Exports Exports equal 32% of global economic outputequal 32% of global economic output, but, but only only 13% of U.S. output13% of U.S. output.. [U.S. supplies [U.S. supplies 1/81/8 of world’s exports of world’s exports]]

In 2010, American imports American imports && exports exports totaled over $4.1 trillion.$4.1 trillion. [$1.832 $1.832 trillion in trillion in exportsexports & $2,330 $2,330 trillion in trillion in importsimports][Deficit $498 BDeficit $498 B]

“Loonie”

David RicardoDavid Ricardo

No, it is comparative advantage No, it is comparative advantage that that matters, not absolute advantage.matters, not absolute advantage.

Adam SmithAdam Smith

Nations should specialize and Nations should specialize and trade based on absolute trade based on absolute advantage.advantage.

“Euro”

• Joe Smith started the day early having set his alarm clockalarm clock (MADE IN JAPANMADE IN JAPAN) for 6 a.m.

• While his coffeepotcoffeepot (MADE IN CHINAMADE IN CHINA) was perking, he shaved with his electric razorelectric razor (MADE IN HONG KONGMADE IN HONG KONG).

• He put on a dress shirtdress shirt (MADE IN SRI LANKA)(MADE IN SRI LANKA), designer jeans (MADE designer jeans (MADE IN SINGAPORE) IN SINGAPORE) and tennis shoestennis shoes (MADE IN KOREAMADE IN KOREA).

• After cooking his breakfast in his new electric skilletelectric skillet (MADE IN INDIAMADE IN INDIA) he sat down with his calculatorcalculator (MADE (MADE IN MEXICO) IN MEXICO) to see how much he could spend today.

• After setting his watch watch (MADE IN TAIWAN ) (MADE IN TAIWAN ) to the radioradio (MADE IN (MADE IN INDIA)INDIA) he got in his carcar (MADE IN GERMANY)(MADE IN GERMANY) filled it with GASGAS from SSaudi Arabiaaudi Arabia & continued his search for a good paying AMERICANAMERICAN JOBJOB..

• At the end of yet another discouraging and fruitless day checking his computercomputer (MADE IN MALAYASIA) (MADE IN MALAYASIA), , Joe decided to relax for a while.

• He put on his sandals (MADE IN BRAZIL)sandals (MADE IN BRAZIL) poured himself a glass of wine wine (MADE IN FRANCE)(MADE IN FRANCE) and turned on his TVTV ((MADE IN INDONESIAMADE IN INDONESIA)), and then wondered why he can't find a good paying job in America..... Actually this is a good thing. We get Actually this is a good thing. We get more choicesmore choices, , lower lower pricesprices, & because more is bought, , & because more is bought, more jobs are createdmore jobs are created..

• Question: What is the definition of GlobalizationGlobalization?

• Answer: Princess Diana’s deathPrincess Diana’s death• Question: How Come?• Answer: An English princessEnglish princess with an Egyptian boyfriendEgyptian boyfriend

crashed in a French tunnelFrench tunnel, driving a German German car car with a Dutch engineDutch engine, driven by a Belgian Belgian who was drunk on Scottish whiskyScottish whisky, followed closely by Italian PaparazziItalian Paparazzi, on Japanese motorcyclesJapanese motorcycles; treated by an American American doctordoctor, using Brazilian medicinesBrazilian medicines.

• This is sent to you by a CanadianCanadian, using Bill Gates’ Bill Gates’ technology technology, and you’re probably reading this on your your computer computer, that uses Taiwanese chipsTaiwanese chips, and a Korean Korean monitor monitor, assembled by Bangladeshi workersBangladeshi workers in a Singapore plantSingapore plant, transported by Indian lorry-driversIndian lorry-drivers, hijacked by IndonesiansIndonesians, unloaded by Sicilian Sicilian longshoremen longshoremen, and trucked to you from MexicoMexico.

Lorry-driversLorry-drivers

That is Globalization… Globalization… The process by which individuals and businesses in other parts of the world are affected by events elsewhere in the world.

1960 1965 1970 1975 1980 1985 1990 1995 2000 2007 20081960 1965 1970 1975 1980 1985 1990 1995 2000 2007 2008

Globalization:Globalization: Merchandise Exports Merchandise Exports as a Share of World GDP ( as a Share of World GDP (32%32%))

GlobalizationGlobalization increases U.S. income by $$1.81.8 ttrillionrillion a a yearyear,or $10,000 per household. Or, without globalization,Americans would be poorer by $1.8 trillion$1.8 trillion a year.

Perc

en

t of

GD

PP

erc

en

t of

GD

P

30%30%

5%5%

00

10%10%

15%15%

20%20%

25%25%

3232%%

14 million iiPPadsads were

sold in the U.S. last year, but because they were made in China, were counted as importsimports.

22 million pairs of NikesNikes are importedimported each year, employing 50,000 Vietnamese.

$700

$600

$500

$400

$300

$200

$100

0 95 97 99 01 02 03 04 07 08 09 10

$677$677

$381$381

American companieshave 54 million golf golf ballsballs produced in China so they are importsimports.

$498$498

Global CowGlobal Cow“Who Supplied My Cheese?”“Who Supplied My Cheese?”

The values given are for Imports and Exports added together.

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

November 2011 Year To Date Total in Total in Billions Billions Country Name of U.S. $ of U.S. $ Canada 49.54 548.07 China 46.74 460.67 Mexico 40.86 423.08 Japan 18.30 177.66 Germany 13.15 134.60 United Kingdom 8.94 97.45 Korea, South 8.47 91.68 Brazil 6.68 67.49 France 5.88 62.13 Saudi Arabia 5.60 54.67

2010 Trade Balance2010 Trade Balance-$498 billion-$498 billion

$764

20092006 2008 20102007

$696

$381

$498

TradeTrade is analogousis analogous to technologyto technology, , disruptive but ultimately beneficial.disruptive but ultimately beneficial.

Principal U.S. Exports & Imports – 2007Principal U.S. Exports & Imports – 2007[in Billions of Dollars][in Billions of Dollars]

ChemicalsChemicalsConsumer DurablesConsumer DurablesAgricultural ProductsAgricultural ProductsSemiconductorsSemiconductorsComputersComputersGenerating EquipmentGenerating EquipmentAutomobilesAutomobilesAircraftAircraftMedical equipmentMedical equipmentTelecommunicationsTelecommunicationsElectrical machineryFuels and lubricantsFuels and lubricants

PetroleumPetroleumAutomobilesAutomobilesHousehold AppliancesHousehold AppliancesComputersComputersMetalsMetalsClothingClothingConsumer ElectronicsConsumer ElectronicsGenerating EquipmentGenerating EquipmentSemiconductorsSemiconductorsTelecommunicationsTelecommunicationsAircraftAircraftChemicalsChemicals

ExportsExports ImportsImports

Source: Department of Commerce DataSource: Department of Commerce Data

$94.1$94.170.970.977.677.650.250.242.942.941.541.543.643.648.648.632.032.025.625.6

$331.0$331.0133.8133.8112.1112.1104.0104.0115.7115.786.386.394.794.755.055.037.137.125.825.8

83.247.747.7

34.434.456.256.2

.

Exports toExports to:

Imports fromImports from:

Value (Billions of Dollars)

Value (Billions of Dollars)

U.S. Exports & Imports of GoodsGoods, 2007

Most Most of ourof our imports imports come fromcome from developing countries. developing countries.

Industrial CountriesIndustrial Countries $553$553Developing CountriesDeveloping Countries 596 596TotalTotal $1,149$1,149

Industrial CountriesIndustrial Countries $819$819Developing CountriesDeveloping Countries 1,1461,146TotalTotal $1,965$1,965

The U.S. and World TradeThe U.S. and World Trade

• *1. National Defense Argument*1. National Defense Argument: certain industries should remain based in our country, especially if they manufacture items vital to our defensevital to our defense. Items this argument have been used for include: penspens, pottery pottery, peanuts peanuts, papers papers, candles candles, thumbtacksthumbtacks, tuna fishing tuna fishing, and pencils pencils.

• *2. Infant Industry Argument*2. Infant Industry Argument: new industries must be protected from older, established foreign competitors until they are mature enough to competemature enough to compete. However, removing protection is almost impossible.

• 3. Dumping Argument3. Dumping Argument: domestic industries need to be protected from foreign dumping. Dumping is the sale of goods sale of goods abroad at a price below their cost 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 Argument4. Foreign–Export–Subsidies Argument: Some governments subsidize the firms that export goodssubsidize the firms that export goods. Firms say that this forces them to compete with both the firm and the government in question.

* You can make a good argument for these.

• 5. Low Foreign Wages Argument5. Low Foreign Wages Argument: A country’s low low wage advantagewage advantage may be offset by its productivity offset by its productivity disadvantagedisadvantage. High wages means high productivity. Low wages mean low productivity.

Some recentrecent minimum wages 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 worker productivity there is probably lowproductivity 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 costcost to do the job?

• Saving Domestic Jobs ArgumentSaving Domestic Jobs Argument: This argument is actually most of the previous arguments previous arguments but inin disguisedisguise.

ROWU.S.U.S.

ChinaChina

JapanGer.FR.

U.S.

China

Japan

Germany

France

Italy

UK

Korea

Russia

Brazil

Rest World

Country Share of Global Manufacturing - 2008Country Share of Global Manufacturing - 2008

U.S. manufacturing is not dying. It is at an all time highall time high. We are making more than twice as much twice as much today as we were in the 70s. However we’ve gone from 19 million19 million manufacturing jobs to 11 11 millionmillion because of increasingncreasing productivityproductivity or building the building the same amount of stuff with fewer workerssame 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 workerstwice 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 44% of jobs were in agriculturewere in agriculture. Tremendous improvements in farm productivity pushed that number to 2.2% today2.2% today. Those who once would have plowed fields plowed fields now work at curing cancercuring cancer, building roads, etc. We don’t want those farm jobs back.

So, all of you who thought U.S. manufacturing was So, all of you who thought U.S. manufacturing was dead dead

““TAKE That!!!”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 MUCHHOW MUCHconsumers do have to payconsumers do have to pay

when we protect domestic jobs when we protect domestic jobs with tariffs and quotas.

12,000 x $40 = $480,00012,000 x $40 = $480,000[[NS-NTNS-NT];]; 12,000 X $25 = $300,000[S-T12,000 X $25 = $300,000[S-T]](It cost $180,000 to save one clock-radio guy’s job)

Suppose Joe Export lives & works in the U.S. making dancingclock radios. He produces and sells 12,000sells 12,000 clock radios per yearat a price of $40price of $40 each each. There is no international trade.

One day the U.S. market is openedU.S. market is opened to dancing clock radiosto dancing clock radios from Japan. The Japanese manufacturers have aJapanese manufacturers have a comparative comparative advantageadvantage and sell them for and sell them for $25 each$25 each. Joe can not compete at. Joe can not compete atthis price. His sales drop to such a degree that he goes out ofthis price. His sales drop to such a degree that he goes out ofbusiness. International business. International trade has harmed himtrade has harmed him but helped but helped American consumers because they save $180,000American consumers because they save $180,000..

““I can do the I can do the econ rap.”econ rap.”““I can do the I can do the econ rap.”econ rap.”

IndustryIndustry Yearly Loss Yearly Loss EmploymentEmployment Annual CAnnual Costost To EconomyTo Economy Loss If BarriersLoss If Barriers Per JobPer Job

From BarriersFrom Barriers Were RemovedWere Removed SavedSavedTextiles $15,850 billion 71,639Dairy Products 1,630 million 2,378

Sugar 657 million 2,040Peanuts 74 million 397

Meat 177 million 928Non-rubber 170 million 1,377 footwear

Orange Juice 307 million 609Canned Tuna 100 million 390

Chicken of the SeaChicken of the Sea

I love the chicken in this tuna can.

Chicken Seaofofthethe

$221,258 685,233

322,059 187,223

190,733 123,456

635,103 257,640

High Cost High Cost of of ProtectionProtectionIt cost an average of $231,289 per job saved.

Consumers pay $100 $100 billionbillion

annually in higher priceshigher prices.Protecting sugar raises candy and soft drink prices; protecting steel makes car prices higher.

This is a “negative-sum “negative-sum game.”game.”

So you can see that, “Free trade is a “Free trade is a

good idea for most good idea for most of us despite the of us despite the

hardship it imposes hardship it imposes on a few of us.”on a few of us.”

Keep The Keep The MoneyMoney At Home At Home Point: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:Counterpoint: Money is not wealth in and of itself,it merely facilitates trade. If America sends dollars toEngland, England will eventually use those dollars tobuy American goods. If we don’t buy goods fromother countries, then other countries will not be ableto buy goods from us.

PointPoint:: Protecting businesses from

foreign competition preserves American jobs.

Counterpoint: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.

Point2:Point2: Import quotas on Japanese autos preserved 4,598 preserved 4,598 American jobsAmerican jobs.Counterpoint2:Counterpoint2: but at a cost to consumers of $241,235$241,235 per jobper job per year, in higher prices paid for cars. Saving a $30,000 30,000 auto job costauto job cost consumersconsumers $120,000 $120,000 annuallyannually in higher prices.

..

Protecting American businesses from foreign competition does potentially preserve American jobs.Point 1: Point 1: Restrictions on imported steel in the 80s saved 17,000saved 17,000 jobsjobs in the steel industry and its suppliers.Counterpoint:Counterpoint: That is half the story. Here is the rest of the story. 1. The higher steel prices saved 17,000saved 17,000 jobs in the steel industry but led to the loss ofloss of 52,400 52,400 jobsjobs in American steel-using industries. For every job saved, three were lost.

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.

*The more you pay for protected goods, the less you have to use to*The more you pay for protected goods, the less you have to use tobuy other goods. The less consumers have to buy other goods, thenbuy other goods. The less consumers have to buy other goods, thenfewer jobs will be created by the market.fewer jobs will be created by the market.

Counterpoint: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.

Point:Point: If we trade freely with low wage countries,U.S. businesses will flee to those countries and U.S.wages will plummet.

““I know you are against I know you are against free free trade as a former employeetrade as a former employee. . But – how do you feel about But – how do you feel about free trade as a consumerfree trade as a consumer??

Over $4 trillion going both waysOver $4 trillion going both ways *Exports support*Exports support 14 million American jobs14 million American jobs. . [Wages 16.5[Wages 16.5%% higher] higher]

6.5 million Americans6.5 million Americans work forwork for foreign companiesforeign companies in the U.S. in the U.S. ToyotaToyota alone has created more than alone has created more than 100,000 U.S. jobs100,000 U.S. jobs..

20092009Deficit in goodsDeficit in goods $501$501Surplus in services Surplus in services $135$135

$381$381

20102010Deficit in goodsDeficit in goods $646$646Surplus in servicesSurplus in services $149$149 $488$488

Total: $2,330 ImportsTotal: $2,330 ImportsTotal: $1,832 ExportsTotal: $1,832 Exports

0

2

4

6

8

10

12

14

16

18

1975 1980 1985 1990 1995 2000 2005

Exports

Imports

Hiring American investment bankersAmerican investment bankers, engineersengineers, consulting fees,royalty payments, accounts, architects, advertising agencies and evenlawyers [they earned $20 billion$20 billion]. Using American hospitalsAmerican hospitals or attending U.S. schoolsU.S. schools. About 3% of all college students are foreigners. Tuition-paying foreign students payabout $18 billion$18 billion a year on tuition, housing, & consumer goodstuition, housing, & consumer goods.

500 million500 million visit the U.S. every year bringing in $70 billion$70 billion. Foreignvisitors buy tourism “exports”,tourism “exports”, such as hotel rooms, airline fareshotel rooms, airline faresand consumer goodsand consumer goods. Watching American movies & TV programsAmerican movies & TV programs [foreign sales accounted for about half of the film industry’s $5 B$5 B box-office revenue.

About 700,000 foreign college students700,000 foreign college students attend American colleges.TexasTexas attracted the 33rdrd largest largest # of foreign students with 38,000 who provide $615 million net spending to the Texas economy$615 million net spending to the Texas economy. IndiaIndia leads with 104,000104,000; ChinaChina is next with 98,00098,000; S. KoreaS. Korea has75,00075,000; and Canada Canada has 30,00030,000; & JapanJapan – 29,00029,000; USCUSC-7,5007,500. CCCCCCCC has 630 foreign630 foreign students. 1/3 of Richland’s1/3 of Richland’s are foreign; 2,0002,000 at UTD UTD out of 15,000out of 15,000. They make up 2525% of% of grad students grad students & 5%5% of of undergradsundergrads. 1/3 of U.S. sci and eng doctorates1/3 of U.S. sci and eng doctorates & 40% ofPHD’s in comp scicomp sci go to foreigners. “Begging at the gates of world’s best” “Begging at the gates of world’s best”

Kentucky colleges welcome 5,018 foreign studentswho contribute $85 million to the state’s economy.

In TexasTexas, 55%55% of engineering master’s degrees go to of engineering master’s degrees go to foreignersforeigners. Over 50% of the PH.D.s in mathematics go to “nonresident aliens”. Also, 75% of engineering PH.D.s75% of engineering PH.D.s go to go to foreignersforeigners.

U.S. Export of Services [X=$543 B; M=$394 B in 09[ [+149B]

38 U.S. schools have 65 branches in 34 countries.The U.S. has more great colleges than the rest of the world combined.

180180

160160

140140

120120

100100

8080

6060

4040

2020

00

276276

CCanadaanada

365365

ChinaChina

120120

JapanJapan

230230

MMexicoexico

163163

MexicoMexico

249249

CCanadaanada

9292

DDeficiteficit

ofof$273$273

ChinaChina

200200

180180

160160

140140

120120

100100

8080

6060

4040

2020

00

IMPORTS

8383

GermanyGermany

3636

TaiwanTaiwan

5050

UKUK

4949

KKoreaorea

3939FFrancerance

4949

UKUK

48 48

GermanyGermany

3939

KoreaKorea2727

FranceFrance2929

SingaporeSingapore

3232NetherlandsNetherlands 2626

TaiwanTaiwan

EXPORTS

6161

JapanJapan

http://www.census.gov/foreign-trade/statistics/highlights/top/index.html

CountryCountry Imports fromImports from Exports toExports toAustralia Beef Airplanes

Aluminum Computers Autos Auto parts

Belgium Jewelry Cigarettes Cars Airplanes Optical Diamonds

Canada Cars Auto parts Trucks Cars Paper Computers

China Toys Soybeans ($9 B) Shoes Semiconductors 5 B Clothes Chemicals ($4 B)

Germany Cars Airplanes Engines Computers Auto parts Cars

Japan Cars Airplanes Computers Computers Telephones Timber

Russia Oil Corn Platinum Wheat Artworks Oil Seed crops

[canola & sunflower]

South Korea Shoes Airplanes Cars Leather Computers Iron ‘ngots

Toyota Camry and Toyota TundraToyota Camry and Toyota TundraHonda Accord and Honda Odyssey MinivanHonda Accord and Honda Odyssey MinivanBMW Z4 Roadster & BMWX5 SUVBMW Z4 Roadster & BMWX5 SUV

Mercedes-Benz-M-ClassMercedes-Benz-M-ClassToyota CorollaToyota CorollaSubaru LegacySubaru Legacy

Hyundai ElantraHyundai ElantraNissan MaximaNissan MaximaChrysler CrossfireChrysler Crossfire

Dodge RamDodge RamPlymouth voyagerPlymouth voyagerChrysler PT CruiserChrysler PT Cruiser

Pontiac FirebirdPontiac FirebirdChevrolet Camaro and ImpalaChevrolet Camaro and ImpalaFord FusionFord Fusion

Mercury CapriMercury CapriChrysler 300Chrysler 300

BBuuyy AAmmeerriiccaann??

1957 Chrysler 3001957 Chrysler 300

Chrysler 300Chrysler 300

Toyota Camry and Tundra – Toyota Camry and Tundra – U.S.A.U.S.A. ( (California and TexasCalifornia and Texas))

Honda Accord and Honda Odyssey Minivan – Honda Accord and Honda Odyssey Minivan – U.S.A.U.S.A. ( (OhioOhio))

BMWX4 Roadster and BMWX5 SUV – BMWX4 Roadster and BMWX5 SUV – U.S.A.U.S.A. ( (South CarolinaSouth Carolina))

Mercedes-Benz-M-Class – Mercedes-Benz-M-Class – U.S.A.U.S.A. ( (AlabamaAlabama))

Toyota Corolla – Toyota Corolla – U.S.A.U.S.A. ( (CaliforniaCalifornia))

Subaru Legacy – Subaru Legacy – U.S.A.U.S.A. ( (IndianaIndiana))

Nissan Maxima– Nissan Maxima– U.S.A.U.S.A. ( (TTennesseeennessee))

Hyundai Elantra– Hyundai Elantra– U.S.A.U.S.A. ( (AlabamaAlabama))

Dodge Ram – Dodge Ram – MexicoMexico

Plymouth Voyager – Plymouth Voyager – CanadaCanada

Chrysler PT Cruiser – Chrysler PT Cruiser – MexicoMexico

Pontiac Firebird – Pontiac Firebird – CanadaCanada

Chevy Camaro and Impala – Chevy Camaro and Impala – CanadaCanadaFord Fusion - MexicoMexico

Mercury Capri – Mercury Capri – AustraliaAustralia

Chrysler Crossfire - Chrysler Crossfire - GermanyGermany

Chrysler 300 - Chrysler 300 - CanadaCanada

Foreign nameplatesForeign nameplates were made were made in thein the U.S.U.S.

Domestic nameplatesDomestic nameplates werewere

made inmade in other countriesother countries..

This competition gives consumers higher quality,

more choices, and lower prices. Globalization has

blurred national auto identities.

Fiat Fiat owns Chrysler. Daimler Daimler builds Mercedes SUVsMercedes SUVs in Vance, Alabama and owns stake in MitsubishiMitsubishi and 10% of Hyundai Motor10% of Hyundai Motor.

GM didGM did own SaabSaab and has stakes in Isuzu, Suzuki, stakes in Isuzu, Suzuki,

Subaru, Fiat and DaewooSubaru, Fiat and Daewoo.

FordFord owns Mazda and Volvo.Mazda and Volvo.

By 2011, predictions are that foreign-based automakers will build more cars at U.S. auto plants than the “Big 3”.

ToyotaToyotaGeorgetown, KYGeorgetown, KYPrinceton, INPrinceton, INFremont, CAFremont, CASan Antonio, TXSan Antonio, TX[$800 mil. Plant[$800 mil. Plantemploying 2,000]employing 2,000]

HondaHondaMarysville, OHMarysville, OHEast Liberty, OHEast Liberty, OHLincoln, ALLincoln, AL

HyundaiHyundaiMontgomery,ALMontgomery,AL

NissanNissanSmyrna, TNSmyrna, TNCanton, MSCanton, MSMitsubishiMitsubishiNormal, ILNormal, ILHyundaiHyundaiMontgomery, ALMontgomery, AL

BMWBMWSpartanburg, SCSpartanburg, SCMercedes-BenzMercedes-BenzVance, ALVance, ALSubaruSubaruLafayette, INLafayette, IN

VolkswagenVolkswagenChattanooga, SCChattanooga, SCKIAKIAWest Point, GAWest Point, GA

Honda provides 50,000 high-output V-6 engines for GM cars, blurring the distinction between U.S./foreign cars. Asian Asian and and European European auto co’s employ 92,700 Americansauto co’s employ 92,700 Americans directlyand 574,500 indirectly 574,500 indirectly accounting for 33% of 33% of U.S. auto productionU.S. auto production. The “Big 3” “Big 3” employ 240,000 workers240,000 workers. It is less expensive to build an Accord here than ship it from Japan. Only 16% of Honda cars16% of Honda cars sold here are are imported imported from Japanfrom Japan. Honda also buys $13 billion worthof parts from 620 suppliers in North America.

The BMW plant in S. Carolina sends 40% of itsBMW plant in S. Carolina sends 40% of itscars to other countriescars to other countries. This is an example of

in-sourcingin-sourcing. As many as 20% 20% of ourof our exports exports are a result of in-sourcingare a result of in-sourcing..

Toyota’s TundraToyota’s Tundra plantplant in San Antonio received in San Antonio received

110,000110,000 applications applications for the for the 2,0002,000 positions positions

that pay from that pay from $15.50$15.50 to to $25$25 an hour an hour..

[parts from 15 countries]

Switzerland may get the inputs to make the speedometer and gears from several countries.

Ford EscortFord Escort

1. Nestle2. Shell3. Lipton4. Baskin-Robbins5. Burger King6. Alka Seltzer7. Volvo8. Sony9. Tropicana10. TV Guide11. Vaseline12. Bayer13. Gatorade14. Adidas15. Levi Straus

SwitzerlandSwitzerlandNetherlandsNetherlands

Great BritainGreat BritainGreat BritainGreat Britain

Great BritainGreat BritainGermanyGermany

SwedenSwedenJapanJapan

CanadaCanadaAustraliaAustraliaGreat BritainGreat Britain

GermanyGermanyU.S.U.S.

GermanyGermany

U.S.U.S.

Global Fruit BasketGlobal Fruit BasketApples New ZealandApricots ChinaBananas EcuadorBlackberries CanadaBlueberries ChileCoconuts PhilippinesGrapefruit BahamasGrapes PeruKiwifruit ItalyLemons ArgentinaLimes El SalvadorOranges AustraliaPears South KoreaPineapples Costa RicaPlums GuatemalaRaspberries MexicoStrawberries PolandTangerines S.AfricaWatermelons Honduras

In an average can of mixed nutsmixed nuts, you find almondsalmonds from ItalyItaly, walnuts walnuts from ChinaChina, Brazilian nutsBrazilian nuts from BoliviaBolivia, cashews cashews from IndiaIndia, pistachios from Turkey, and hazelnutshazelnuts from CanadaCanada.

Trade fosters competition, which rewards productivity and restrains cost.

More-traded ProductsMore-traded ProductsFive-year price change (percent)

VVideo Equipmentideo Equipment

TVTV sets sets

TToysoys

PPhoto equipmenthoto equipment

RRoasted coffeeoasted coffee

AAudio equipmentudio equipment

DDishes & flatwareishes & flatware

WWomen’s outerwearomen’s outerwear

MMen’s en’s shirts/sweatersshirts/sweaters

FFilm & photo sup.ilm & photo sup.

GGirls’ apparelirls’ apparel

MMen’s footwearen’s footwear

NNew carsew cars

WWomen’s dressesomen’s dresses

RRiceice

HHHH laundry equip. laundry equip.

Less-traded ProductsLess-traded Products

BUYBUYBuy D-FWBuy D-FW

Buy “D”

[If we consumed only the goods & services we produced,we would toil long hours but remain dirt poor]

JapanJapan – – “Land of the $30 pizzas, $30 lipstick, $50 “Land of the $30 pizzas, $30 lipstick, $50 melons, $100 jeans and $4,500 two-bedroom apts.”melons, $100 jeans and $4,500 two-bedroom apts.”

Japan has beenJapan has been a a closed economy [fewer choices, higher closed economy [fewer choices, higher pricesprices]

ItemItem N.Y.N.Y. TokyoTokyoShock Absorbers $228$228 $605$605

Alternator $120$120 $600$600

Watermelon $5$5 $50$50

Cup of coffee $1$1 $7$7

Cab to airport $30$30 $200$200

Stamp .44.44 .79.79

Gallon of gasoline $3.00$3.00 $7.00$7.00

Newspaper 11.50.50 $2.00$2.00

Movie Ticket $14$14 $20$20We have 550 cars per 1,000550 cars per 1,000; Japan has only 240 per 1000240 per 1000 inhabitants.Japanese cameras Japanese cameras areare moremore expensive expensive in in TokyoTokyo than in New York. In Tokyo,you have to have a sizable inheritance to be able to afford a house. Japanhas had a decade-long economic tailspindecade-long economic tailspin, even with interest rates less than 1%.interest rates less than 1%.

The Japanese paid $28 The Japanese paid $28 billionbillion

per year in higher prices for per year in higher prices for rice because they would notrice because they would notbuy from U.S. rice farmers.buy from U.S. rice farmers.

Japanese consumers pay Japanese consumers pay $600,000 in higher prices $600,000 in higher prices for each job protected. for each job protected.

ChinaChinaGermanyGermany

U.S.U.S.JapanJapan

NetherlandsNetherlandsFranceFrance

ItalyItalyBelgiumBelgium

0 2 4 6 8 10 120 2 4 6 8 10 12

Source: World Trade Organization

The 8 largest export nations account for 46% of world exports.The 8 largest export nations account for 46% of world exports. [Selected Nations][Selected Nations]

So, China & Germany are the leading export nations but the So, China & Germany are the leading export nations but the U.S. is the leading export and import [or trade]nation.U.S. is the leading export and import [or trade]nation.

Percentage Share of World Exports, 2009Percentage Share of World Exports, 2009

Principal U.S. exports includePrincipal U.S. exports includechemicals, agricultural products, chemicals, agricultural products, consumer durables, aircraft, andconsumer durables, aircraft, andsemiconductors.semiconductors.

Top Chinese ImportsTop Chinese Imports (percentage of all imports)(percentage of all imports)88% of all Radios87% Christmas & festive items83% Toys70% Leather goods67% Shoes67% Handbags65% Lamps and lights64% Cases for cameras, eyeglasses, etc.60% Drills, power tools56% Household plastics54% Sporting goods53% Ceramic Kitchenware

The U.S. trade deficit with China in 2009 was $273 B. $273 B. Wal-MartWal-Martbought $20$20 B B from China in 2010 & is their 8th largest trade partner.

We import 54 million golf We import 54 million golf balls from China each year.balls from China each year.

After a series of product After a series of product recallsrecalls, from , from pet food to tires, pet food to tires, American regulatorsAmerican regulatorsare paying more attention to goods are paying more attention to goods exported to the U.S. from China.exported to the U.S. from China.

Who Buys Chinese Goods?Who Buys Chinese Goods?The U.S. accounts for 1/5 of all The U.S. accounts for 1/5 of all Chinese export destinations, 2007.Chinese export destinations, 2007.

FDA ordered recall after a poisonousFDA ordered recall after a poisonousingredient was found in toothpaste.ingredient was found in toothpaste.

1.5 mil imported toy 1.5 mil imported toy trains were made trains were made using lead paint.using lead paint.

450,000 tires were 450,000 tires were recalled because of recalled because of tire separationtire separationproblems.problems.

More than 60 billion cans of cat and dog food were recalled.

$56 $56 billionbillion

In In goods goods from from U.S. U.S. to to

ChinaChina

10 million toys including “Big Bird”were recalled because of “lead”or magnets that tear the intestineswhen swallowed by children.

675,000 Barbie doll accessories

The U.S. tradedeficit withChinaChina in 2010was $273 $273 billionbillion.X to China $92 BM from China $$365 B365 B

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.

Feb 2011

Apple’s I phone… $1.9 billion trade deficit

Exports have more than more than DoubledDoubled as a percent of GDP since 19751975

$$498498 billion billion trade deficit in 20102010

Export Goods & Services make up about 12%12% of American GDP

When I was

born!

Write these into your notes!!!

Babe Ruth was the best hitterbest hitter and pitcherpitcher on his team. He had been the best pitcher in the American League for several years, winning 94 94 gamesgames and and losing only 46losing only 46. He could produceHe could produce the the samesame amountamount of of home runshome runs as any teammateteammate with fewer at batsfewer at bats. The problemproblem was that if he pitched, he would batfewer times because pitchers need rest after pitching.

The Babe had helped the Red Sox win the pennant in 19151915,, 1916 1916, , & & 19181918. Hehad pitched 29 scoreless innings29 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 runs40 of the Red Sox 46 home runs. After being sold to the Yankees in 1920sold to the Yankees in 1920, the coaches decided that the Babe had a comparative advantage in hittingcomparative 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 runs714 home runs even though he spent seven years as a pitcher. And theAnd the Red Sox don’t win again – until 2004Red Sox don’t win again – until 2004.

Hank Aaron had over 2,500 more at-bats than the Babe. Hitting a homerun every 10-11 Hank Aaron had over 2,500 more at-bats than the Babe. Hitting a homerun every 10-11

at-bats, the Babe would have had over 200 more homeruns, somewhere around at-bats, the Babe would have had over 200 more homeruns, somewhere around “950”. “950”.

Hank Aaron had over 2,500 more at-bats than the Babe. Hitting a homerun every 10-11 Hank Aaron had over 2,500 more at-bats than the Babe. Hitting a homerun every 10-11

at-bats, the Babe would have had over 200 more homeruns, somewhere around at-bats, the Babe would have had over 200 more homeruns, somewhere around “950”. “950”.

Product MarketProduct Market [outputs][outputs]

CountryCountry GunsGuns ButterButterRabbitRabbit 40 40 unitsunits 120120 units units

WabbitWabbit 20 20 unitsunits 4040 units units

Resource MarketResource Market [inputs] [inputs]

CountryCountry GunsGuns ButterButterRabbitRabbit 4040 hours hours 120120 hours hours

WabbitWabbit 2020 hours hours 4040 hours hours

WWhathat country has ancountry has an absolute absoluteadvantage in advantage in gunsguns??

WWhat country has anhat country has an absolute absoluteadvantage inadvantage in gunsguns??RabbitRabbit WabbitWabbit

Why does Why does RabbitRabbit have an have an absolute advantageabsolute advantage in in gunsguns??

Why does Why does WabbitWabbit have an have an absolute advantageabsolute advantage in in gunsguns??

RabbitRabbit can producecan produce absolutelyabsolutelymore gunsmore guns than than WabbitWabbit [[40 units40 units v. v. 20 units20 units]]

WabbitWabbit can can produce guns produce guns absolutely fasterabsolutely faster thanthan RabbitRabbit [[20 hours20 hours v. v. 40 hours40 hours]]

RabbitRabbit

RabbitRabbit1 G = 3 B1 G = 3 B11//33 G=1BG=1B

WabbitWabbit1 G = 2 B1 G = 2 B1/21/2 G=1B G=1B

RabbitRabbit1 B = 3 G1 B = 3 G11//33 B=1G B=1G

WabbitWabbit1 B = 2 G1 B = 2 G1/21/2 B=1G B=1GWabbitWabbit RabbitRabbit WabbitWabbit

Terms of Trade: 1G = 2.5 BTerms of Trade: 1G = 2.5 B Terms of Trade: 1B = 2.5 GTerms of Trade: 1B = 2.5 G

OutputOutput v. v. InputInput Comparative Comparative andand Absolute Advantage Absolute Advantage

I Can do 8 push-ups.

I Can do 42 I Can do 42 push-ups.push-ups.

I have an I have an absolute advantageabsolute advantage in the production of push-ups.in the production of push-ups.

I can clean that I can clean that house in 4 hours.house in 4 hours.

I’m more efficient. I can do the I’m more efficient. I can do the same work in 3 hours so I have same work in 3 hours so I have an an absolute advantageabsolute advantage..

Ole Miss guyOle Miss guyMSU BulldogMSU Bulldog

FFuture uture Rebel/BlackbearRebel/Blackbear Maid Maid FFuture uture MSU Maid MSU Maid service owner!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, With trade, a few people lose a lot, a lot of people gain a little. a lot of people gain a little. [Freer trade is like improved technology][Freer trade is like improved technology]

““We can We can produce 40 produce 40 tons of corn.”tons of corn.”

“We can produce 60 tons of corn, so - we have an absolute advantage because we can produce more corn with the same resources.”

4040

6060

““We can produce 40 tons of corn or we could We can produce 40 tons of corn or we could grow 50 tons of wheat with the same resources.” grow 50 tons of wheat with the same resources.” Maybe we should do wheatMaybe we should do wheat? Because ? Because COMPARED to you, we are better at wheat COMPARED to you, we are better at wheat and not as good at corn!and not as good at corn!

“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

4040

6060

50

50

CountryCountry Comparative aComparative advantage dvantage ddueue to natural resources & to natural resources & climateclimate

United StatesUnited States Wheat, corn, and cerealsWheat, corn, and cerealsCanadaCanada TimberTimberSaudi ArabiaSaudi Arabia OilOilFranceFrance WineWineBrazilBrazil CoffeeCoffeeIsraelIsrael Oranges and grapefruitOranges and grapefruitMexicoMexico TomatoesTomatoes

Comparative advantage largely due to physical capital,Comparative advantage largely due to physical capital,CountryCountry human capital, and scientific knowledgehuman capital, and scientific knowledge

United StatesUnited States Aircraft, computers, industrial chemicals, plastics, & chemicalsAircraft, computers, industrial chemicals, plastics, & chemicalsJapanJapan Automobiles, steel, electronicsAutomobiles, steel, electronicsGermanyGermany Machine tools, scientific instruments, luxury automobilesMachine tools, scientific instruments, luxury automobilesUUnited nited KKingdomingdom Financial servicesFinancial servicesTaiwanTaiwan TextilesTextilesSwitzerlandSwitzerland WatchesWatchesSouth KoreaSouth Korea ShipsShips

Comparative Advantage and differences in opportunity costs are the basis for specialized production and trade.

• 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– More cheese and oranges for everyone!

• Disadvantages:Disadvantages:– Job losses among dairy farmers in Florida– Job losses among orange growers in Wisconsin

• Advantages: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.

Florida Cheeseheads

PPC –PPC – before trade & specialization– prisoners of their own PPC’s and CPC’s

FFIISSHH

SHRIMPSHRIMP

8080

2020

PPCPPCCPCCPC

Before trade, I’m a prisoner of my own PPC.Before trade, I’m a prisoner of my own PPC.

Tom Hanks aloneTom Hanks alone

4040[Consumption Possibilities Curve][Consumption Possibilities Curve]

101000

Tom’s DTom’s Domestic omestic CComparativeomparative C Costost

1 shrimp = 4 fish1 shrimp = 4 fish¼ shrimp = 1 fish¼ shrimp = 1 fish

FFIISSHH

SHRIMPSHRIMP

9090

1515

PPCPPCCPCCPC

Before trade, I’m a prisoner of my own PPC.Before trade, I’m a prisoner of my own PPC.

Bubba Gump aloneBubba Gump alone

4545[Consumption Possibilities Curve][Consumption Possibilities Curve]

7.57.500

Bubba’s DBubba’s Domestic omestic CComparativeomparative C Costost

1 shrimp = 6 fish1 shrimp = 6 fish1/6 shrimp = 1 fish1/6 shrimp = 1 fish

Toms’s DCCToms’s DCC Bubba’s DCCBubba’s DCC1S1S = __ F = __ F 1S = __F 1S = __F__ S = __ S = 1F1F __ S = __ S = 1F1F

ComparativeComparative and and AbsoluteAbsolute AdvantageAdvantage[CComparative omparative AAdvantagedvantage can produce at a lower productive opportunity can produce at a lower productive opportunity

costcost]]

44 661/41/4 1/61/6

100100

1818

“Do what you do best & trade for the rest.”

Bubba and Tom are better together- they can SHARE! Bubba and Tom are better together- they can SHARE!

TermsTerms of of TradeTrade1 1 ShrimpShrimp = __ = __fishfish

World CCWorld CC 11 ShrimpShrimp=__ Fish=__ Fish

__ Shrimp=1 Fish__ Shrimp=1 Fish55

55

11//55

8080

oo 2020

9090

00 1515

TomTom BubbaBubba

“A prisoner of my own PPC.”

ShrimpShrimp ShrimpShrimp

Fis

hFis

h ““I can consume I can consume only on my PPC.”only on my PPC.”

4040

1010

4545

7.57.5

5050

99

costscosts costscosts

Bubba should catch fish and Tom should catch

Shrimp and share

Separately they could have 90/15 or 80/20- together they can have 90/20!

Fis

hFis

h

Trade Allows Nations to Consume Beyond Trade Allows Nations to Consume Beyond Their PPCs While Producing On ItTheir PPCs While Producing On It

10 shrimp & 50 fish10 shrimp & 50 fish

12 shrimp & 40 fish12 shrimp & 40 fish

5050

1010 2020

We are suspending reality.We are suspending reality.CPCCPC (after trade) (after trade)

CPCCPC (before trade)(before trade)

PPCPPC (before & after trade) (before & after trade)

100100

8080

4040

FIS

HFIS

H

00

11 shrimp and 45 fish11 shrimp and 45 fish

10 shrimp and 40 fish10 shrimp and 40 fish

ShrimpShrimp

“Now with trade, you can escape your PPC and CONSUME more of both fish and shrimp.”

4545

Haiti’s DCCHaiti’s DCC Cuba’s DCCCuba’s DCC1B1B = __ C = __ C 1B = __ 1B = __ CC__ B = __ B = 1C1C __ B = __ B = 1C1C

ComparativeComparative and and AbsoluteAbsolute AdvantageAdvantage[CComparative omparative AAdvantagedvantage can produce at a lower productive opportunity can produce at a lower productive opportunity

costcost]]

44 661/41/4 1/61/6

100100

1818

“Do what you do best & trade for the rest.”

Absolute AdvantageAbsolute Advantage - more efficient, can produce more with the same number of inputs [who can produce absolutely more]

““ExportExport”” what it can what it can produceproduce at a at a lower relative pricelower relative price and ““importimport”” goods it can goods it can buybuy at a at a lower relative price.lower relative price.

1. (Haiti/Cuba) has an absolute advantage in coffeeabsolute advantage in coffee and (Haiti/Cuba) has an absolute advantage in breadabsolute advantage in bread..2. HaitiHaiti will exportexport (bread/coffee) [[comparative advantagecomparative advantage]] and importimport (bread/coffee). [[comparative comparative disadvantagedisadvantage]] & CubaCuba will exportexport (bread/coffee) & importimport (bread/coffee).3. Mutually advantageous tradeadvantageous trade can occur between Haiti & Cuba when 1 bread1 bread is exchanged for (3/5/7) tons of coffeetons of coffee. Production in both is subject to (increasing/constant) opportunity costs.

““Trade is the free lunch of economics.”Trade is the free lunch of economics.”

TermsTerms of of TradeTrade1 1 breadbread = __ = __coffeescoffees

World CCWorld CC 11 BreadBread=__ Coffees=__ Coffees

__ Bread=1 Coffee__ Bread=1 Coffee55

55

11//55

8080

oo 2020

9090

00 1515

HaitiHaiti CubaCuba

“A prisoner of my own PPC.”

BreadBread BreadBread

Coff

ee

Coff

ee

Coff

ee

Coff

ee

““I can consume I can consume only on my PPC.”only on my PPC.”

4040

1010

4545

7.57.5

5050

99

costscosts costscosts

Brazil’s DCCBrazil’s DCC Chile’s DCCChile’s DCC1 W = __ S 1 W = __ S___W = 1S ___W = 1S

4. ChileChile has a comparative advantagecomparative advantage in (wheat/steel) & an absolute advantageabsolute advantage in (wheat/steel/both). BrazilBrazil has a comparative advantagecomparative advantage in (wheat/steel).5. The opportunity cost of one unit of wheat foropportunity cost of one unit of wheat for ChileChile is (2/4/6) units of steel. The opportunity cost of one unit of steel foropportunity cost of one unit of steel for BrazilBrazil is (1/2 or ¼ ) wheat.6. If the 2 countries trade, ChileChile would exportexport (wheat/steel) & import (wheat/steel). If the 2 countries traded, BrazilBrazil would exportexport (wheat/steel) & import (wheat/steel).

44 22¼¼ ½½

3030

44

Terms of TradeTerms of Trade1 1 WWheatheat== ___ ___ SteelsSteels33

World CCWorld CC1 1 Wheat Wheat == __ __ SteelsSteels

__ __ Wheat = 1 SteelWheat = 1 Steel1/31/3

33

1212

00 33

2020

00 1010

BrazilBrazil ChileChile

Ste

el

Ste

el

Ste

el

Wheat Wheat

66

1.51.5

1010

55

1515

22

costscosts costscosts

Examples of comparative advantageExamples of comparative advantageCountryCountry Comparative aComparative advantage dvantage ddueue to natural resources & to natural resources & climateclimate

United StatesUnited States Wheat, corn, and cerealsWheat, corn, and cerealsCanada TimberSaudi Arabia OilFrance WineBrazil CoffeeIsrael Oranges and grapefruitMexico Tomatoes

Comparative advantage largely due to physical capital,Comparative advantage largely due to physical capital,CountryCountry human capital, and scientific knowledgehuman capital, and scientific knowledge

United StatesUnited States Aircraft, computers, industrial chemicals, plastics, & chemicalsAircraft, computers, industrial chemicals, plastics, & chemicalsJapan Automobiles, steel, electronicsGermany Machine tools, scientific instruments, luxury automobilesUnited Kingdom Financial servicesTaiwan TextilesSwitzerland WatchesSouth Korea Ships

DCC DCC for for U.S.U.S. DCC DCC for for BrazilBrazil1 H = __ B 1 H = __ B___H = 1B ___ H = 1B

8. BrazilBrazil has a comparative advantagehas a comparative advantage in (bread/ham) and a comparative disadvantagecomparative disadvantage in (bread/ham).9. The opportunity cost of producing 1 unit of ham opportunity cost of producing 1 unit of ham for thefor the U.S. U.S. is (10/12/14) breads. 10. Acceptable terms of tradeterms of trade might be 1 ham for (8/12/16) breads.

14141/141/14 1/101/10

7070

00 55

4040

4400HamHam HamHam

Bre

ad

Bre

ad

Bre

ad

Bre

ad

Terms of TradeTerms of Trade1 Ham = __ Bread

1010

1212

BrazilBrazilcostscosts costscosts

FuzzyFuzzy A A BB C C D D EE FF DCC: DCC: FuzzyFuzzy WuzzyWuzzy AA B B CC DD EE FF DCCDCC:: Wuzzy WuzzyPlumsPlums 1500 1200 900 600 300 01500 1200 900 600 300 0 1G = __ P PlumsPlums 3500 2500 1500 1000 500 03500 2500 1500 1000 500 0 1G = __ PGrapesGrapes 0 100 0 100 200 300 400 500200 300 400 500 __ G= 1P GrapesGrapes 0 150 300 450 575 7000 150 300 450 575 700__ G = 1P

Terms of TradeTerms of Trade

1 1 Grape = __ PlumsGrape = __ Plums

1/31/3 55

1/51/5 500500 1P1P

CC900900200200

BB25002500 150150

11. In WuzzyWuzzy, the opportunity cost of 1 grapeopportunity cost of 1 grape is (1/2/3/4/5) plums.12. FuzzyFuzzy has a comparative advantagecomparative advantage in & should produce (plums/grapes).13. The terms of tradeterms of trade will be 1 grape1 grape for somewhere between (3&5/2&6) plums.14. Assume that if Fuzzy did not specialize it would produceFuzzy did not specialize it would produce combo “combo “CC”” and ifand if WuzzyWuzzy did not specialize it would produce combo “did not specialize it would produce combo “BB””. The gainsgains from from specializationspecialization and tradeand trade are: (0/100/150) plums and (0/100/150) grapes.

44

331G1G 35003500

The countries of:The countries of:

““Fuzzy”Fuzzy” andand “Wuzzy”“Wuzzy”

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)

FroggyFroggy AA BB CC DD EE DCC: FroggyDCC: Froggy WoggyWoggy AA BB CC DD EE DCC: WoggyDCC: WoggyPorkPork(tons) 4 3 2 1 0 1P = __ B PorkPork(tons) 8 6 4 2 0 1P = __ B BeansBeans(tons) 0 5 10 15 20 __ P = 1B BeansBeans(tons) 0 6 12 18 24 __ P = 1B

Terms of TradeTerms of Trade1 1 Pork Pork == __ __ BeansBeans

15. Production in both countries is subject to (increasing/constant) opportunity costopportunity cost.16. If these 2 nations specialize in accordance with comparative advantagecomparative advantage, FroggyFroggy will produce (pork/beans) & WoggyWoggy will produce (pork/beans).17. In FroggyFroggy, the opportunity cost of 1 pork1 pork is (1/5 or 5 or 3) beans’18. Assume that prior to specialization & trade, Froggy produced combo “C”Froggy produced combo “C” and Woggy produced “B”Woggy produced “B”. If these 2 nations now specialize according to comparativecomparative advantageadvantage, the total gainstotal gains will be (4/2/0) tons of beans & (4/2/0) ton(s) of pork.19. Feasible terms of tradeterms of trade would be (1/6/4) ton of porkpork for (1/6/4) tons of beansbeans.

551/51/5

331/31/3

44

2.5 pork [10x1/4]2.5 pork [10x1/4]

88 beansbeans [2x4] [2x4]

PiggyPiggy AA BB CC DD EE DCC: PiggyDCC: Piggy WiggyWiggy AA BB CC DD EE DCC: WiggyDCC: WiggyFishFish 80 60 40 20 0 1C = __ F FishFish 240 180 120 60 0 1C = __FChipsChips 0 5 10 15 20 __ C = 1F ChipChips 0 10 20 30 40 __ C = 1F

Terms of TradeTerms of Trade

1 Chip = __ Fish1 Chip = __ Fish

20. (Piggy/Wiggy) has an absolute advantage in bothabsolute advantage in both fish &fish & chipschips.21. For WiggyWiggy, the opportunity cost of producing 1 ton of chipsopportunity cost of producing 1 ton of chips is (1/4/6) tons of fish.22. WiggyWiggy shouldshould specializespecialize(export) in (fish/chips) and importimport (fish/chips).

23. Before specialization and trade PiggyPiggy chose combochose combo “C”“C” and Wiggy chose “B”Wiggy chose “B”. After specialization, the gains from tradegains from trade were (20/40/60) tons of fishtons of fish and (0/10/20) tons of chipstons of chips.

441/41/4

661/61/6

55

5050 Fish [10x5] Fish [10x5]

1212 chipschips [60x1/5] [60x1/5]

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)

24. If trade occurs, DoggyDoggy will exportexport (soup/peanuts) and importimport (soup/peanuts).

WoggyWoggy will exportexport (soup/peanuts) and importimport (soup/peanuts). 25. For DoggyDoggy, the opportunity cost of 1 soupopportunity cost of 1 soup is (1/2/3) peanuts. For WoggyWoggy, the opportunity cost of 1 soupopportunity cost of 1 soup is (1/2/3) peanuts.26. Prior to specialization, Doggy & Woggy chose combination “C”Doggy & Woggy chose combination “C”.. Now each specializes according to comparative advantagecomparative advantage. The gainsgains from tradefrom trade will be (0/20/40) units of soupsoup & (0/20/40) units of peanutspeanuts.

DoggyDoggy AA BB CC D D EE DCC: DoggyDCC: Doggy WoggyWoggy A B C D E DCC: WoggyDCC: WoggySoupSoup 60 45 30 15 0 1S = __ P SoupSoup 20 15 10 5 0 1S = __ PPPeanutseanuts 0 15 30 45 60 Peanutsnuts 0 15 30 45 60 __ S = 1P

11 331/31/3

Terms of TradeTerms of Trade 1 1 Soup =Soup = __ __ PeanutsPeanuts22

6060 Peanuts [30x2] Peanuts [30x2]

1515 soups [30x1/2] soups [30x1/2]

27. (Djibouti/Canada) has an absolute advantage in bothabsolute advantage in both commodities.

(Djibouti/Canada) has a comparative advantagecomparative advantage in in producing wheatproducing wheat.28. (Djibouti/Canada) has an absolute disadvantage in bothabsolute disadvantage in both, but a comparative advantage in fishcomparative advantage in fish.29. Advantageous tradeAdvantageous trade can occur between the two when 1 wheat is exchanged1 wheat is exchanged for (1/2.5/3) fish.

Djibouti Djibouti DCCDCC: Djibouti: Djibouti CanadaCanada DCCDCC: : CanadaCanadaFish 10 hours 1W = __F Fish 20 hours 1 W = __ FWheat 20 hours ___ W=1F Wheat 60 hours ___W = 1F

Terms of Trade: Terms of Trade: 1 1 Wheat Wheat == __ __ FishFish

221/21/2

331/3 1/3

22..5 5

We are going togoing to turn inputs into outputsturn inputs into outputs.In 20 hours20 hours, DjiboutiDjibouti can produce an output of 1 wheatoutput of 1 wheat or or 2 fish2 fish.In 60 hours60 hours, CanadaCanada can produce an output of 1 wheat or 3 fishoutput of 1 wheat or 3 fish.

costscosts costscosts

DCC: U.S.DCC: U.S. Russia Russia DCC:DCC: R RussiaussiaCaviar 6 hours 1C = __W Caviar 16 hours 1C = __ WWheat 3 hours __ C = 1W Wheat 4 hours __ C = 1W

30. (Russia/U.S.) has an absolute disadvantageabsolute disadvantage in bothin both commodities commodities. (Russia/U.S.) has a comparative advantage in wheatcomparative advantage in wheat.31. (Russia/U.S) has an absolute advantage in both commoditiesabsolute advantage in both commodities. (Russia/U.S.) has a comparative advantage in caviarcomparative advantage in caviar.31. Advantageous tradeAdvantageous trade can occur between the two nations when 1 caviar is exchanged1 caviar is exchanged for (1/3/5) tons of wheattons of wheat.

[lower # of hours gives absolute advantage]

221/21/2

441/41/4

Terms of TradeTerms of Trade 1 1 Caviar Caviar = __ = __ WheatsWheats33

We are once again turning inputs into outputsturning inputs into outputs.In 6 hours6 hours, the the U.S.A.U.S.A. can produce an outputoutput of of 1 1 caviarcaviar or 2 or 2 wheatswheats.

In 16 16 hourshours, RRussiaussia can produce an outputoutput of of 1 caviar1 caviar or or 4 wheats4 wheats.

And with inputsinputs (hourshours), the smaller numbersmaller number indicates absoluteabsolute advantageadvantage; that country is more efficientmore efficient because it can produce a good absolutelyabsolutely fasterfaster than the otherthan the other with the same inputs.

Absolute Advantage [Absolute Advantage [OutputsOutputs v.v. InputsInputs]

Remember that with outputsoutputs or quantityquantity, the largerlarger numbernumber indicates absolute advantageabsolute advantage; that country can produce absolutelyabsolutely moremore with the same inputs, and is more efficient.

ProductProductMarketMarket

ResourceResourceMarketMarket

22ndnd M Most ost MMissed issed QQuestion On uestion On 95 AP E95 AP Exam [26% correct]xam [26% correct]

Country Food Clothing DuckyDucky 20 hours 20 hours 50 hours50 hours

WuckyWucky 10 hours10 hours 20 hours20 hours

a. DuckyDucky has a comparative advantage in the production of both food and clothing. b. WuckyWucky has a comparative advantage in the production of both food and clothing.c. DuckyDucky has a comparative advantage in food production, & WWuckyucky has a comparative advantage in clothing production.d. DuckyDucky has a comparative advantage in clothing production, & WuckyWucky has a comparative advantage in food production.e. Neither country has a comparative advantage in the

production of either good.CountryCountry FoodFood ClothingClothingDucky 20 hrs 50 hrsDucky 20 hrs 50 hrs 1C = 2.5F; .4C = 1F 1C = 2.5F; .4C = 1FWucky 10 hrs 20 hrs Wucky 10 hrs 20 hrs 1C = 2F; .5C = 1F 1C = 2F; .5C = 1F

Terms of Trade might be 1C = 2.2FTerms of Trade might be 1C = 2.2F

DuckyDucky WuckyWucky

Product MarketProduct Market [outputs][outputs]

CountryCountry GunsGuns ButterButterRabbitRabbit 40 40 unitsunits 120120 units units

WabbitWabbit 20 20 unitsunits 4040 units units

Resource MarketResource Market [inputs] [inputs]

CountryCountry GunsGuns ButterButterRabbitRabbit 4040 hours hours 120120 hours hours

WabbitWabbit 2020 hours hours 4040 hours hours

WWhathat country has ancountry has an absolute absoluteadvantage in advantage in gunsguns??

WWhat country has anhat country has an absolute absoluteadvantage inadvantage in gunsguns??RabbitRabbit WabbitWabbit

Why does Why does RabbitRabbit have an have an absolute advantageabsolute advantage in in gunsguns??

Why does Why does WabbitWabbit have an have an absolute advantageabsolute advantage in in gunsguns??

RabbitRabbit can producecan produce absolutelyabsolutelymore gunsmore guns than than WabbitWabbit [[40 units40 units v. v. 20 units20 units]]

WabbitWabbit can can produce guns produce guns absolutely fasterabsolutely faster thanthan RabbitRabbit [[20 hours20 hours v. v. 40 hours40 hours]]

RabbitRabbit

WWhat country has ahat country has a comparativecomparativeadvantage in advantage in gunsguns??

WWhat country has ahat country has a comparativecomparativeadvantage in advantage in gunsguns??WabbitWabbit RabbitRabbit

WabbitWabbit can produce guns at a lower can produce guns at a loweropportunityopportunity cost cost [[2 butters2 butters v. v. 3 butters3 butters]]

RabbitRabbit can can produce guns at a lowerproduce guns at a loweropportunityopportunity costcost [ [1/3 butter1/3 butter v. v. 1/2 butter1/2 butter]]

RabbitRabbit1 G = 3 B1 G = 3 B11//33 G=1BG=1B

WabbitWabbit1 G = 2 B1 G = 2 B1/21/2 G=1B G=1B

RabbitRabbit1 B = 3 G1 B = 3 G11//33 B=1G B=1G

WabbitWabbit1 B = 2 G1 B = 2 G1/21/2 B=1G B=1GWabbitWabbit RabbitRabbit WabbitWabbit

““Let’s changeLet’s change inputsinputs intointo outputsoutputs.”.”

Terms of Trade: 1G = 2.5 BTerms of Trade: 1G = 2.5 B Terms of Trade: 1B = 2.5 GTerms of Trade: 1B = 2.5 G

OutputOutput v. v. InputInput Comparative Comparative andand Absolute Advantage Absolute Advantage