Post on 01-Jan-2016
transcript
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