Slide 1U.S. 2013 Net ExportsOVERVIEW / Questions of the DayBeginning StoryProduction Possibility FrontiersAbsolute AdvantageShould You Trade?Your Opportunity CostKim’s Opportunity CostSummary of Opportunity CostsComparative AdvantageTrade RatesTrade Rates: Price of a LobsterTrade Rates: Price of a CoconutPropose a TradeWhere do we end up after trade?Production Possibility FrontiersBIG IDEA(S) IN ECONOMICS!!!!Trade and Adam Smith19.2 world trade and the u.s.Slide 21II. How Globalized is the World: Goods/ServicesII. Real Growth in World Trade vs. World GDPII. Globalization: Benefits & CriticismsII. Globalization: Benefits & CriticismsII. Top 10 World Exporters, 2013II. Top 10 World Importers, 2013II. Who does the U.S. trade with?II. What Do We Sell?II. What Do We Buy?II. U.S. Concerns with Free TradeII. 2012 Net Exports, Selected CountriesKey Terms and ConceptsPractice…MICRO TOPIC:GAINS FROM TRADEAbsolute and Comparative AdvantageU.S. 2013 Net ExportsAircraft/Spacecraft Wheat Raw Cotton T-shirts Computers Crude Oil $(300.00) $(250.00) $(200.00) $(150.00) $(100.00) $(50.00) $- $50.00 $100.00 $150.00 Source: International Trade Centre; Trade Map – Trade Competitiveness MapOVERVIEW / Questions of the Day•Why do individuals and countries trade?•Why don’t we produce everything ourselves?•Why does the U.S. sell aircraft and buy shoes?1. Trade allows us to 2. Trade allows for•Are we always better off by trading? •Does it depend on our trading partner?•Can you be better off by not trading?Beginning Story•Oh no! You and Kim Kardashian are shipwrecked on an island•Only lobster and coconuts to eat•Suppose that in a typical week:•You can catch 10 lobsters or gather 30 coconuts or some combination•Kim can catch 4 lobsters or gather 20 coconuts or some combination•Should you work with Kim to help each other survive?•Or will she bring you down and you both slowly starve to death?LobstersCoconutsKim: can catch either 2 lobsters or gather 10 coconuts (or some combination)LobstersCoconutsYou: can catch either 5 lobsters or gather 15 coconuts (or some combination)Production Possibility FrontiersAbsolute Advantage•When a person (country) is more •A comparison of •You have the absolute advantage in•You can •10 •You have the absolute advantage in •You can gather more •30 to her 20•Kim K has the absolute advantage inShould You Trade?•Should you trade with Kim K?•On the surface, •On the surface, Kim K seems basically worthless•Let’s frame the situation in a different way•How much does 1 lobster cost you to catch?•How much does 1 lobster cost Kim to catch?•How much does 1 coconut cost you to gather?•How much does 1 coconut cost Kim to gather?Your Opportunity Cost•What is the slope of your PPF?•Answer: •What does that mean?•Answer: it means that In the amount of time it takes you to catch a lobster, you could haveLobsters3010CoconutsSlope =Kim’s Opportunity Cost•What is the slope of Kim’s PPF?•Answer: •What does that mean?•Answer: it means that every lobster In the amount of time it takes Kim to catch a lobster, she could haveLobsters420CoconutsSummary of Opportunity CostsKim1 lobster costs 1 coconut costs You1 lobster costs 1 coconut costsComparative Advantage•When one person (or country) can produce a good at •A comparison of •You have the comparative advantage in•You lose fewer•Kim has the comparative advantage in•She loses fewerTrade Rates•Let you catch lobster and Kim gather coconuts•Trade with each other at the end of the week•But how many lobsters for how many coconuts?•How many lobsters should you give Kim and how many coconuts should she give you?•Goal:Trade Rates: Price of a LobsterYou have the comparative advantage in lobsters1 Lobster cost you1 lobster costs Kim You want to Kim wants to •To make yourself better off, you need to charge •To make herself better off, Kim wants to pay Therefore, 1 lobster should trade forTrade Rates: Price of a CoconutKim has the comparative advantage in coconuts1 coconut costs Kim 1 coconut costs you Kim wants to You wants to •To make herself better off, Kim needs to•To make yourself better off, you want to Therefore, 1 coconut should trade forPropose a Trade1 lobster for 3 ___ 5 coconutsHow about 1 lobster for _____coconuts?When we get one side, we just How about 1 coconut for 1/5 ___ 1/3 lobstersHow about 1 coconut for _____ lobsters? This will always satisfy both bounds - mathematically it has toHow aboutWhere do we end up after trade?Before TradeYou: 10 lobsters0 coconutsKim: 0 lobsters20 coconutsAfter TradeYou: Kim: You spend the week catching lobsters; Kim gathers coconutsLobsters420CoconutsLobsters3010CoconutsProduction Possibility FrontiersBefore tradeBefore tradeKimYouBIG IDEA(S) IN ECONOMICS!!!!•Trade depends on •Trade rate depends on the opportunity costs•In order to help both parties, the rate must •Trade means more of all goods because of•this means we •thus making the most possible with our available resourcesTrade and Adam Smith“It is maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy...What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it off them with some part of the produce of our own industry employed in a way in which we have some advantage.” Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations19.2 WORLD TRADE AND THE U.S.How ‘Globalized’ is the World today?22II. How Globalized is the World: Goods/Services1980 1985 1990 1995 2000 2005 2010 2015 $- $5,000 $10,000 $15,000 $20,000 $25,000 Source: World Trade Organization; Statistics Database; numbers in billions; nominalServices ExportsGoods ExportsTotal ExportsII. Real Growth in World Trade vs. World GDP19801985199019952000200520102015100200300400500600700Indexed Growth in World Trade and Output World ProductionWorld TradeYearly Percentage GrowthSource: World Bank; World Development IndicatorsAverage growth: 3%Average growth: 7.5%23All numbers based on 2005 US $’sII. Globalization: Benefits & Criticisms Benefits of Globalization PeopleConsumers have FDI creates jobs in both rich and poor countries (‘rungs of the economic ladder’) FirmsAccess to better