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Why Do People Trade? Capstone Lesson 44. Class Ranking of Tradable Items Total Points Round 1 Round...
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Transcript of Why Do People Trade? Capstone Lesson 44. Class Ranking of Tradable Items Total Points Round 1 Round...
Voluntary Trade
• Benefits both parties• Win-Win• Consider simple daily
examples• Consider city, state or
nation without trade
What are these people about to say to each other?
Absolute and Comparative Advantage
• Comparative Advantage: The comparison of the production of goods according to their opportunity cost.• Absolute Advantage: The comparison of the production of goods according to their productivity.
• Examples: U.S. and Mexico; Babe Ruth hitting and pitching
To Trade or Not to Trade?
• If you have an absolute advantage in everything would you still benefit from trade?
– Yes– Babe Ruth had a
comparative advantage as a hitter—opportunity cost of pitching is too high.
– Specialize where you have a comparative advantage—both parties better off (more wealth)
LeBron James and Scotty
• LeBron James is a great basketball player and a great lawn mower.• James could mow his lawn in 2 hours. •He could also film a Nike commercial in that time making $10,000 – opportunity cost of mowing yard.• His nieghbor Scotty can mow James’ lawn in 4 hours.•He could also work at McDonald’s and earn $32 – opportunity cost of mowing yard.
LeBron James and Scott
• James is better than Scotty at mowing grass—he has an absolute advantage.• Scotty has a comparative advantage mowing grass.• Would James still benefit from trade? Would Scotty?• Yes, as long as James pays Scotty more than $32 and less than $10,000 they are both better off (wealthier) than if this trade did not occur.
Other Applications
• People (countries) should specialize in what they are good at and trade for other stuff:
– Why don’t we grow our own food? Or build our own homes?
– Why do we use assembly lines?
– I don’t teach economics, biology, and history.
– Josh Freeman and Aaron Rogers don’t play every position on the field.
North American Free Trade Association
• Trading Members: Canada, Mexico, USA
• Purposes:– Reduce trade barriers– Increase economic activity
in North America– Improve the standard of
living of member nations