International TradeInternational Trade

Scenario 1Scenario 1

You are starting a bakery with a partnerYou are starting a bakery with a partner It takes you 1 hour to make 80 muffins and It takes you 1 hour to make 80 muffins and

1 hour to make 20 cookies1 hour to make 20 cookies Your partner takes 1 hour to make 20 Your partner takes 1 hour to make 20

muffins and 1 hour to make 80 cookiesmuffins and 1 hour to make 80 cookies

Absolute AdvantageAbsolute Advantage

Ability of a particular person or a country Ability of a particular person or a country to produce a particular good with fewer to produce a particular good with fewer resources than another person or countryresources than another person or country

Ability of a particular person or country to Ability of a particular person or country to produce more goods given the same produce more goods given the same resourcesresources

Absolute AdvantageAbsolute Advantage

MuffinsMuffins CookiesCookies

YouYou

(2hrs)(2hrs)

80 units80 units

(1 hr)(1 hr)

20 units20 units

(1 hr)(1 hr)

Your Your partnerpartner

(2 hrs)(2 hrs)

20 units20 units

(1 hr)(1 hr)

80 units 80 units

(1 hr)(1 hr)

Total Output: 200 Units

Absolute AdvantageAbsolute Advantage

Total Output: 320 units

MuffinsMuffins CookiesCookies

YouYou

(2hrs)(2hrs)

160 units160 units

(2hrs)(2hrs)

00

Your Your partnerpartner

(2 hrs)(2 hrs)

160 units160 units

(2hrs)(2hrs)

Scenario 2Scenario 2

It takes you 2 hours to write up the whole It takes you 2 hours to write up the whole section on Obama’s stimulus plan and 2 section on Obama’s stimulus plan and 2 hours to write up on the whole section hours to write up on the whole section on1929 New Dealon1929 New Deal

It takes your partner 3 hour to write up on It takes your partner 3 hour to write up on Obama’s stimulus plan and 2.5 hours to Obama’s stimulus plan and 2.5 hours to write up on the 1929 New Dealwrite up on the 1929 New Deal

Comparative AdvantageComparative Advantage

ability to produce a particular good at a ability to produce a particular good at a lower opportunity cost lower opportunity cost

The producer who gives up less of other The producer who gives up less of other goods to produce good X has the smaller goods to produce good X has the smaller opportunity cost ; thus, he is said to have a opportunity cost ; thus, he is said to have a comparative advantage comparative advantage

If someone is able and willing to provide If someone is able and willing to provide you with a product at a lower cost than you you with a product at a lower cost than you can provide for yourself, it make sense to can provide for yourself, it make sense to trade for ittrade for it

Comparative AdvantageComparative Advantage

Given up/GainGiven up/Gain

Comparative AdvantageComparative Advantage

CountryCountry Obama Obama StimulusStimulus

1929 New Deal1929 New Deal

YouYou

Your Your partnerpartner

Choose the one with the smaller number

Comparative AdvantageComparative Advantage

CountryCountry Obama Obama StimulusStimulus

1929 New Deal1929 New Deal

YouYou 2/2 = 12/2 = 1 2/2 = 12/2 = 1

Your Your partnerpartner

3/2.5= 1.23/2.5= 1.2 2.5/3 = 0.832.5/3 = 0.83

Choosing the one with the smaller number. Your partnerShould work on the New Deal and you should work on Obama

Another Scenario: Comparative Another Scenario: Comparative AdvantageAdvantage

CountryCountry ChairsChairs TablesTables

Country ACountry A

(In one day)(In one day)

200 units200 units 200 units200 units

Country BCountry B

(In one day)(In one day)

30 units30 units 90 units90 units

Total Output: 230 Units 290 Units = 520 units

Comparative AdvantageComparative Advantage

CountryCountry ChairsChairs TablesTables

Country ACountry A

(In one day)(In one day)

200/200 = 1200/200 = 1 200/200 = 1200/200 = 1

Country BCountry B

(In one day)(In one day)

90/30 = 390/30 = 3 30/90 = 0.3330/90 = 0.33

Comparative AdvantageComparative Advantage

CountryCountry ChairsChairs TablesTables

Country ACountry A

(In one day)(In one day)

400 units400 units 0 units0 units

Country BCountry B

(In one day)(In one day)

0 units0 units 180 units180 units

Total Output: 400 Units 180 Units = 580 units

Reason For TradeReason For Trade

Production requires the use of resources Production requires the use of resources are either not available or too costly to are either not available or too costly to produce in one’s own countryproduce in one’s own country

Reason For TradeReason For Trade

For example: For example: Ghana can produce bananas more cheaplyGhana can produce bananas more cheaply Germany can produce cars more cheaplyGermany can produce cars more cheaply It’s possible, but very expensive, for Ghana to It’s possible, but very expensive, for Ghana to

produce cars and Germany to produce produce cars and Germany to produce bananasbananas

So:So: Germany should buy bananas from Germany should buy bananas from Ghana and Ghana should buy cars from Ghana and Ghana should buy cars from GermanyGermany

Reason For TradeReason For Trade

Specialization of production of goods = Specialization of production of goods = More efficient production of goodsMore efficient production of goods

Three main factors determine what Three main factors determine what products a country exports and importsproducts a country exports and imports resourcesresources market sizemarket size climateclimate

Economic GrowthEconomic Growth

Occurs when the production of goods and Occurs when the production of goods and services increasesservices increases

Increasing export is one way to enhance a Increasing export is one way to enhance a country’s balance of trade and balance of country’s balance of trade and balance of payments and therefore, GDPpayments and therefore, GDP