Topic 12 Trade Agenda Some basic facts about trade Economic basis for trade PPF and trade Absolute and comparative advantage Terms of trade Motivating Questions Why does the US trade with China Why does China trade with the US What are some negative impacts of trade Should we trade all products or just some Aside Concern regarding the impact of trade is not new Free trade one of the greatest blessings which a government can confer on a people is in almost every country unpopular Thomas Babington Macaulay 1824 as cited in Irwin 2002 Trade facts How important is trade to the world economy Trade Facts Economic Basis PPF and trade Absolute Comparative Advantage Terms of Trade Should the U S import goods Yes No Cheaper goods Let s the US focus on producing more valuable goods so GDP is larger May not have access to goods domestically bananas coffee etc Impact on local producers competition Environmental concerns global Increasing unemployment Trade Facts Economic Basis PPF and trade Absolute Comparative Advantage Terms of Trade Which of the following scenarios do you prefer An entrepreneur starts a new business that uses a secret technology to convert wheat and lumber into cheap high quality manufacturing goods without any labour Some domestic producers go out of business Trade Facts Economic Basis PPF and trade Absolute Comparative Advantage An entrepreneur imports high quality manufacturing goods from China in exchange for wheat Domestic producers go out of business resulting in increased unemployment Terms of Trade World s top exporters 2011 2500 US billions 2000 1500 1000 500 0 Country Hong Kong China Ireland Congo Rep Estonia Vietnam Panama Kyrgyzstan Iceland Mongolia Switzerland Korea Rep Sweden Barbados Germany Kazakhstan Poland Norway Moldova Croatia Laos Guinea Morocco Samoa Algeria United Kingdom Canada New Zealand Saint Kitts and Nevis El Salvador France Guatemala Romania India Grenada Sudan Sierra Leone Tajikistan United States Nepal Exports as of GDP 250 200 150 100 50 0 imports Trade Facts Economic Basis PPF and trade Absolute Comparative Advantage exports Terms of Trade Hong Kong China Puerto Rico Slovak Republic Moldova Mauritania Lithuania Belarus Macedonia FYR Fiji Mongolia Saint Lucia Samoa Dominica Latvia Afghanistan Georgia Grenada Gambia Denmark Lebanon Jamaica Switzerland Laos Croatia Kenya Philippines Syria Yemen Rep United Kingdom Mexico Greece Kazakhstan France Turkey Bangladesh Russia Cuba Colombia Brazil Imports as of GDP 250 200 150 100 50 0 imports Trade Facts Economic Basis PPF and trade Absolute Comparative Advantage exports Terms of Trade Imports as of GDP 250 200 150 100 50 0 imports Trade Facts Economic Basis PPF and trade Absolute Comparative Advantage exports Terms of Trade World Trade as of World GDP World Merchandise Trade as of GDP 60 50 40 30 20 10 0 1960 Trade Facts Economic Basis 1965 PPF and trade 1970 1975 Absolute Comparative Advantage 1980 1985 Terms of Trade 1990 1995 2000 2005 Economic Basis of Trade Trade Facts Economic Basis PPF and trade Absolute Comparative Advantage Terms of Trade Would you trade in this scenario Why You Your neighbour Raise cattle No other source of food so you eat beef three times a day and drink milk and water Grows vegetables No other source of food so eats veggies three meals a day and drinks water Trade Facts Economic Basis PPF and trade Absolute Comparative Advantage Terms of Trade Country Trade Reason 1 Uneven distribution of resources between nations Natural resources Human resources Capital resources Trade Facts Economic Basis PPF and trade Absolute Comparative Advantage Terms of Trade Country Trade Reason 2 Production efficiencies Who is more efficient at growing bananas Costa Rica or Norway Note Norway could grow bananas but at a high cost Production requires different technologies or combinations of resources that may be more costly in one country compared to another Trade Facts Economic Basis PPF and trade Absolute Comparative Advantage Terms of Trade Country Trade Reason 3 Which do you prefer a Ferrari or a Corvette Preferences Some people prefer imported goods to similar goods made domestically Trade Facts Economic Basis PPF and trade Absolute Comparative Advantage Terms of Trade PPF and Trade Trade Facts Economic Basis PPF and trade Absolute Comparative Advantage Terms of Trade Consider the following Time per item Items per 8 hours Computers Coffee USA 20 min 10 min Brazil 1 hr 15 min Computers Coffee USA 24 48 Brazil 8 32 This yields the following production possibilities United States A 8 0 B 4 4 C 0 8 Brazil Computers Computers Coffee Coffee Trade Facts Economic Basis PPF and trade Absolute Comparative Advantage Terms of Trade A 8 0 B 4 4 C 0 8 Coffee We can graph the PPF 60 United States 50 Computers 40 Coffee B 4 4 C 0 8 A 8 0 B 4 4 C 0 8 30 Brazil 20 Computers 10 Coffee 0 0 10 20 30 Computer United States Trade Facts A 8 0 Economic Basis PPF and trade Brazil Absolute Comparative Advantage Terms of Trade Questions to Answer 60 50 Coffee 40 30 20 10 0 0 10 20 30 Who is better at producing each good If countries want both goods and no trade occurs where do they produce Assume they specialize and trade Are they better off Computer United States Trade Facts Economic Basis PPF and trade Brazil Absolute Comparative Advantage Terms of Trade Absolute and Comparative Advantage Specializing is good Trade Facts Economic Basis PPF and trade Absolute Comparative Advantage Terms of Trade What would you do You and your friend take the same two classes You each need to submit a final exam in each class Sharing answers is permitted Do you a Work on both exams b Work on one and copy the answers from your friend for the second Trade Facts Economic Basis PPF and trade Absolute Comparative Advantage Terms of Trade Why are so many professional hockey players Canadian 53 3 of NHL players in 2010 2011 Large infrastructure cost for any sport arenas parks coaches etc The more you spend the better the results not necessarily per capita Smaller countries have to specialize Trade Facts Economic Basis PPF and trade Absolute Comparative Advantage Terms of Trade For trade specialization can make everyone better off Why Because the cost of production is how much you have to give up to produce Recall the PPFs discussed earlier United States A 8 0 B 4 4 C 0 8 Brazil A 8 0 B 4 4 C 0 8 Computers 24 12 0 Computers 8 4 0 Coffee 0 24 48 Coffee 0 16 32 Trade Facts Economic Basis PPF and trade Absolute Comparative Advantage Terms of
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