Senior Cut Day

Why Trade?

Why is Trade Controversial?

Free Trade Theory

Why Nations Trade

Basics of Trade

• Exports: goods/services leave country

• Imports: goods/services enter country

• Trade Surplus: Export more than import

• Trade Deficit: Import more than export

Ways to Limit Trade

• Tariffs– taxes on imports

• Quotas- limits on quantity imported

• Protectionism: Gov’t policy which seeks to limit trade

• Globalization: the “global” movement away from protectionism and towards free trade – Trade without Tariffs & Quotas

– Worldwide movement towards free market capitalism

Introduction to free trade theory example

Betty- types 120 w.p.m. Jim- types 60 w.p.m.

Who should do the typing: Betty or Jim?

Assumption: No errors

Betty & Jim

Additional knowledge:

Betty is a brain surgeon

Jim operates a forkliftat the warehouse of a large store

A handwritten 90-page Master’s Thesis needs to be typed

David Ricardo• In 1816 David Ricardo developed the theory of free trade

based on comparative advantage

• His theory is still the basis of free trade theory today

Ricardo Trade Terms

• Absolute Advantage: when a country can outright produce more of a good than another country

• Comparative Advantage: when a country can produce a good at a lower opportunity cost

1000

500

1000

1000 Wheat

Coffee

Coffee

Wheat

BRAZILMEXICO

Production Possibilities Frontier (PPF):

Any point on the line is efficient Below line is inefficient Above the line is not obtainable in short run

Production Possibilities Frontier (PPF) Curve Review

End Trade Theory Part I

• Review with partner

1000

500

1000

1000 Wheat

Coffee Coffee

Wheat

BRAZIL

MEXICO

Trade Analysis:

1) Build an opportunity cost table2) Determine who has a comparative advantage in each good3) Country will produce only this product 4) Trade will benefit BOTH countries (end up above their own PPF curve)

4-Step Trade Process

1000

500

1000

1000 Wheat

Coffee Coffee

Wheat

BRAZIL MEXICO (gain) (give up/opp. Cost)

1 Coffee = ____ Wheat 1 Coffee = _____ Wheat

1 Wheat = ____ Coffee 1 Wheat = ____ Coffee

Opportunity Cost Table

BRAZIL

MEXICO

1

2

1/2

1

Build Opportunity Cost Table

BRAZIL MEXICO

1 Coffee = ____Wheat 1 Coffee = _____ Wheat

1 Wheat = ____ Coffee 1 Wheat = ____Coffee

1/2

2

1

1

Wheat : BRAZIL has comparative advantage---produce only WHEAT

Coffee : MEXICO has comparative advantage---produce only COFFEE

coffee

wheat

1000

500

1000

1000 Wheat

Coffee

Wheat

BRAZIL

MEXICO

Determining Comparative Advantage

BRAZIL MEXICO

1000

500

1000

1000Wheat

Coffee

Coffee

Wheat

* (500,500)* (250,500)

400 Coffee

300 Wheat

BRAZIL

0 Coffee

1,000 Wheat

1,000 Coffee

0 Wheat

MEXICO

.(700, 400)

.(300, 600)

after trade

after trade

Trade Example:

Theoretical Benefits ofFree Trade

Summary: In Theory

• Countries produce goods where they have a comparative advantage

• Trade is mutually beneficial– End up at a point above their own PPF curve

Review Sheet #6-11

Brazil Mexico Coffee 2000 900 Wheat 2000 300

BRAZIL MEXICO

BRAZIL Mexico (gain) (give up/opp. Cost)

1 Coffee = ____ Wheat 1 Coffee = _____ Wheat

1 Wheat = ____ Coffee 1 Wheat = _____ Coffee

Coffee

Coffee

WheatWheat

2000

2000

900

300

1

1

1/3

3

Brazil Nicaragua Coffee 200 40 Wheat 200 20

BRAZIL NICARAGUA

BRAZIL NICARAGUA (gain) (give up/opp. Cost)

1 Coffee = ____ Wheat 1 Coffee = _____ Wheat

1 Wheat = ____ Coffee 1 Wheat = _____ Coffee

CoffeeCoffee

WheatWheat

200

200

40

20

1

1

½

2

UNITED STATES FRANCE (gain) (give up/opp. Cost)

1 Corn = ____ Wine 1 Corn = _____ Wine

1 Wine = ____ Corn 1 Wine = ____ Corn

U.S. France Corn 1600 300

Wine 800 600

UNITED STATES FRANCE

Corn

Corn

Wine Wine

1600

800 600

300

½

2

2

½

TAIWAN UNITED STATES (gain) (give up/opp. Cost)

1 DVD Player = ____ Comp. Software 1 DVD Player = ____ Comp. Software

1 Comp. Software = ____ DVD Player 1 Comp. Software = ____ DVD Player

Taiwan U.S. DVD players 200 300 Computer software 100 900

TAIWAN UNITED STATES

DVDDVD

Comp.Software Comp.Software

100

200

300

900

½

2

3

1/3