a
Singapore plant, transported by Indian lorry-drivers,
hijacked by Indonesians, unloaded by Sicilian
longshoremen, and trucked to you from Mexico.
That is Globalization… The process by which
individuals and businesses in other parts of the world
are affected by events elsewhere in the world.
Lorry-drivers
Percent of GDP
Globalization: Merchandise Exports
as a Share of World GDP (32%)
32%
30%
25%
20%
15%
10%
5%
0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2007 2008
Globalization increases U.S. income by $1.8 trillion a year,
or $10,000 per household. Or, without globalization,
Americans would be poorer by $1.8 trillion a year.
14 million iPads were
sold in the U.S. last
year, but because
they were made in
China, were counted
as imports.
22 million pairs of
Nikes are imported
each year, employing
50,000 Vietnamese.
American companies
have 54 million golf
balls produced in
China so they are imports.
$677
$700
$600
$498
$500
$381
$400
$300
$200
$100
0
95 97 99 01 02 03 04 07 08 09 10
Global Cow
“Who Supplied My Cheese?”
Top 10 Countries with which the U.S. Trades
These Countries represent 66.89% of U.S. Imports, & 60.41% of U.S. Exports in
goods.
The values are exports and imports added together
The values given are for Imports and Exports added together.
Country Name
Canada
China
Mexico
Japan
Germany
United Kingdom
Korea, South
Brazil
France
Saudi Arabia
November 2011
Total in Billions
of U.S. $
49.54
46.74
40.86
18.30
13.15
8.94
8.47
6.68
5.88
5.60
Year To Date Total in
Billions
of U.S. $
548.07
460.67
423.08
177.66
134.60
97.45
91.68
67.49
62.13
54.67
Trade is analogous to technology,
disruptive but ultimately beneficial.
$764
$696
$498
$381
2010 Trade Balance
-$498 billion
2006
2007
2008
2009
2010
Principal U.S. Exports & Imports – 2007
[in Billions of Dollars]
Source: Department of Commerce Data
Exports
Imports
Chemicals
$94.1
70.9
Consumer Durables
Agricultural Products
77.6
Semiconductors
50.2
Computers
42.9
Generating Equipment 41.5
Automobiles
43.6
Aircraft
48.6
Medical equipment
32.0
Telecommunications
25.6
Electrical machinery
83.2
Fuels and lubricants
47.7
$331.0
Petroleum
133.8
Automobiles
Household Appliances112.1
104.0
Computers
Metals
115.7
Clothing
86.3
Consumer Electronics 94.7
Generating Equipment 55.0
Semiconductors
37.1
Telecommunications 25.8
Aircraft
34.4
56.2
Chemicals
The U.S. and World Trade
U.S. Exports & Imports of Goods, 2007
Value (Billions of Dollars)
Exports to:
Industrial Countries
Developing Countries
Total
.
Imports from:
$553
596
$1,149
Value (Billions of Dollars)
Industrial Countries
Developing Countries
Total
$819
1,146
$1,965
Most of our imports come from developing countries.
•
•
•
•
* You can make a good argument for these.
*1. National Defense Argument: certain industries should
remain based in our country, especially if they manufacture
items vital to our defense. Items this argument have been
used for include: pens, pottery, peanuts, papers, candles,
thumbtacks, tuna fishing, and pencils.
*2. Infant Industry Argument: new industries must be
protected from older, established foreign competitors until they
are mature enough to compete. However, removing
protection is almost impossible.
3. Dumping Argument: domestic industries need to be
protected from foreign dumping. Dumping is the sale of goods
abroad at a price below their cost and therefore undersell
domestic competitors to put them out of business; obtain
monopoly power and raise their prices.
4. Foreign–Export–Subsidies Argument: Some
governments subsidize the firms that export goods. Firms
say that this forces them to compete with both the firm and the
government in question.
• 5. Low Foreign Wages Argument: A country’s low
wage advantage may be offset by its productivity
disadvantage. High wages means high productivity.
Low wages mean low productivity.
 Some recent minimum wages in other countries:
Turkey: 41¢; India: 42¢, Hungary: $1.22, Brazil:
$1.50, Mexico: $6 a day, Haiti: 68¢ or $5.50 per day;
Indonesia: $1.06 a day [where Nikes are made].
 Even though these wages are very low, worker
productivity there is probably low. It may take several
workers to do what one American worker can do. The
more important question is what does it cost to do the job?
• Saving Domestic Jobs Argument: This argument is
actually most of the previous arguments but in disguise.
Country Share of Global Manufacturing - 2008
U.S.
ROW
U.S.
China
Japan
Germany
France
China
Italy
UK
Korea
FR. Ger.
Japan
Russia
Brazil
Rest World
U.S. manufacturing is not dying. It is at an all time high. We are
making more than twice as much today as we were in the 70s.
However we’ve gone from 19 million manufacturing jobs to 11
million because of increasing productivity or building the
same amount of stuff with fewer workers. Where will they go?
High tech employs millions compared to almost none 50 years ago.
So, we are building twice as much with fewer workers. That
trend will continue and then some. Health care. Clean energy. And
fields we can’t imagine yet. For instance, in 1900, 44% of jobs
were in agriculture. Tremendous improvements in farm
productivity pushed that number to 2.2% today. Those who once
would have plowed fields now work at curing cancer, building
roads, etc. We don’t want those farm jobs back.
So, all of you who thought U.S. manufacturing was dead
“TAKE That!!!”
1. How many domestic jobs in the firms that produce
good X are being saved because of the tariff?
2. How much do consumers have to pay in higher
prices to save those jobs?
Let’s just see HOW MUCH
consumers do have to pay
when we protect domestic jobs
with tariffs and quotas.
12,000 x $40 = $480,000[NS-NT]; 12,000 X $25 = $300,000[S-T]
(It cost $180,000 to save one clock-radio guy’s job)
“I can do the
econ rap.”
Suppose Joe Export lives & works in the U.S. making dancing
clock radios. He produces and sells 12,000 clock radios per year
at a price of $40 each. There is no international trade.
One day the U.S. market is opened to dancing clock radios
from Japan. The Japanese manufacturers have a comparative
advantage and sell them for $25 each. Joe can not compete at
this price. His sales drop to such a degree that he goes out of
business. International trade has harmed him but helped
American consumers because they save $180,000.
Industry
Textiles
Dairy Products
Yearly Loss
To Economy
From Barriers
$15,850 billion
1,630 million
Employment
Loss If Barriers
Were Removed
71,639
2,378
Annual Cost
Per Job
Saved
$221,258
685,233
Sugar
Peanuts
657 million
74 million
2,040
397
322,059
187,223
Meat
Non-rubber
footwear
177 million
170 million
928
1,377
190,733
123,456
Orange Juice
Canned Tuna
307 million
100 million
609
390
635,103
257,640
I love the chicken
in this tuna can.
Chicken of the Sea
of
Chicken the
Sea
High Cost of Protection
It cost an average of
$231,289 per job saved.
Consumers pay $100 billion
annually in higher prices.
Protecting sugar raises candy
and soft
drink
prices;
protecting steel makes car
prices higher.
This is a “negative-sum
game.”
So you can see that,
“Free trade is a
good idea for most
of us despite the
hardship it imposes
on a few of us.”
Keep The Money At Home
Point: When I buy a coat in England, I have the coat
and England has the money. But when I buy a coat in
America, I have the coat and America has the money.
America is more wealthy because it has both the coat
and the money.
Abe Lincoln
Counterpoint: Money is not wealth in and of itself,
it merely facilitates trade. If America sends dollars to
England, England will eventually use those dollars to
buy American goods. If we don’t buy goods from
other countries, then other countries will not be able
to buy goods from us.
Point: Protecting businesses from
foreign competition preserves
American jobs.
Counterpoint: Few are helped by protective
policies, but they are more visible and more
vocal than the many who are hurt. Protecting
jobs in import competing industries raising
prices to consumers and costs jobs in
industries that use imported inputs. America
and consumers pay dearly each time
protectionist measures “save” jobs.
Protecting American businesses from foreign
competition does potentially preserve American jobs.
Point 1: Restrictions on imported steel in the 80s saved 17,000
jobs in the steel industry and its suppliers.
Counterpoint: That is half the story. Here is the rest of the story.
1. The higher steel prices saved 17,000 jobs in the steel
industry but led to the loss of 52,400 jobs in American steel-using
industries. For every job saved, three were lost.
Point2: Import quotas on Japanese autos preserved 4,598
American jobs.
Counterpoint2: but at a cost to consumers of $241,235
per job per year, in higher prices paid for cars. Saving a
$30,000 auto job cost consumers $120,000 annually in higher prices.
*The more you pay for protected goods, the less you have to use to
buy other goods. The less consumers
have to buy other goods, then
.
fewer jobs will be created by the market.
In the last few years, tariffs have preserved 3,500 steel
jobs; by contrast tariffs have cost steel users
between 12,000 and 43,000 jobs due to higher prices.
Point: If we trade freely with low wage countries,
U.S. businesses will flee to those countries and U.S.
wages will plummet.
Counterpoint: Low wages, combined with low
productivity, will result in high unit costs. High wages in
the U.S. Result from the high productivity of American
workers, aided by the availability of raw materials,
massive capital equipment, sophisticated management,
and elaborate infrastructure.
“I know you are against free
trade as a former employee.
But – how do you feel about
free trade as a consumer?
Imports
18
16
14
12
10
Exports
8
6
4
2
0
1975
1980
1985
1990
1995
2000
2005
Total: $1,832 Exports Total: $2,330 Imports
Over $4 trillion going both ways
*Exports support 14 million American jobs. [Wages 16.5% higher]
6.5 million Americans work for foreign companies in the U.S.
Toyota alone has created more than 100,000 U.S. jobs.
2009
Deficit in goods
$501
Surplus in services $135
$381
2010
Deficit in goods
$646
Surplus in services $149
$488
U.S. Export of Services [X=$543 B; M=$394 B in 09[ [+149B]
500 million visit the U.S. every year bringing in $70 billion. Foreign
visitors buy tourism “exports”, such as hotel rooms, airline fares
and consumer goods.
Kentucky colleges welcome 5,018 foreign students
Watching American movies & TV programs [foreign sales
who for
contribute
million
to the state’s
economy.revenue.
accounted
about half$85
of the
film industry’s
$5 B box-office
Hiring American investment bankers, engineers, consulting fees,
royalty payments, accounts, architects, advertising agencies and even
38[they
U.S. earned
schools
have
65 branches in 34 countries.
lawyers
$20
billion].
Using
American
hospitals
or attending
schools.
The
U.S. has
more great
collegesU.S.
than
the restAbout
of 3% of
all college
are foreigners. Tuition-paying foreign students pay
the students
world combined.
about $18 billion a year on tuition, housing, & consumer goods.
About 700,000 foreign college students attend American colleges.
Texas attracted the 3rd largest # of foreign students with 38,000
who provide $615 million net spending to the Texas economy.
India leads with 104,000; China is next with 98,000; S. Korea has
75,000;
Canada
has 30,000; &master’s
Japan – 29,000;
In Texas,and
55%
of engineering
degreesUSC-7,500.
go to
CCCC has 630 foreign students. 1/3 of Richland’s are foreign;
foreigners.
Over 50% of the PH.D.s in mathematics go to
2,000 at UTD out of 15,000. They make up 25% of grad students &
“nonresident
aliens”.
Also,
75%sci
of and
engineering
PH.D.s&go
to of
5% of undergrads.
1/3
of U.S.
eng doctorates
40%
foreigners.
PHD’s in comp sci go to foreigners. “Begging at the gates of world’s best”
276 365
200 249
230
180
180
160
160
140
163
140
120
120
120
100
83
80
100
60
80
60
40
20
0
50
40
92
20
Deficit
0
Canada
61
of
48
$273
Canada China Mexico
China
Japan
Germany
Mexico Japan
49
UK
Germany
39
Korea
EXPORTS
UK
49
Korea
36
Taiwan
39
France
IMPORTS
32
Netherlands
29
Singapore
27
France
http://www.census.gov/foreign-trade/statistics/highlights/top/index.html
26
Taiwan
Country
Imports from
Exports to
Australia
Beef
Aluminum
Autos
Airplanes
Computers
Auto parts
Belgium
Jewelry
Cars
Optical
Cigarettes
Airplanes
Diamonds
Canada
Cars
Trucks
Paper
Auto parts
Cars
Computers
China
Toys
Shoes
Clothes
Soybeans ($9 B)
Semiconductors 5 B
Chemicals ($4 B)
Germany
Cars
Engines
Auto parts
Airplanes
Computers
Cars
Japan
Cars
Computers
Telephones
Airplanes
Computers
Timber
Russia
Oil
Platinum
Artworks
Corn
Wheat
Oil Seed crops
[canola & sunflower]
South Korea
Shoes
Cars
Computers
Airplanes
Leather
Iron ‘ngots
Toyota Camry and Toyota Tundra
Honda Accord and Honda Odyssey Minivan
BMW Z4 Roadster & BMWX5 SUV
Mercedes-Benz-M-Class
Toyota Corolla
Subaru Legacy
Hyundai Elantra
Nissan Maxima
Chrysler Crossfire
Dodge Ram
Plymouth voyager
Chrysler PT Cruiser
Buy
American?
Chrysler 300
Pontiac Firebird
Chevrolet Camaro and Impala
Ford Fusion
Mercury Capri
Chrysler 300
1957 Chrysler 300
Toyota Camry and Tundra – U.S.A. (California and Texas)
Honda Accord and Honda Odyssey Minivan – U.S.A. (Ohio)
BMWX4 Roadster and BMWX5 SUV – U.S.A. (South Carolina)
Mercedes-Benz-M-Class – U.S.A. (Alabama)
Toyota Corolla – U.S.A. (California)
Subaru Legacy – U.S.A. (Indiana)
Foreign nameplates
Nissan Maxima– U.S.A. (Tennessee) were made in the U.S.
Hyundai Elantra– U.S.A. (Alabama)
Dodge Ram – Mexico
Domestic nameplates were
Plymouth Voyager – Canada
made in other countries.
Chrysler PT Cruiser – Mexico
Pontiac Firebird – Canada
Chevy Camaro and Impala – Canada
Ford Fusion - Mexico
Mercury Capri – Australia
Chrysler Crossfire - Germany
Chrysler 300 - Canada
This competition gives consumers higher quality,
more choices, and lower prices. Globalization has
blurred national auto identities.
Fiat owns Chrysler. Daimler builds Mercedes SUVs
in Vance, Alabama and owns stake in Mitsubishi and
10% of Hyundai Motor.
GM did own Saab and has stakes in Isuzu, Suzuki,
Subaru, Fiat and Daewoo.
Ford owns Mazda and Volvo.
By 2011, predictions are that foreign-based automakers will
build more cars at U.S. auto plants than the “Big 3”.
The BMW plant in S. Carolina sends 40% of its
cars to other countries. This is an example of
in-sourcing. As many as 20% of our exports
are a result of in-sourcing.
Toyota’s Tundra plant in San Antonio received
110,000 applications for the 2,000 positions
that pay from $15.50 to $25 an hour.
Honda provides 50,000 high-output V-6
engines for GM cars, blurring the distinction
between U.S./foreign cars. Asian and European
auto co’s employ 92,700 Americans directly
and 574,500 indirectly accounting for 33% of
U.S. auto production. The “Big 3” employ
240,000 workers. It is less expensive to
build an Accord here than ship it from Japan.
Only 16% of Honda cars sold here are imported
from Japan. Honda also buys $13 billion worth
of parts from 620 suppliers in North America.
Toyota
Georgetown, KY
Princeton, IN
Fremont, CA
San Antonio, TX
[$800 mil. Plant
employing 2,000]
Honda
Marysville, OH
East Liberty, OH
Lincoln, AL
Hyundai
Montgomery,AL
Nissan
Smyrna, TN
Canton, MS
Mitsubishi
Normal, IL
Hyundai
Montgomery, AL
BMW
Spartanburg, SC
Mercedes-Benz
Vance, AL
Subaru
Lafayette, IN
Volkswagen
Chattanooga, SC
KIA
West Point, GA
[parts from 15 countries]
Ford Escort
Switzerland may get the inputs to make the
speedometer and gears from several countries.
1. Nestle Switzerland
2. Shell Netherlands
3. Lipton Great Britain
4. Baskin-Robbins Great Britain
5. Burger King Great Britain
6. Alka Seltzer Germany
7. Volvo Sweden
8. Sony Japan
9. Tropicana Canada
10. TV Guide Australia
11. Vaseline Great Britain
12. Bayer Germany
13. Gatorade U.S.
14. Adidas Germany
15. Levi Straus U.S.
Global Fruit Basket
Apples New Zealand
Apricots
China
Bananas
Ecuador
Blackberries Canada
Blueberries
Chile
Coconuts Philippines
Grapefruit Bahamas
Grapes
Peru
Kiwifruit
Italy
Lemons
Argentina
Limes
El Salvador
Oranges
Australia
Pears South Korea
Pineapples Costa Rica
Plums
Guatemala
Raspberries Mexico
Strawberries Poland
Tangerines S.Africa
Watermelons Honduras
In an average can of mixed nuts, you find almonds
from Italy, walnuts from China, Brazilian nuts
from Bolivia, cashews from India, pistachios
from Turkey, and hazelnuts from Canada.
Trade fosters competition, which rewards productivity and restrains cost.
Video Equipment
TV sets
Toys
Photo equipment
Roasted coffee
Audio equipment
Dishes & flatware
Women’s outerwear
Men’s shirts/sweaters
Film & photo sup.
Girls’ apparel
Men’s footwear
New cars
More-traded Products
Five-year price change (percent)
Women’s dresses
Rice
HH laundry equip.
Less-traded Products
Buy D-FW
BUY
Buy “D”
Buy only from your self.
1. Food
2. Economic knowledge
[If we consumed only the goods & services we produced,
we would toil long hours but remain dirt poor]
Japan – “Land of the $30 pizzas, $30 lipstick, $50
melons, $100 jeans and $4,500 two-bedroom apts.”
Japan has been a closed economy [fewer choices, higher prices]
Item
N.Y.
Tokyo
Shock Absorbers
Alternator
Watermelon
Cup of coffee
Cab to airport
Stamp
Gallon of gasoline
Newspaper
Movie Ticket
$228
$120
$5
$1
$30
.44
$3.00
1.50
$14
$605
$600
$50
$7
$200
.79
$7.00
$2.00
$20
The Japanese paid $28 billion
per year in higher prices for
rice because they would not
buy from U.S. rice farmers.
Japanese consumers pay
$600,000 in higher prices
for each job protected.
We have 550 cars per 1,000; Japan has only 240 per 1000 inhabitants.
Japanese cameras are more expensive in Tokyo than in New York. In Tokyo,
you have to have a sizable inheritance to be able to afford a house. Japan
has had a decade-long economic tailspin, even with interest rates less than 1%.
[Selected Nations]
The 8 largest export nations account for 46% of world exports.
Percentage Share of World Exports, 2009
0
China
Germany
U.S.
Japan
Netherlands
France
Italy
Belgium
2
4
6
8
10
12
Principal U.S. exports include
chemicals, agricultural products,
consumer durables, aircraft, and
semiconductors.
So, China & Germany are the leading export nations but the
U.S. is the leading export and import [or trade]nation.
Source: World Trade Organization
The U.S. trade deficit with China in 2009 was $273 B. Wal-Mart
bought $20 B from China in 2010 & is their 8th largest trade partner.
Top Chinese Imports
(percentage of all imports)
88% of all Radios
87% Christmas & festive items
83% Toys
70% Leather goods
67% Shoes
67% Handbags
We import 54 million golf
65% Lamps and lights
64% Cases for cameras, balls from China each year.
eyeglasses, etc.
60% Drills, power tools
56% Household plastics
54% Sporting goods
53% Ceramic Kitchenware
After a series of product recalls, from
pet food to tires, American regulators
are paying more attention to goods
exported to the U.S. from China.
10 million toys including “Big Bird”
were recalled because of “lead”
or magnets that tear the intestines
when swallowed by children.
Who Buys Chinese Goods?
The U.S. accounts for 1/5 of all
Chinese export destinations, 2007.
1.5 mil imported toy
trains were made
using lead paint.
450,000 tires were
recalled because of
tire separation
problems.
$56
billion
In
goods
from
U.S.
to
China
More than 60 billion cans of cat
and dog food were recalled.
FDA ordered recall after a poisonous
ingredient was found in toothpaste.
675,000 Barbie
doll accessories
The U.S. trade
deficit with
China in 2010
was $273 billion.
X to China $92 B
M from China $365 B
Feb 2011
The US buys far
more from
(IMPORTS) than it
sells (EXPORTS) to
China - the US
claims this is because
China has kept its
currency artificially
weak. In fact trade
with China accounts
for 14.3% of all US
trade - the States
only does more trade
with Canada.
Apple’s I phone… $1.9 billion trade deficit
Export Goods & Services make
up about 12% of American GDP
Exports have more than
Doubled as a percent
of GDP since 1975 When I
$498 billion trade
deficit in 2010
was
born!
Write these into your notes!!!
Babe Ruth was the best hitter and pitcher on
his team. He had been the best pitcher in the
American League for several years, winning 94
Hank Aaron had over 2,500 more at-bats than the Babe. Hitting a homerun every 10-11
games
and losing only 46. He could produce
at-bats, the Babe would have had over 200 more homeruns, somewhere around “950”.
the same amount of home runs as any teammate
with fewer at bats.
The problem was that if he pitched, he would bat
fewer times because pitchers need rest after pitching.
The Babe had helped the Red Sox win the pennant in 1915, 1916, & 1918. He
had pitched 29 scoreless innings in the world series. As a pitcher for the Red
Sox in 1918 & 1919, he hit 40 of the Red Sox 46 home runs.
After being sold to the Yankees in 1920, the coaches decided that the Babe
had a comparative advantage in hitting. A few pitchers on the team could pitch
almost as well as the Babe, but not one could touch the his hitting. In terms of
opportunity costs, the Yankees would lose fewer games if the Babe specialized
in hitting. So – the Babe ended up hitting 714 home runs even though he spent
seven years as a pitcher. And the Red Sox don’t win again – until 2004.
Output v. Input Comparative and Absolute Advantage
Rabbit
1G=3B
1/3 G=1B Rabbit Wabbit
Wabbit
1G=2B
1/2 G=1B
Wabbit
Rabbit
1B=3G
1/3 B=1G Rabbit
Wabbit
1B=2G
1/2 B=1G
Terms of Trade: 1G = 2.5 B
Product Market [outputs]
Country Guns Butter
Rabbit
40 units 120 units
Wabbit
20 units
40 units
Terms of Trade: 1B = 2.5 G
Resource Market [inputs]
Country Guns Butter
Rabbit
40 hours 120 hours
Wabbit
20 hours
40 hours
What country has an absolute
advantage in guns? Rabbit
What country has an absolute
advantage in guns?Wabbit
Why does Rabbit have an
absolute advantage in guns?
Why does Wabbit have an
absolute advantage in guns?
Rabbit can produce absolutely
more guns than Wabbit
Wabbit can produce guns
absolutely faster than Rabbit
[40 units v. 20 units]
[20 hours v. 40 hours]
I Can do 8
push-ups.
I have an absolute advantage
in the production of push-ups.
I Can do 42
push-ups.
Ole Miss guy
MSU Bulldog
I can clean that
house in 4 hours.
Future Rebel/Blackbear Maid
I’m more efficient. I can do the
same work in 3 hours so I have
an absolute advantage.
Future MSU Maid
service owner!
Two Isolated Nations
Constant Costs [Straight Line PPF’s]
Different Domestic Costs
Different Technology and
Resources in Each Nation
Self-Sufficiency Output Mix
Trading According to Comparative Advantage
With trade, a few people lose a lot,
a lot of people gain a little.
[Freer trade is like improved technology]
“We can produce 60 tons of
corn, so - we have an
absolute advantage because
we can produce more corn
with the same resources.”
60
“We can
produce 40
tons of corn.”
40
“We can produce 60 tons of corn, so - we have
an absolute advantage because we can produce
more corn with the same resources. OR we
could produce 50 tons of Wheat with those
same resources. We are Absolutely better
at corn, and COMPARED to you we should
do corn and you should do wheat
60
50
“We can produce 40 tons of corn or we could grow
50 tons of wheat with the same resources.” Maybe
we should do wheat? Because COMPARED to
you, we are better at wheat and not as good
at corn!
50
40
Country
Comparative advantage due to natural resources & climate
United States
Canada
Saudi Arabia
France
Brazil
Israel
Mexico
Wheat, corn, and cereals
Timber
Oil
Wine
Coffee
Oranges and grapefruit
Tomatoes
Comparative Advantage and differences in opportunity
Comparative advantage largely due to physical capital,
costs are the
basis
for specialized
Country
human
capital,
and scientificproduction
knowledge and trade.
United States
Japan
Germany
United Kingdom
Taiwan
Switzerland
South Korea
Aircraft, computers, industrial chemicals, plastics, & chemicals
Automobiles, steel, electronics
Machine tools, scientific instruments, luxury automobiles
Financial services
Textiles
Watches
Ships
• Should Wisconsin grow oranges?
• Should Florida make cheese?
• No & No! [We don’t want the Florida cheese heads]
–
–
–
–
Wisconsin should specialize in cheese
Florida should specialize in orange production
Then trade cheese for oranges
Florida
Cheeseheads
More cheese and oranges for everyone!
• Disadvantages:
– Job losses among dairy farmers in Florida
– Job losses among orange growers in Wisconsin
• Advantages:
- Job
gains among dairy farmers in WI and job gains
among orange growers in FL more than make up for the
other job losses.
- Trade is beneficial for both states as a whole …
… though not for all residents.
PPC – before trade &
80
specialization– prisoners of
their own PPC’s and CPC’s
Before trade, I’m a prisoner of my own PPC.
PPC
CPC
F
I
S 40
H
[Consumption Possibilities Curve]
Tom Hanks alone
Tom’s Domestic Comparative Cost
1 shrimp = 4 fish
¼ shrimp = 1 fish
0
SHRIMP 20
10
90
Before trade, I’m a prisoner of my own PPC.
PPC
CPC
F
I
S 45
H
[Consumption Possibilities Curve]
Bubba Gump alone
Bubba’s Domestic Comparative Cost
1 shrimp = 6 fish
1/6 shrimp = 1 fish
0
SHRIMP 15
7.5
Comparative and Absolute Advantage
Fish
Toms’s DCC
costs
1S =
__4 F 100
1/4 S = 1F 80
__
50
40
can produce at a lower productive opportunity cost]
Tom
“A prisoner of
my own PPC.”
Bubba
90
Bubba’s DCC
6
1S costs
= __F
1/6
__ S = 1F
“I can consume
only on my PPC.”
Fish
[Comparative Advantage
45
Terms of Trade
5 fish
1 Shrimp = __
World CC
10
oShrimp
20
5 Fish
1 Shrimp=__
0
7.5 9
15 18
Shrimp
1__
/5 Shrimp=1 Fish
Separately they could have 90/15 or 80/20- together they can have 90/20!
Bubba and Tom are better together- they can SHARE!
“Do what you do best
& trade for the rest.”
Bubba should catch fish
and Tom should catch
Shrimp and share
Trade Allows Nations to Consume Beyond Their PPCs
While Producing On It
100
We are suspending reality.
CPC (after trade)
CPC (before trade)
80
FISH
PPC (before & after trade)
10 shrimp & 50 fish
11 shrimp and 45 fish
10 shrimp and 40 fish
12 shrimp & 40 fish
50
45
40
“Now with trade, you can escape
your PPC and CONSUME more of
both fish and shrimp.”
0
10
20
Shrimp
Comparative and Absolute Advantage
Coffee
Haiti’s DCC
costs
1B =
__4 C 100
1/4 B = 1C 80
__
50
40
can produce at a lower productive opportunity cost]
Haiti
“A prisoner of
my own PPC.”
10
o Bread
20
90
Cuba
Coffee
[Comparative Advantage
Cuba’s DCC
6 C
1B costs
= __
1/6
__ B = 1C
“I can consume
only on my PPC.”
45
Terms of Trade
5 coffees
1 bread = __
World CC
0
1 Bread=__
5 Coffees
7.5 9
Bread
15 18
1__
/5 Bread=1 Coffee
“Trade is the free lunch of economics.”
1. (Haiti/Cuba) has an absolute advantage in coffee and (Haiti/Cuba) has an
absolute advantage in bread.
2. Haiti will export (bread/coffee) [comparative advantage] and import (bread/coffee).
[comparative disadvantage] & Cuba will export (bread/coffee) & import (bread/coffee).
3. Mutually advantageous trade can occur between Haiti & Cuba when 1 bread is exchanged
for (3/5/7) tons of coffee. Production in both is subject to (increasing/constant) opportunity costs.
“Export” what it can produce at a lower relative price and “import” goods it can buy at a lower relative price.
Absolute Advantage - more efficient, can produce more with
“Do what you do best
the same number of inputs [who can produce absolutely more] & trade for the rest.”
Brazil
30
Chile’s DCC
costs
2S
1W=
__
___W
= 1S
½
Chile
20
6
1.5 2 3 4
0 Wheat
Steel
12
Steel
Brazil’s DCC
costs__
1W=
4 S
¼ = 1S
___W
15
Terms of Trade
3 Steels
1 Wheat= ___
10
0
5
10
Wheat
1
World CC
Wheat =
__
3
Steels
__ Wheat = 1 Steel
1/3
4. Chile has a comparative advantage in (wheat/steel) & an absolute advantage
in (wheat/steel/both). Brazil has a comparative advantage in (wheat/steel).
5. The opportunity cost of one unit of wheat for Chile is (2/4/6) units of steel.
The opportunity cost of one unit of steel for Brazil is (1/2 or ¼ ) wheat.
6. If the 2 countries trade, Chile would export (wheat/steel) & import (wheat/steel).
If the 2 countries traded, Brazil would export (wheat/steel) & import (wheat/steel).
Examples of comparative advantage
Country
Comparative advantage due to natural resources & climate
United States
Canada
Saudi Arabia
France
Brazil
Israel
Mexico
Wheat, corn, and cereals
Timber
Oil
Wine
Coffee
Oranges and grapefruit
Tomatoes
Country
Comparative advantage largely due to physical capital,
human capital, and scientific knowledge
United States
Japan
Germany
United Kingdom
Taiwan
Switzerland
South Korea
Aircraft, computers, industrial chemicals, plastics, & chemicals
Automobiles, steel, electronics
Machine tools, scientific instruments, luxury automobiles
Financial services
Textiles
Watches
Ships
70
40
0
Bread
Bread
DCC for U.S.
costs __
14 B
1H=
1/14 = 1B
___H
Brazil
Ham
5
0 Ham 4
DCC for Brazil
costs__
1H=
10 B
___
1/10 H = 1B
Terms of Trade
1 Ham = __
12 Bread
8. Brazil has a comparative advantage in (bread/ham) and a
comparative disadvantage in (bread/ham).
9. The opportunity cost of producing 1 unit of ham for the U.S.
is (10/12/14) breads.
10. Acceptable terms of trade might be 1 ham for (8/12/16) breads.
The countries of:
“Fuzzy” and “Wuzzy”
Fuzzy
A
B
CC D E F DCC: Fuzzy Wuzzy A B
D E F DCC: Wuzzy
B C
5 P
2500 1500 1000 500 0 1G = __
Plums 1500 1200 900
3 P Plums 3500
1G = __
900 600 300 0 1G
35002500
1/5 G = 1P
150 300 450 575 700__
1/3 G= 1P Grapes
1P
Grapes 0 100 200
0 150
200 300 400 500
500__
Terms of Trade
1
Grape = 4
__ Plums
11. In Wuzzy, the opportunity cost of 1 grape is (1/2/3/4/5) plums.
12. Fuzzy has a comparative advantage in & should produce (plums/grapes).
13. The terms of trade will be 1 grape for somewhere between (3&5/2&6) plums.
14. Assume that if Fuzzy did not specialize it would produce combo “C” and if Wuzzy
did not specialize it would produce combo “B”. The gains from specialization
and trade are: (0/100/150) plums and (0/100/150) grapes.
Plums: They were making 900(c) and 2500(b) separately- so a total
of 3,400 plums working separately… but if we let Wuzzy focus
completely on plums… (while fuzzy is making grapes) there will be
3,500! So that is 100 extra… to share! (and 150 extra grapes)
Froggy
Pork(tons)
Beans(tons)
2.5 pork [10x1/4]
A B C D E DCC: Froggy
4 3 2 1 0 1P = __
5B
0 5 10 15 20 1/5
__ P = 1B
Woggy
A B C D E DCC: Woggy
Pork(tons) 8 6 4 2 0 1P = __
3 B
Beans(tons) 0 6 12 18 24 1/3
__ P = 1B
8 beans [2x4]
Terms of Trade
4 Beans
1 Pork = __
15. Production in both countries is subject to (increasing/constant)
opportunity cost.
16. If these 2 nations specialize in accordance with comparative advantage,
Froggy will produce (pork/beans) & Woggy will produce (pork/beans).
17. In Froggy, the opportunity cost of 1 pork is (1/5 or 5 or 3) beans’
18.
Assume that prior to specialization & trade, Froggy produced combo “C” and
Woggy produced “B”. If these 2 nations now specialize according to comparative
advantage, the total gains will be (4/2/0) tons of beans & (4/2/0) ton(s) of pork.
19. Feasible terms of trade would be (1/6/4) ton of pork for (1/6/4) tons of beans.
Piggy
Fish
Chips
50 Fish [10x5]
A B C D E DCC: Piggy
4 F
80 60 40 20 0 1C = __
1/4 C = 1F
0 5 10 15 20 __
Wiggy
A B C D E DCC: Wiggy
Fish
240 180 120 60 0 1C = __F
6
1/6 C = 1F
Chips
0 10 20 30 40 __
12 chips [60x1/5]
Terms of Trade
1 Chip = __
5 Fish
20. (Piggy/Wiggy) has an absolute advantage in both fish & chips.
21. For Wiggy, the opportunity cost of producing 1 ton of chips
is (1/4/6) tons of fish.
22. Wiggy should specialize(export) in (fish/chips) and import (fish/chips).
23. Before specialization and trade Piggy chose combo “C” and Wiggy chose “B”.
After specialization, the gains from trade were (20/40/60) tons of fish and
(0/10/20) tons of chips.
Fish: They were making 40(c) and 180(b) separately- so
a total of 220 fish working separately… but if we let wiggy
focus completely on fish… there will be 240! So that is 20
extra… to share! (piggy still makes an efficient 20 chips)
15 soups [30x1/2]
Doggy
Soup
Peanuts
A B C D E DCC: Doggy Woggy
1 P
60 45 30 15 0 1S = __
Soup
0 15 30 45 60
Peanuts
60 Peanuts [30x2]
A B C D E DCC: Woggy
3P
20 15 10 5 0 1S = __
0 15 30 45 60 1/3
__ S = 1P
Terms of Trade
1 Soup = __
2 Peanuts
24. If trade occurs, Doggy will export (soup/peanuts) and import (soup/peanuts).
Woggy will export (soup/peanuts) and import (soup/peanuts).
25. For Doggy, the opportunity cost of 1 soup is (1/2/3) peanuts.
For Woggy, the opportunity cost of 1 soup is (1/2/3) peanuts.
26. Prior to specialization, Doggy & Woggy chose combination “C”.
Now each specializes according to comparative advantage. The gains
from trade will be (0/20/40) units of soup & (0/20/40) units of peanuts.
Fish
Wheat
Djibouti
DCC: Djibouti
Canada
2 Fish 20 hours
10 hours 1W costs
= __F
20 hours ___
1/2 W=1F Wheat 60 hours
DCC: Canada
1 W costs
= __
3F
___W
1/3 = 1F
Terms of Trade:
1 Wheat = 2
__
.5 Fish
27. (Djibouti/Canada) has an absolute advantage in both commodities.
(Djibouti/Canada) has a comparative advantage in producing wheat.
28. (Djibouti/Canada) has an absolute disadvantage in both, but a
comparative advantage in fish.
29. Advantageous trade can occur between the two when
1 wheat is exchanged for (1/2.5/3) fish.
We are going to turn inputs into outputs.
In 20 hours, Djibouti can produce an output of 1 wheat or 2 fish.
In 60 hours, Canada can produce an output of 1 wheat or 3 fish.
[lower # of hours gives absolute advantage]
Caviar 6 hours
Wheat 3 hours
DCC: U.S.
2
1C = __W
__ C = 1W
1/2
Russia
DCC: Russia
4W
Caviar 16 hours 1C = __
Wheat
4 hours 1/4
__ C = 1W
Terms of Trade
3 Wheats
1 Caviar = __
30. (Russia/U.S.) has an absolute disadvantage in both commodities.
(Russia/U.S.) has a comparative advantage in wheat.
31. (Russia/U.S) has an absolute advantage in both commodities.
(Russia/U.S.) has a comparative advantage in caviar.
31. Advantageous trade can occur between the two nations when
1 caviar is exchanged for (1/3/5) tons of wheat.
We are once again turning inputs into outputs.
In 6 hours, the U.S.A. can produce an output of 1 caviar or 2 wheats.
In 16 hours, Russia can produce an output of 1 caviar or 4 wheats.
Absolute Advantage [Outputs v. Inputs]
Remember that with outputs or quantity, the larger
number indicates absolute advantage; that country
can produce absolutely more with the same inputs,
and is more efficient.
Product
Market
And with inputs (hours), the smaller number indicates absolute
advantage; that country is more efficient because it can produce
a good absolutely faster than the other with the same inputs.
Resource
Market
2nd Most Missed Question On 95 AP Exam [26% correct]
Country
Food
Clothing
Ducky
20 hours
50 hours
Wucky
10 hours
20 hours
Wucky
Ducky
a. Ducky has a comparative advantage in the production
of both food and clothing.
b. Wucky has a comparative advantage in the production
of both food and clothing.
c. Ducky has a comparative advantage in food production, &
Wucky has a comparative advantage in clothing production.
d. Ducky has a comparative advantage in clothing production,
& Wucky has a comparative advantage in food production.
e. Neither country has a comparative advantage in the
production of either good.
Country
Food
Clothing
Ducky 20 hrs 50 hrs
1C = 2.5F; .4C = 1F
Wucky 10 hrs 20 hrs
1C = 2F;
.5C = 1F
Terms of Trade might be 1C = 2.2F
Output v. Input Comparative and Absolute Advantage
Wabbit
Rabbit
1G=3B
1/3 G=1B Rabbit Wabbit
1G=2B
1/2 G=1B
Wabbit
Rabbit
1B=3G
1/3 B=1G Rabbit
Wabbit
1B=2G
1/2 B=1G
Terms of Trade: 1G = 2.5 B
Product Market [outputs]
Country Guns Butter
Rabbit
40 units 120 units
Wabbit
20 units
40 units
Terms of Trade: 1B = 2.5 G
Resource Market [inputs]
Country Guns Butter
Rabbit
40 hours 120 hours
Wabbit
20 hours
40 hours
What country has an absolute
advantage in guns? Rabbit
Why does Rabbit have an
absolute advantage in guns?
What country has an absolute
advantage in guns?Wabbit
Why does Wabbit have an
absolute advantage in guns?
Wabbit can produce guns
absolutely faster than Rabbit
Rabbit can produce absolutely
more guns than Wabbit
[40 units v. 20 units]
What country has a
comparative
advantage in guns?
Wabbit
Wabbit can produce guns at a lower
opportunity cost [2 butters v. 3 butters]
[20 hours v. 40 hours]
What country has a
comparative
advantage in guns? Rabbit
“Let’s change inputs into outputs.”
Rabbit can produce guns at a lower
opportunity cost [1/3 butter v. 1/2 butter]