Gains From Trade

Gains From TradeHow does trade make people better off?Imagine that you are the manager of a fast-food restaurant. You are outgoing, interact well with customers, and work the cash register proficiently. You are also efficient in the kitchen and can manage several tasks at once, such as making pizzas, preparing salads, and filling drinks. Preview

You have one employee who is slow in the kitchen and often struggles to cook while filling drink orders. Your employee works the cash register well but interacts little with the customers.

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What is your opportunity cost if you work the cash register?

What is your opportunity cost if you work in the kitchen?PreviewBased on your opportunity costs, describe where you will work and where you will place your employee. Explain your rationale.

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Specialization is defined as the development of skills or knowledge in one aspect of a job or field of interest. People who specialize become expert in a particular activity.

When societies specialize, the create a division of labor in which critical tasks are undertaken by different individuals. The result is a much more productive society than one in which everyone is self-sufficient.SpecializationImagine a society in which everyone is able to perform every necessary task for survival well enough to survive.

Whats good about this arrangement?

Whats not so good?Specialization

What is trade?It is a voluntary exchange that two or more parties engage in, when they find they have a coincidence of wants a fancy way of saying that they all have something that each other desires.How do people trade?The simplest form of trade is barter. What is bartering, and why is this not always the best way to trade?Money is a better option, because it serves as a medium of exchange something can be used to trade for goods/services universally. Money is critical for market economies.Specialization and TradeWhy does specialization encourage trade?Trade creates economic interdependence, in which people rely on others for most of the goods and services they want.When you specialize, you limit yourself. This means you now depend on others to do things that you cannot do because of this limitation.Specialization and Trade

Why is trading a better option?

TurnipsClams10 per hour

10 per hour40 per day

40 per day30 per hour

15 per hour120 per day

60 per dayAbsolute Advantage

TurnipsClams10 per hour

10 per hour40 per day

40 per day30 per hour

15 per hour120 per day

60 per dayAbsolute Advantage

Why would He-Man bother trading with Skeletor?absolute advantage: the time and labor required for you to produce something is less than it is for another producer (you are more productive, overall)

comparative advantage: the ability to perform a task at a lower opportunity cost than someone else is able to perform that same taskComparative AdvantageHe-Man and Skeletor would still benefit from trading, even though He-Man has an absolute advantage, because each has a different comparative advantage.

Lets explore this conceptComparative Advantage

Bill GatesFounder of Microsoft.

Made his fortune writing software, including Microsoft Windows and other widely-used programs.

So wealthy, it would cost him more money to stop and pick up a $50 bill than to simply keep going about his regular job.

Justin BieberRetired singer.

Made his fortune crooning pre-adolescent girls out of their iTunes money.

Now spends his time getting into trouble with the law, collecting royalties from his songs.Bill Gates has a strong work ethic and holds an absolute advantage in productivity.

Should this mean, then, that Bill Gates should mow his own lawn?

What would Bill Gates be giving up to take the time to mow his own lawn? (What would be his opportunity cost? )The Scenario

The ScenarioBill Gates would be better off hiring Justin Bieber to mow his lawn and going to work instead. He would make much more money.

Justin would be better off mowing Bills lawn, since his opportunity cost getting arrested for driving under the influence of weed (or just plain wasting time) is smaller. Plus, hed earn like $10, and get some sunshine and exercise.

What does it cost to go alone?Cost of One TurnipCost of One Clam1 clam

1 turnip clam

2 turnipsCalculating Comparative Adv.

WithoutSpecialization & TradeWithSpecialization & TradeGainsT

CProductionConsumptionProductionConsumption20

20025+520

204023+3T

C90

9012095+515

15017+2Gains With Trade!

Comparative advantage applies to nations as well as individuals. When nations specialize in producing what they have a comparative advantage for, and then trade, society usually benefits.Some factors are fairly obvious, i.e. climate and natural resources.Florida excels at orange production because of the warm, humid weather.Saudi Arabia excels in oil production because it has vast oil reserves.Comparative AdvantageOther factors, like education, wage levels, and technology, also play a role.The United States has a highly educated and highly skilled workforce, giving it a comparative advantage in developing advanced technologies like computer systems.Less developed nations have a comparative advantage in the production of simpler goods like clothing that do not require skilled labor.Comparative AdvantageTrade moves goods to people who value them. Doing so increases their value.You have a new ball cap that does not fit you.Your friend has a soccer ball they dont use.You want the ball, she wants the hat.You trade and both end up with something you want. In essence, you are both wealthier.Remember wealth is more than just money. It is whatever people value!Trade Makes Us Wealthier!Trade increases the quantity and variety of goods available.

Trade Makes Us Wealthier!

Trade lowers the cost of goods.First, by opening up markets to less costly goods from other places.Second, by expanding markets for products. This allows producers to take greater advantage of mass production buying supplies and producing things on a large scale can often be done more cheaply than on a small scale.

Trade Makes Us Wealthier!

Trade Makes Us Wealthier!Not everyone gains from expanding global trade.Cheap imports can take business away from American producers and even force some out of business.This can lead to American workers losing their jobs.This especially impacts places that depend more heavily on manufacturing (historically, Mansfield!)More Winners Than Losers

Economists point out that as the economy changes, old jobs may be lost, but new ones are created.

More Winners Than Losers

Free TradeIn theory, completely free trade (in which national governments do not interfere whatsoever with trade between nations), should make people better off.We have already seen, though, how free trade can hurt the economies of certain parts of the country - at least in the short run.Are there any other drawbacks?In theory, the United States should go all-in on industries they have a comparative advantage for (high-tech, high-skill production and service jobs) and leave simpler tasks to less-developed countries who hold a comparative advantage in those.What exceptions might there be?Free TradeA strategic industry is an industry that a government considers to be very important for the countrys economy or safety.

Strategic Industries

Strategic IndustriesWhy might it not be in the best interest of our national security to completely turn over things like food or energy production to less developed countries, even though they might hold a comparative advantage in it?Strategic IndustriesBy the time of Augustus, North Africa and Egypt were supplying most of the grain that the empire consumed, with farms in Italy selling only a marginal amount. In other words, instead of a fertile citizen population tilling the fields and sustaining the state locally, the Romans outsourced their agricultural production to feed their cities across the Mediterranean.The Roman ExampleThe consequences for the later empire could not be any more grave[T]he Vandals would continue moving to North Africa, and eventually took over Carthage, ending the supply of grain being shipped to Rome. This meant functionally that the city could scarcely feed itself- Ryan Grant, The Distributist ReviewThe Roman Example

No Oil for Infidels!