ECONOMICS FOR THE VIRTUAL ENTERPRISE
“The business of America is business.” —Calvin Coolidge
Lesson 21: page 1
LESSON 21: INTERNATIONAL TRADE
Focus Question: How important is international trade for our economy?
Objectives
Students will be able to:
• Explain the relationship of absolute advantage, comparative advantage, and specialization to
international trade.
• Analyze charts illustrating U.S. imports and exports.
• Discuss key trade issues (e.g., the establishment of NAFTA).
Standards
NES: 5, 6
Common Core
• Reading Standards for Literacy in Social Studies: Grades 11-12
— Key Ideas and Details: #1, 2
— Craft and Structure: #6
— Integration of Knowledge and Ideas: #7
— Range of Reading and Level of Text Complexity #10
•
Mathematics Standards for High School Students
— Interpreting Function: F-IF (#4)
Materials
Economics Today and Tomorrow (Glencoe-McGraw Hill), pp. 472-477
Teaching Strategies
Introduction:
• Prior to this lesson, ask each student to bring to class an inexpensive item, worth $25 or less, that they
would be willing to trade for another item. Ask students to rate the item, deciding how much they
personally value the item, using a scale of 10 to 1 (10 = an item of great personal value and 1 = an
item of little personal value). The students should write these numbers down on paper and give them
to you. Record these ratings of personal value on a single piece of paper or on a smart board; do not
show these ratings to the class until the end of the activity (see below).
•
On the day of this lesson, ask the students to show their items to the entire class. Some students might
even do little commercials explaining the unique or special features of their items. The purpose here
is to stir up interest for the round of trading that is to come next.
•
Give students five minutes to trade their item with any other student in class. At the end of this
trading period, as part of the whole class discussion, ask students to explain their answers to the
following:
— How many of you made trades?
— What items did you trade?
— How many of you did not trade? Explain why not.
ECONOMICS FOR THE VIRTUAL ENTERPRISE
“The business of America is business.” —Calvin Coolidge
Lesson 21: page 2
•
Show the class the personal value ratings for all the items made available for trade. Ask the class:
— How many of you received items in the trade that were rated equal to or above the item that you
traded?
— How many of you received items in the trade that were lower in personal value than item you
traded?
— What do we learn about trade between countries from this activity?
Body of the lesson:
• Distribute Worksheet 21A, “International Trade.” Explain the exercise on the handout to the class.
After students complete the exercise, have them explain their answers to the following questions:
– What headline would you give this story?
– What do we learn from this story about trade?
– Based on what you read, how would you explain the terms absolute advantage, comparative
advantage, and specialization to someone who knew nothing about economics?
– What roles do absolute advantage, comparative advantage, and specialization play in international
trade?
– Why might it make sense for a country with an absolute advantage in all products to trade with
another country?
– Based on this article, what would you say is the most important reason nations trade with each
other?
•
Distribute Worksheet 21B, “The U.S’s Leading Trade Partners.” Explain the exercise on the
worksheet to the class. Then have students complete the exercise on the worksheet. As part of the
whole class discussion, have students explain their answers to the following questions:
– What do we learn from this chart about the United States and international trade?
– What conclusions can we draw from the fact that the U.S. imports more than it exports from its
leading trading partners?
– What information contained in this chart should be considered good news for the U.S. economy?
What information contained in this chart should be considered bad news for the U.S. economy?
•
Distribute Worksheet 21C, “Imports and Exports.” Explain the exercise on the worksheet to the
students. Then have students complete the exercise on the worksheet. As part of the whole class
discussion, have them explain their answers to the following questions:
– What is the most important thing you learned from this chart about U.S. imports?
– What is the most important thing you learned from this chart about U.S. exports?
– What is the one category of goods and/or services that you would like to see the U.S.
export more of?
– What is the one category of goods and/or services that you would like to see the U.S.
import less of?
– How would you use this chart to explain the reasons why the U.S. engages in international trade?
•
Distribute Worksheet 21D, “NAFTA Pros and Cons.” Explain the exercise on the worksheet to the
class. Then have students complete the exercise on the worksheet. As part of the whole class
discussion, have students explain their answers to the following questions:
– How would you describe NAFTA to someone who knew nothing about it?
– What are NAFTA’s greatest advantages?
– What are NAFTA’s greatest disadvantages?
– Do you think that NAFTA’s advantages outweigh its disadvantages?
Summary/Assessment
Have students explain their answers to the following question:
To what extent are Americans better off because the U.S. engages in trade than they would be if it did not?
ECONOMICS FOR THE VIRTUAL ENTERPRISE
“The business of America is business.” —Calvin Coolidge
Lesson 21: page 3
Worksheet 21A
International Trade
Directions. The newspaper article on this worksheet discusses international trade. Write a headline for
the article in the space provided below and complete the exercise at the end of the worksheet.
_____________________________________________________________________________________
(Headline)
Some Americans believe that, as the richest country in the world, the U.S. would be better off if it did not
trade with other countries and, instead, make everything we need for ourselves. This belief raises the
question, “Why should we trade with other nations?” The answer to the question lies in an understanding
two key concepts, comparative advantage and specialization.
To understand the advantages of international trade, pretend that there are just two countries in the world,
the U.S. and Canada. Furthermore, assume each country:
• produces only two goods: shoes and shirts;
• uses all of its resources to produce either shoes or shirts; and
• makes both products, spending half of their working hours on each.
Finally, assume that the U.S. makes more shoes (100) than shirts (75), and Canada makes more shirts
(100) than shoes (80). This situation is illustrated in Table A.
TABLE A
U.S.
Canada
Shoes
100
80
Total
180
Shirts
75
100
175
Considering the situation pictured in Table A, the sensible thing to do for each country would be to
specialize, meaning that the U.S. would make only shoes and Canada would make only shirts. What will
happen when each country spends all its working hours making one product? It will make twice as much
of that product and none of the other, as shown in Table B.
Absolute Advantage
TABLE B
U.S.
Canada
Shoes
200
0
Total
200
Shirts
0
200
200
The world now has both more shoes and more shirts. The U.S. can trade 100 units of shoes for 100 units
of shirts, and both countries will benefit. In this example, where the U.S. could make more shoes than
Canada with the same resources, economists would say that the U.S. has an absolute advantage at
shoemaking. Canada, on the other hand, had an absolute advantage at shirt making.
ECONOMICS FOR THE VIRTUAL ENTERPRISE
“The business of America is business.” —Calvin Coolidge
Lesson 21: page 4
Worksheet 21A, International Trade, continued
Comparative Advantage
Now suppose one country has an absolute advantage in both products. Is trade still a good idea under
these circumstances? Table C shows what production might be like if the U.S. had an absolute advantage
at making both shoes and shirts.
TABLE C
U.S.
Canada
Shoes
100
80
Total
180
Shirts
80
75
155
In this case, the U.S. can produce more of each good with the same set of resources than Canada can. The
downside of deciding to produce more of either the shoes or the shirts with the available resources, will
be the loss of production of the other good. The U.S. could produce either 200 units of shoes or 160 units
of shirts. Canada could produce either 160 units of shoes or 150 units of shirts. If the U.S. produces only
shoes, it gives up 80 units of shirts to gain 100 units of shoes. If Canada produces only shoes, it gives up
75 units of shirts to gain 80 units of shoes. The cost of producing shirts is higher for the U.S., and the
cost of producing shoes is lower. The cost of producing shoes is higher for Canada, the cost of producing
shirts is lower. Under these circumstances, economists would say that the U.S. has a comparative
advantage in shoemaking and Canada has a comparative advantage in shirt making.
Specialization
Table D shows what happens when each country specializes in the product in which it has a comparative
advantage.
TABLE D
U.S.
Canada
Shoes
200
0
Total
200
Shirts
0
150
150
By specializing in this way, the U.S. and Canada have increased the world’s production of shoes by
twenty units over what they produced before, from 180 to 200. But the world has lost five units of shirts,
going from 155 to 150. (See Table C.) Production in the U.S. could be adjusted to make up the
difference. For example, if the U.S. gave up 10 units of shoes, it could produce 8 units of shirts. Table E
shows the results of such a tradeoff.
TABLE E
U.S.
Canada
Shoes
190
0
Total
190
Shirts
8
150
158
In this way, the total production of both goods could be increased. This is why we trade.
Adapted from: http://ecedweb.unomaha.edu/lessons/feog5.htm
Exercise. In the space below, explain the most important reasons why nations trade with each other:
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
ECONOMICS FOR THE VIRTUAL ENTERPRISE
“The business of America is business.” —Calvin Coolidge
Lesson 21: page 5
Worksheet 21B
The U.S.’s Leading Trade Partners
Directions. Study the chart on this worksheet. Then, complete the exercise.
Adapted from: www.creditwritedowns.com
Exercise. After studying the chart above, answer the following questions:
1. What is the title of this chart? _________________________________________________________
2. To which country does the U.S. export the most goods and services? __________________________
3. From which country does the U.S. import the least goods and services? ________________________
4. What is one conclusion you can draw from the fact that the U.S. imports more than it exports from its
leading trade partners? _______________________________________________________________
ECONOMICS FOR THE VIRTUAL ENTERPRISE
“The business of America is business.” —Calvin Coolidge
Lesson 21: page 6
Worksheet 21C
Imports and Exports
Directions. Study this worksheet and complete the exercise that follows.
Imports by Category (2012)
Category
Amount in $ billion
% of Total
1. Oil
433.4
18.6
2. Machines, engines
314.6
13.5
3. Electronic equipment
296.4
12.7
4. Vehicles
244.2
10.5
5. Medical, technical equipment
69.8
3.0
6. Pharmaceuticals
64.4
2.8
7. Gems, precious metals
62.9
2.7
8. Chemicals
54.6
2.3
9. Furniture, lighting, signs
47.9
2.1
44.2
1.9
10. Plastics
http://www.worldsrichestcountries.com/top_us_imports.html
Exports by Category (2012)
Category
Amount in $ billion
% of Total
1. Machines, engines
215.2
13.9
2. Electronic equipment
162.1
10.5
3. Oil
137.5
8.9
4. Vehicles
132.9
8.6
5. Aircraft, spacecraft
104.3
6.7
6. Medical, technical equipment
87.5
5.4
7. Gems, precious metals
71.7
4.6
8. Plastics
58.8
3.8
9. Chemicals
46.2
3.0
40.1
2.6
10. Pharmaceuticals
http://www.worldsrichestcountries.com/top_us_exports.html
ECONOMICS FOR THE VIRTUAL ENTERPRISE
“The business of America is business.” —Calvin Coolidge
Lesson 21: page 7
Worksheet 21C, continued
Exercise. Using the two charts above, answer the following questions:
1. Which three categories of goods and/or services does the U.S. import most?
1) _________________
2) _________________
3) _________________
2. Which three categories of goods and/or services does the U.S. export most?
1) _________________
2) _________________
3) _________________
3. What is the one category of goods and/or services that you think the U.S. should export more of:
_________________________________________________________________________________
4. What is the one category of goods and/or services that you think the U.S. should import less of:
_________________________________________________________________________________
ECONOMICS FOR THE VIRTUAL ENTERPRISE
“The business of America is business.” —Calvin Coolidge
Lesson 21: page 8
Worksheet 21D
NAFTA Pros and Cons
Directions. The North American Free Trade Association (NAFTA), which went into effect in 1994, is a
trade agreement existing among the U.S., Canada, and Mexico. Read the worksheet below and complete
the exercise.
Pros
NAFTA is the world's largest free trade area. The agreement among Canada, the U.S., and Mexico
eliminated most trade barriers (including all tariffs—taxes on imports—and product quotas) among the
three countries. NAFTA links 450 million people and the $17 trillion in goods and services produced by
the three countries. Trade has increased from $297 billion in 1993, the year before NAFTA was enacted,
to $1.6 trillion in 2009. Estimates are that NAFTA increases economic output in the U.S. by as much as
.5% a year.
Some service industries, such as health care and financial services, see an increase in exports. Farm
products also reap the benefits of NAFTA's lower tariffs. U.S. consumers also benefit from NAFTA.
Mexican oil can be imported for less, lowering the cost of gas in the U.S. and decreasing reliance on oil
from the Middle East. Lower gas prices means food can be transported more cheaply, as well.
Cons
NAFTA led to the loss of 500,000-750,000 jobs in the U.S., thanks to companies moving across the
border to Mexico. As a result, workers in those industries affected by NAFTA could not bargain for
higher wages.
NAFTA has created negative consequences for Mexico, too. NAFTA allowed government-subsidized
U.S. farm products into Mexico, where local farmers could not compete with the artificially low prices.
As Mexicans lost their farms, they had little choice but to work in sub-standard conditions in the
maquiladoras (factories owned by U.S. firms in northern Mexico) where Mexicans work for very low
wages. U.S. companies also degraded the Mexican environment to keep costs low.
Do NAFTA's Pros Outweigh Its Cons?
NAFTA's disadvantages are significant. Can anything really justify the loss of entire industries in
New York or Michigan, worker mistreatment for remaining workers in the U.S. or in the maquiladora
program, and environmental damage along the border?
However, from an economic perspective, NAFTA is a success. Without it, the U.S. could not compete as
effectively against the European Union or China and its trade agreements. That $1.6 trillion in increased
trade is really needed after the 2008 financial crisis. Even more people would be unemployed without it.
Perhaps NAFTA should have been designed with more protections. Nevertheless, free trade agreements
are a necessity for the U.S. to compete in the global economy.
http://useconomy.about.com/b/2008/04/24/nafta-pros-and-cons.htm?p=1 (updated in 2012)
Exercise. Complete the chart below, listing the two most important advantages of NAFTA and the two
most important disadvantages of NAFTA.
Advantages of NAFTA
Disadvantages of NAFTA
1.
1.
2.
2.