International trade

Trade opener1. Where was your shirt made?

(Have your neighbor check)2. What type of labor makes t shirts?

3. What type of labor designs cellphones?

Comparative Advantage Activity

Absolute Advantage

Whoever can do the job the fastest

• Total hours to finish jobs

Comparative Advantage

Whoever can do the job with the lowest opportunity cost

Another way of looking at Comparative Advantage

• Should Jason Terry clean his own house?

Another way of looking at Comparative Advantage

• Should Lebron James clean his house?

Specialization of labor• Firms &

countries figure out more efficient methods of production

• Effect on concept of trade?

Honduras

• 100 tons of sugar/year

OR

• 100 tons of bananas

Cuba

• 600 tons of sugar/year

OR

• 200 tons of bananas

Cuba & Honduras• Scarcity of farm

land

• Who has absolute advantage?

• Who has the comparative advantage of trade?

• Why is this better?

Cuba:

600 tons of sugar/yearOR200 tons of bananas

Honduras:

100 tons of sugar/yearOR100 tons of bananas

Who has comparative advantage: T shirts, financial, medical services,

entertainment, shoes

• Land, labor and capital in Honduras• GDP per capita: $2,200 / Population: 8 million• Literacy rate: 85%, 2 universities

• Land, labor and capital in USA• GDP per capita: $48,000 / Population: 300 million• Literacy rate: 90%, 800+ universities

Trade• Free trade = absence of

restrictions of goods/services

• List 3 winners & 3 losers if all countries had free trade

• Winners:

• Losers:

Benefits of FREE TRADE• Lower prices for consumers

• More competition leading to better products

• Job opportunities for producers

• Job opportunities in buyer countries

• Opportunity costs?

Source: World Bank

Drawbacks of FREE TRADE• Structural unemployment

• Lower union membership

• Ethical problems

Free Trade Assignment

• Letter to John McCain

• 2-3 paragraphs considering:

Should the US expand its free trade zone to include all of the Western Hemisphere? Consider both sides, but choose the better one.

Bellringer1. When they were for sale,

how often did you buy Twinkies?

2. Draw a supply/demand graph showing your answer to #1, comparing a time when you were younger? (HINT: TRIBE)

3. What 2 goods does a poor country like Guatemala have a comparative advantage producing?

Types barriers to FREE TRADE• Tariffs• Tax on imports• Result: higher price for consumers, job saving

– Opportunity cost

• Quotas• Limit on imports• Result: high prices, less choice• Examples: Japanese full sized trucks• Lexus, Infinity, etc

Types barriers to FREE TRADE

• Embargos

• Banning imports

• Result: less exports for embargoed country

• Subsidies

• Gov’t help for industries

• Result: higher taxes locally, other countries retaliate

Twinkie article• What really killed the twinkie?

• How would this be a problem in the future for the US?

• Who is benefiting from this situation?

• Who is suffering?

• What should the US congress do about it?

Other crazy import tariffs

• Japan: 700% tax on rice

• European Union: orange juice (31%), peanut butter (132%), and tobacco products (350%)

• South Korea: 100% automobiles

• Canada: 28% leather shoes

• United States: 249 % solar panels, Waterproof shoes with a metal toe cap 37.5 %

• Brazil: 60% tablet computers

Let’s consider some systems• EU, WTO, Trading blocs, NAFTA

NAFTA

• 1994-present

• US, Canada, Mexico

• Eliminated thousands

of tariffs

• Expanded to CAFTA in 2005

G-8 Developing World

• USA

• Italy

• Canada

• Russia

• Japan

• Germany

• France

• Great Britain

• All fought WW2

• All in IMF

• Countries still developing

• “Third World”

• Some successful:– China, India, Costa

Rica

• Some failing:– Haiti, Zimbabwe,

Myramar

European Union

• 1954- Present• Free movement

of goods, services and people

• Euro-zone

• Contrast with US/Latin Am.

World Trade Organization

• 1995-present

• 152 countries

• Goal = Global free trade

• Closely related to IMF

• controversial

Free Trade Assignment

• Letter to John McCain

• 2-3 paragraphs considering:

Should the US expand its free trade zone to include all of the Western Hemisphere? Consider both sides, but choose the better one.

Tires

• 2 producers:

• 3 groups of consumers

• Sellers decide price and give pitch• Buyers decide which tires to buy

Save American Jobs Bill20% tariff on all foreign goods

Trade Balance• Value of exports > value of imports• Trade Surplus• Net Exporter• Germany, China, Canada, Norway

• Value of imports > value of exports• Trade Deficit• Net importer• USA, Mexico, Japan,

Balance of payments• Measure of trade between a country and the rest

of the world• Current Account:• Trade, income, transfers• $$$ out, must come back

• Capital Account• Financial Account• Investments

• Foreign Reserves• Draw on board