El Dorado High School
Spring 2015
Mr. Ruiz

Analyze resource distribution locations and evaluate their
significance.

Describe absolute and comparative advantage and explain
how comparative advantage contributes to trade amongst
nations.

Analyze the impact of U.S. imports/ exports on the U.S.
and its trading partners.

Describe the effects of trade on employment.

The U.S. produces many
products, but many of the
products our citizens use are
manufactured somewhere else.

Unequal distribution of resources
prevents countries from
producing everything their
citizens need or want.

Resource distribution is at the
center of how and why countries
trade.

Recall at the beginning of this semester we discussed the Factors of Production,
these are the components needed to make the goods and services:

Natural Resources
Materials found in nature, including: arable land,
water ,oil/ gas deposits, timber, and mineral deposits.
 The location of these natural resources can help
determine what products may be produced in
certain regions.


Human Capital


The knowledge and skills gained by a worker through experience and education
Can be measure in a country through literacy rate or percentage of people who can read.

Physical Capital


Includes the objects made by men and women that are used to produce goods and services.
Examples: Machinery, factories, computers, infrastructure (roads & bridges)

Economic Activity Patterns
 Five (5) major economic activities include:



1) Producing,
2) Exchanging,
3) Consuming,
4) Saving,
5) Investing
Production, distribution, and other economic activities are largely influenced by geographic and human factors (You ski where there
are mountains and you mine where there is ore deposits)
Unequal Resource Distribution

Each nations possess different quantities of land, labor & capital; this is many times determined by nature and sometimes by culture
and history.

Because nations differ in resources, they also differ in their capacities to produce different goods and services.
The Need for Trade

Nations essentially specialize to maximize their consumption of goods and services

Specialization occurs when individuals or nations decide to produce the goods and service they are best suited for rather than trying to
be fully self-sufficient.

When nations specialize they are able to obtain thru trade goods/services that they cannot produce or produce poorly

Every nation on Earth possesses different types of
quantities of land, labor, and capital resources. Many
of these are, of course, determined by nature and
geography.

Additionally, a nation’s culture and history also
affect the human and physical resources

Think in terms of educational levels, wars, religious beliefs
coupled with customs.

Examples of differences:

The United States population averages 97 % literacy
rate while India’s rate is slightly more than half of
that at 52%. The United States population tops 320
million while India’s population is almost four times
that at just over 1 billion.

Based on the above numbers (using your common sense),
where would a company likely find the cheapest and most
abundant labor force?

Trading is meant to benefit
both countries with abundant
resources and those with few
resources. Let’s observe two
(2) trading production/ trade
concepts that can help explain
the benefits of trade:
1.
Absolute advantage
2.
Comparative advantage

A person or a nation is considered to have absolute advantage when it can
produce more of a given product using a given amount of resources
Example:



Country A can produce 1000 parts per hour with 200 workers.
Country B can produce 2500 parts per hour with 200 workers.
Country C can produce 10000 parts per hour with 200 workers.
Considering that labor and material costs are all equivalent, Country C has the absolute
advantage over both Country B and Country A because it can produce the most parts per
hour at the same cost as other nations. Country B has an absolute advantage over Country A
because it can produce more parts per hour with the same number of employees. Country A
has no absolute advantage because it can't produce more goods than either Country B or
Country C given the same input.
TOM’S PRODUCTION
POSSIBILITIES
HANK’S PRODUCTION
POSSIBILITIES

An individual or nation
has a comparative
advantage in producing
a good or service if the
opportunity cost of
producing the good is
lower for that individual
or nation than for other
nations or people.
Tom’s
Hank’s
Opportunity Opportunity
Cost
Cost
One fish
¾ Coconut
One
coconut
4/3 Fish
2 Coconuts
½ fish

Specialize and Trade
Both castaways are better off when they each specialize in what they are good at and trade.
It’s a good idea for Tom to catch the fish for both of them, because his opportunity cost of a
fish in terms of coconuts not gathered is only 3⁄4 of a coconut, versus 2 coconuts for Hank.
Correspondingly, it’s a good idea for Hank to gather coconuts for the both of them.

How the Castaways Gain from Trade
Both Tom and Hank experience gains from trade:
Tom’s
consumption of fish increases by two, and his consumption of
coconuts increases by one.
Hank’s
consumption of fish increases by four, and his consumption of
coconuts increases by two.
Tom has an absolute advantage in both
activities: he can produce more output with a
given amount of input (in this case, his time) than
Hank.
But we’ve just seen that Tom can indeed benefit
from a deal with Hank because comparative, not
absolute, advantage is the basis for mutual gain.
So Hank, despite his absolute disadvantage, even
in coconuts, has a comparative advantage in
coconut gathering.
Meanwhile Tom, who can use his time better by
catching fish, has a comparative disadvantage in
coconut-gathering.

Summary:
Comparative vs. Absolute Advantage
An
individual has a comparative advantage in producing a good
or service if the opportunity cost of producing the good is lower
for that individual than for other people.
An
individual has an absolute advantage in an activity if he or
she can do it better than other people. Having an absolute
advantage is not the same thing as having a comparative
advantage.

Reminder: A person or a nation is considered to have the comparative
advantage if it has the lower opportunity cost in the production of
certain goods and services.
Table 2.1
1) Refer to Table 2.1. Matthew's opportunity cost of designing one
Web site is
A) 1/5 of a brochure.
B) 4 brochures.
C) 5 brochures.
D) 10 brochures.
Table 2.1
2) Refer to Table 2.1. Andrew's opportunity cost of designing one Web site
is
A) 1/4 of a brochure.
B) 2 brochures.
C) 4 brochures.
D) 8 brochures.
Table 2.1
3) Refer to Table 2.1. ________ has a comparative advantage in ________
brochures.
A) Andrew; both Web site design and in
B) Matthew; both Web site design and in
C) Andrew; Web site design and Matthew has a comparative
advantage in
D) Matthew; Web site design and Andrew has a comparative
advantage in
Table 2.1
4) Refer to Table 2.1. To maximize total production,
A) Matthew should make brochures and design Web sites, but
Andrew should only make brochures.
B) Andrew should specialize in Web site design and Matthew
should specialize in making brochures.
C) Matthew should specialize in Web site design and Andrew
should specialize in brochures.
D) Matthew and Andrew should both split their time between
making brochures and Web site design.

The U.S. enjoys a comparative advantage in
producing many goods and services.

It exports a variety of goods/services due to an
abundance of factor resources.

What is the role of the United States as an
importer and exporter in the world market?
Terms: Import: A good that is brought in from another
country for sale
Export: A good that is sent to another country
for sale


As both an importer and exporter, the U.S. is
in a good position to benefit from increased
trade in goods and services in the world
market
The U.S. is a top five world trade leader in
both exportation and importation

Trade allows nations to specialize in the production of a goods and
services

Specialization and employment
Specialization can also change a
nation’s employment patterns
Three (3) concerns that may arise
due to changes in specialization:


 Unemployment
 Retraining
 Relocation


Specialization and employment in the United States
Shifts in employment in the United States have taken place in the last few
decades as a result of world trade and other factors.
 Example: Advances in robotics and productivity gave Japan the comparative
advantage in automobile production in the mid 1970s.

Trade
Barriers
and
Agreements

Define various types of trade
barriers

Compare the effects of free trade
and trade barriers on economic
activities

Understand arguments in favor of
protectionism

Evaluate the benefits and costs of
participation in international trade
agreements

Trade barriers are means for preventing a foreign
product or service from freely entering a nation’s territory.

We’ll take a look at three(3) common forms
of trade barriers:

Import Quotas


Voluntary Export Restraints


Limit on the amount of a good that can be imported.
A self-imposed limitation on the number of products
shipped to a particular country.
Tariffs


A tax on imported goods.
Customs duty: A form of tariff on certain items purchase abroad

Trade barriers are simply governmental actions to
limit supply. Both negative and positive effects
can be attributed to the implementation of trade
barriers.

Example: The U.S. wishes for its cotton growers to have an
opportunity to sell their goods domestically, so it establishes
quotas on importers of cotton. The quota may have the effect
of compelling clothing manufacturers to by cotton here in the
United States.

Increased Prices for Foreign Goods

Producers may benefit from trade barriers here in the
U.S.; however, consumers tend to lose out because trade
barriers also tend to result in higher market prices.

Trade Wars

As a result of trade barriers, economic conflicts may
arise. When one nation restricts imports the partner
nation may respond with restrictions of their own. This
cycle eventually results in trade wars between trading
nations that ultimately lead to the substantial decrease in
trade.



Why does a country impose trade barriers?
Answer: To protect domestic industry from foreign competition
Three (3) main arguments stand in support of Protectionism
Protecting Jobs:
Sheltering domestic labor in industries that would be hurt by foreign competition.
The argument is that layoffs would result if foreign competition wasn’t stymied in
industries where domestic labor could not feasibly compete with a cheaper product
of labor force.
Protecting infant Industries:
Protecting new domestic industries in the early stages of their development
The argument is that new industries need time and practice to become more
efficient producers, therefore, tariffs and other protectionist policies shield these
industries from more establishes foreign rivals.
Safeguarding National Security:
Certain industries may require protection from foreign competition because their
products are essential to defending the United States.
The argument is that in the event of war the United States would need industries
that provide energy and advanced technologies; not depending on other nations for
these crucial resources during a crisis is key.

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In efforts to increase free trade, several nations have developed
international free trade agreements to reduce trade barriers and tariffs
between certain select nations.
These trading blocks essentially try to secure trade benefits between
trade partners that other nations outside this trading block may not be
able to access and benefit from.
The World Trade Organization (WTO)
Founded in 1995, this organization was created to ensure compliance
with the General Agreement on Tariffs and Trade (GATT, 1948)
and to negotiate new trade agreements and resolve trade disputes.
Major world trade organizations:

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

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The European Union (EU)
North American Free Trade Agreement (NAFTA)
Asia-Pacific Economic Cooperation (APEC)
The Southern Common Market (MERCOSUR)
The Caribbean Community and Common Market (CARICOM)
Measuring Trade


Because there are numerous nations on earth there are also a multitude of different type of currencies with different
comparative values. These values may and do change daily in the foreign exchange market.
Examples:



1 Euro = 1.078 (1.08) USD
1 British Pound = 1.498 (1.5) USD
1 USD = 118.839 (118.89) Japanese Yen
(Note: These figures represent the exchange values as of 2:10 p.m., April 17 th, 2015)
Since nations’ possess their own currency, for trade to take place, an exchange rate had to be established to determine the
comparable value of one currency to another.
Strong vs. Weak Currencies
Appreciation:
An increase in the value of currency is called appreciation.
When a nation’s currency appreciates, that nation’s products become more expensive in other countries, resulting in some
nations consuming less of the products from a nation who’s currency has appreciated.
On the other hand, that same appreciation allows the citizens of that nation to consume foreign products as less cost.
Depreciation:
A decrease in the value of currency is called depreciation.
When a nation’s currency depreciates, its products become cheaper to other nations.
At the same time, foreign products become more expensive for that nation; therefore, imports will likely decrease.

Fixed Exchange Rate System

A currency system in which governments try
to keep the values of their currencies
constant against one another.

Flexible Exchange Rate System

A currency system that allows the exchange
rate to be determined by supply and demand.
By 1973, numerous countries, including the
U.S., dropped the fixed exchange structure
for the flexible exchange rate system.
This system accounts for the day-to-day
changes in currency values.



Note: Today, most countries make use of a mixture of
these two systems, with the U.S. and other major
currencies employing a dominate flexible exchange
rate.