Why People Trade, Why People Trade, Domestically and Domestically and InternationallyInternationallyFocus: GlobalizationLesson Two

ConceptsConceptsAbsolute advantageComparative advantageOpportunity costProduction possibilities table

Content StandardsContent Standards• Voluntary exchange occurs only when

all participating parties expect to gain. This is true for trade among individuals or organizations within a nation, and among individuals or organizations in different nations.

• When individuals, regions, and nations specialize in what they can product at the lowest cost and then trade with others, both production and consumption increase.

BenchmarksBenchmarksPeople voluntarily exchange goods and

services because they expect to be better off.

Voluntary exchange gives people a wider range of choices.

International trade promotes specialization and division of labor.

Individuals and nations have a comparative advantage in the production of goods or services if they can produce a product at a lower opportunity cost than other individuals and nations.

TradeTradeWhat have you traded?Why did you trade?

Explain that we will now participate in a trading activity.

Divide students into groups of 10.

Trading ActivityTrading ActivityDistribute bags with colored stickers.Have students group according to stickers.Rate satisfaction or utility from 0 to 5

(high).Explain that they get to keep or trade the

item with someone in their group.Calculate group satisfaction.Conduct one more trading round with

anyone in the class.Again calculate group utility and # of

trades.

Visual 1: UtilityVisual 1: Utility

Number of Trades Utility

Before Trading 0After trade within group

After international trade

Trade DiscussionTrade Discussion

Did more people trade in Round 1 or Round 2?

Were you required to trade?Number of items to trade was the

same. Why were people happier?Why did you trade?Should people and businesses in U.S.

trade with other countries?To answer this question, we’ll look at

production in two countries

Comparative AdvantageComparative AdvantageOccurs when people or firms

specialize in the production of a good or service for which they have a lower opportunity cost

Opportunity cost – highest valued alternative that is given up when a choice is made

Pass out Visual 3: Have students work through the questions.

Nino’s Pizza Shop (from Nino’s Pizza Shop (from visual 3)visual 3)

A. Nino’s opp cost of producing 9 pizzas is 36 salads –

B. Tony’s opp cost of producing 6 pizzas is 12 salads –

C. Nino’s opp cost of 36 salads is 9 pizzas –

D. Tony’s 12 salads is 6 pizzas –

of 1 pizza is 4 salads.1 pizza is 2 salads.

1 salad is ¼ pizza.

1 salad is ½ pizza.

Nino’s Pizza Shop Cont.Nino’s Pizza Shop Cont.E. Who has lowest opp cost for

making pizza?F. Who has the lowest opp cost for

making salad? G. Who has the comp adv in pizzas?

In salad?H. How does specialization affect

the running of the pizza shop?

Tony

Nino

NinoTony

Country Comp AdvCountry Comp AdvCountry A & Country B – 2 sides of

board – six volunteers for each – distribute production cards

In one day each worker in country A can produce 8 cell phones OR 4 microwave ovens

Show all cell phones and all ovensHave one student flip from phones

to ovens – record on the table – continue until 0 phones

Production Possibilities Production Possibilities (Visual 4)(Visual 4)

Country A A B C D E F G

# cell phones

# of ovens

Country B A B C D E F G

# cell phones

# of ovens

Discussion – A ProductionDiscussion – A Production

1. How does # of phones change as more ovens are produced?

2. How does the # of ovens change as more cell phones are produced?

3. What does overall chart show?4. This is called production

possibilities table.5. Why is there a trade off in

producing more of either good?

Country B - ProductionCountry B - ProductionSix volunteers to stand by

Country BIn one day each worker in country

B can produce 1 cell phone OR 2 microwave ovens

Show all cell phones and all ovensHave one student flip from

phones to ovens – record on the table – continue until 0 phones

Production PossibilitiesProduction Possibilities

Country A A B C D E F G

# cell phones

48 40 32 24 16 8 0

# of ovens 0 4 8 12 16 20 24

Country B A B C D E F G

# cell phones

0 1 2 3 4 5 6

# of ovens 12 10 8 6 4 2 0

Country B Production Country B Production DiscussionDiscussion

1. What does the production possibilities table show you about making cell phones and microwave ovens in Country B?

2. Why does this occur?3. If each country produces cell phones,

which country can produce more?4. If each country produces ovens, which

country can produce more?5. Country A had an absolute advantage in

the production of both goods.

TradeTradeShould Country A trade cell

phones or microwaves with Country B since they have an absolute advantage?

To determine, we must calculate the opportunity cost of each.

Distribute Visual 4 to each student. Work in pairs to complete.

Opportunity Cost – A Opportunity Cost – A (Visual 4 (Visual 4 part A)part A)

Country A1.OC of 8 cell phones?2.OC of 1 cell phone?3.OC of 4 microwaves?4.OC of 1 microwave?

Opportunity Cost B - Opportunity Cost B - (Visual 4 (Visual 4 part B)part B)

Country B1.OC of 1 cell phone?2.OC of 2 microwaves?3.OC of 1 microwave?4.Which country has the lowest

opportunity cost of producing cell phones?

5.Microwaves?

Total ProductionTotal Production

Country A A B C D E F G

# cell phones

48 40 32 24 16 8 0

# of ovens 0 4 8 12 16 20 24

Country B A B C D E F G

# cell phones

0 1 2 3 4 5 6

# of ovens 12 10 8 6 4 2 0

Before trade, Country A was producing at B combination and Country B at D.•What is total production of cell phones?•Of microwave ovens?

Total Production Total Production DiscussionDiscussion

1. If Country A produces all phones, how many more will be produced?

2. How many ovens will be given up?3. Country B puts all workers into production

of ovens, how many will be produced?4. How many lost?5. What would be the total output of cell

phones with specialization?6. Of microwave ovens?7. What were the affects of specialization

and trade?

Disadvantages of TradeDisadvantages of TradeCountries are more interdependentRely on others to produce what we

consumeWars and trade barriers can

interrupt tradeNot trading means paying higher

opportunity costs and decreasing overall level of production and consumption --- living standards will fall.

ClosureClosureWhy do individuals and nations

trade?How does overall satisfaction

levels change?How does specialization affect

production and consumption?What is absolute advantage?What is comparative advantage?