Specialization in              Production               doing what we do           “most best” or “least worst”03/14/13   ...
03/14/13           Unit 6 Specialization in Production               2  Economic Independence. Is it worth it?            ...
If voluntary exchange            benefits both traders             domestically, is the               same thing true     ...
Who should produce what?    The Law of Comparative Advantage           • The softball (athletic) team example           • ...
Two Comparative Advantages                          Hours to Make                       Hours to Mow and                  ...
Who Gains What?                                              Cabinet Maker        TeenagerTime to make cabinet            ...
Who Gains What?                                             Cabinet Maker         TeenagerTime to make cabinet            ...
Who Gains What?                                              Cabinet Maker        TeenagerTime to make cabinet            ...
Both Parties Gain from Specialization in       Production and Exchange      the cabinet maker                             ...
The Law of           Comparative Advantage     In exchange between two parties, even      if one party is better at both ...
The Law of           Comparative Advantage   The kid mowing my lawn does a lousy job. I believe I    could do much better...
What should we (as Rational Economic Actors) focus on achieving?03/14/13                Unit 6 Specialization in Productio...
Should we focus on achieving?                      Buy Californian03/14/13                     Unit 6 Specialization in Pr...
Should we focus on achieving?                      Buy Los Angeles!03/14/13                     Unit 6 Specialization in P...
Remember           Self sufficiency is expensive!03/14/13            Unit 6 Specialization in Production   15
International Economic Cooperation   Q. Is it Good or Bad for America?                                                    ...
Free Trade                                              (for the Consumers)   wider range of alternatives   lower price...
Free Trade (for the Workers)   Helps some workers (producers),    hurts others   therefore NAFTA and other trade    agre...
The Question             How do we gain trade’s           advantages while dealing with             trade’s disadvantages?...
The U.S. will export       capital intensive and       knowledge intensive     products while importing     labor intensiv...
Q. How Will You Make       Yourself Scarce in the       Global Economy of the           21 Century?              st03/14/1...
The Cheap Labor Fallacy Where to Locate Your Factory?                         Country A                    Country B      ...
The Cheap Labor Fallacy Where to Locate Your Factory?                         Country A                    Country B      ...
Main Points   People can get more from scarce resources if they    specialize in those activities in which they have a   ...
Main Points          International trade probably creates           more jobs than it destroys but at           the same ...
Which is the strong dollar?   A. $1.00 = 100Y per $1.00   B. $1.00 = 200Y per $1.0003/14/13           Unit 6 Specializat...
WHY DO WE CARE? re: IMPORTS    JAPANESE PRODUCT COSTS 100Y    CALCULATING THE PRICE IN U.S.A.   50    Y = $1.00; Price o...
WHY DO WE CARE? IMPORTS    JAPANESE PRODUCT COSTS 100Y   PRICE IN U.S. IS:      A. @ 50Y = $1.00; Price of Product in $ ...
WHY DO WE CARE? Re: EXPORTS   if a U.S. PRODUCT COSTS $50   the PRICE IN JAPAN would be    A. @ 50Y = $1.00; Price of Pr...
WHY DO WE CARE? EXPORTS      if the U.S. PRODUCT COSTS $50      the PRICE IN JAPAN would be   A. @ 50Y = $1; Price of pr...
The Big Ideas   Self-sufficiency is expensive   For the U. S. engaging in free trade     • improves the world’s economic...
The Big Ideas     It is not the wage but the relation of the wage to      labor productivity affecting the plant’s locati...
note (a): CURRENCY FLUCTUATIONS   A currency has value, or worth, in relation    to other currencies, and those values   ...
note (b): CURRENCY FLUCTUATIONS   For example: part two, just the opposite    will happen if the country suffers an    ec...
CURENCY FLUCTUATIONS: example(a)@START: the “same” widget costs $1 inthe USA and Y100 in Japan.             $1.00 = Y100TH...
CURENCY FLUCTUATIONS: example(b)Now the widget still costs Y100 in Japanbut an American needs to spend $0.80 tobuy the Jap...
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  • Mpp#006+production.considerations.(36)

    1. 1. Specialization in Production doing what we do “most best” or “least worst”03/14/13 Unit 6 Specialization in Production 1
    2. 2. 03/14/13 Unit 6 Specialization in Production 2 Economic Independence. Is it worth it? EASILY @ GREATER COULD NOT OR LOWER COST EDUCATION CHICKENS BANANAS STEREOS LEVIS CARS COMPUTERS HOUSES TELEVISIONS COFFEE
    3. 3. If voluntary exchange benefits both traders domestically, is the same thing true internationally?03/14/13 Unit 6 Specialization in Production 3
    4. 4. Who should produce what? The Law of Comparative Advantage • The softball (athletic) team example • Through specialization and exchange, both parties can gain from lower costs and greater output03/14/13 Unit 6 Specialization in Production 4
    5. 5. Two Comparative Advantages Hours to Make Hours to Mow and Cabinet Rake YardCabinet Maker 3 2Teenager 20 3Cabinet Maker 3/20 = .15 2/3 = .67advantage overteenagerTeenager disadvantage 20/3 = 8.67 3/2 = 1.5 03/14/13 Unit 6 Specialization in Production 5
    6. 6. Who Gains What? Cabinet Maker TeenagerTime to make cabinet 20 hoursHourly pay $10Cost to make cabinetCost to buy cabinetSaving by buying cabinetTime to do yard work 2 hoursHourly pay $50Cost to do yard workCost to hire yard workSaving by hiring yard work 03/14/13 Unit 6 Specialization in Production 6
    7. 7. Who Gains What? Cabinet Maker TeenagerTime to make cabinet 20 hoursHourly pay $10Cost to make cabinet $200Cost to buy cabinet $150Saving by buying cabinet $50Time to do yard work 2 hoursHourly pay $50Cost to do yard workCost to hire yard workSaving by hiring yard work 03/14/13 Unit 6 Specialization in Production 7
    8. 8. Who Gains What? Cabinet Maker TeenagerTime to make cabinet 20 hoursHourly pay $10Cost to make cabinet $200Cost to buy cabinet $150Saving by buying cabinet $50Time to do yard work 2 hoursHourly pay $50Cost to do yard work $100Cost to hire yard work $30Saving by hiring yard work $70 03/14/13 Unit 6 Specialization in Production 8
    9. 9. Both Parties Gain from Specialization in Production and Exchange the cabinet maker The teenager specializes in cabinets specializes in yard work cabinet maker Teenager gains $70 gains $5003/14/13 Unit 6 Specialization in Production 9
    10. 10. The Law of Comparative Advantage  In exchange between two parties, even if one party is better at both activities, both parties can benefit from specialization in production and exchange.  Both domestically and internationally03/14/13 Unit 6 Specialization in Production 10
    11. 11. The Law of Comparative Advantage The kid mowing my lawn does a lousy job. I believe I could do much better job in less time. (studying economic lessons versus providing lawn care) The guy cleaning our house does a great job. I believe I could do a better job in less time. (studying economics lessons versus providing house care) My wife is a much better parent than I am. Should she should stay home with the kids? (Conditions precedent?)03/14/13 Unit 6 Specialization in Production 11
    12. 12. What should we (as Rational Economic Actors) focus on achieving?03/14/13 Unit 6 Specialization in Production 12
    13. 13. Should we focus on achieving? Buy Californian03/14/13 Unit 6 Specialization in Production 13
    14. 14. Should we focus on achieving? Buy Los Angeles!03/14/13 Unit 6 Specialization in Production 14
    15. 15. Remember Self sufficiency is expensive!03/14/13 Unit 6 Specialization in Production 15
    16. 16. International Economic Cooperation Q. Is it Good or Bad for America? A. Wrong Question!03/14/13 Unit 6 Specialization in Production 16
    17. 17. Free Trade (for the Consumers) wider range of alternatives lower price higher quality all benefits of domestic competition fewer goods available for domestic use Founders of Nation recognized this Europe now recognizes this 03/14/13 Unit 6 Specialization in Production 17
    18. 18. Free Trade (for the Workers) Helps some workers (producers), hurts others therefore NAFTA and other trade agreements will • help highly skilled and/or information intensive workers and industries • hurt low skilled workers and/or labor intensive industries03/14/13 Unit 6 Specialization in Production 18
    19. 19. The Question How do we gain trade’s advantages while dealing with trade’s disadvantages?03/14/13 Unit 6 Specialization in Production 19
    20. 20. The U.S. will export capital intensive and knowledge intensive products while importing labor intensive products03/14/13 Unit 6 Specialization in Production 20
    21. 21. Q. How Will You Make Yourself Scarce in the Global Economy of the 21 Century? st03/14/13 Unit 6 Specialization in Production 21
    22. 22. The Cheap Labor Fallacy Where to Locate Your Factory? Country A Country B Country C1.Hourly Wage $10 $12 $52.Workday 8 HOURS 8 HOURS 8 HOURS3.Daily wage $ $ $4.Daily production 240 260 1205.Average rejects 40 40 606.Usable units7.Cost per usable unit 03/14/13 $ Unit 6 Specialization in Production $ $ 22
    23. 23. The Cheap Labor Fallacy Where to Locate Your Factory? Country A Country B Country C1.Hourly Wage $10 $12 $52.Workday 8 HOURS 8 HOURS 8 HOURS3.Daily wage $80 $96 $404.Daily production 240 260 1205.Average rejects 40 40 606.Usable units 200 220 607.Cost per usable unit 03/14/13 $0.40 $0.44 Unit 6 Specialization in Production $0.67 23
    24. 24. Main Points People can get more from scarce resources if they specialize in those activities in which they have a comparative advantage In an exchange between two parties, even if one party is better at both activities, both parties can gain from specialization and exchange. This is the law of comparative advantage Comparative advantage applies to both domestic and international production and exchange.03/14/13 Unit 6 Specialization in Production 24
    25. 25. Main Points  International trade probably creates more jobs than it destroys but at the same time international trade has serious distributive effects.  Low wage is not the same as low labor cost. It is the wage in relation to productivity that is relevant.03/14/13 Unit 6 Specialization in Production 25
    26. 26. Which is the strong dollar? A. $1.00 = 100Y per $1.00 B. $1.00 = 200Y per $1.0003/14/13 Unit 6 Specialization in Production 26
    27. 27. WHY DO WE CARE? re: IMPORTS JAPANESE PRODUCT COSTS 100Y CALCULATING THE PRICE IN U.S.A. 50 Y = $1.00; Price of Product in $#.##?B. B. 100 Y = $1.00; Price of Product in $#.##?03/14/13 Unit 6 Specialization in Production 27
    28. 28. WHY DO WE CARE? IMPORTS JAPANESE PRODUCT COSTS 100Y PRICE IN U.S. IS: A. @ 50Y = $1.00; Price of Product in $ 2.00 B. @ 100Y = $1.00; Price of Product in $ 1.0003/14/13 Unit 6 Specialization in Production 28
    29. 29. WHY DO WE CARE? Re: EXPORTS if a U.S. PRODUCT COSTS $50 the PRICE IN JAPAN would be A. @ 50Y = $1.00; Price of Product in Y = B. @100Y = $1.00; Price of Product in Y = 03/14/13 Unit 6 Specialization in Production 29
    30. 30. WHY DO WE CARE? EXPORTS  if the U.S. PRODUCT COSTS $50  the PRICE IN JAPAN would be A. @ 50Y = $1; Price of product is Y2500 B. @ 100Y = $1; Price of product is Y500003/14/13 Unit 6 Specialization in Production 30
    31. 31. The Big Ideas Self-sufficiency is expensive For the U. S. engaging in free trade • improves the world’s economic efficiency • is unambiguously good for consumers • helps high-skill workers and high-skill industries while hurting low-skill workers and low-skill industries • has environmental effects03/14/13 Unit 6 Specialization in Production 31
    32. 32. The Big Ideas  It is not the wage but the relation of the wage to labor productivity affecting the plant’s location  You will compete in a global economy.  A STRONG dollar: • makes U.S. imports less expensive • makes U. S. exports more expensive to foreigners • helps U.S. importers • harms U. S. exporters03/14/13 Unit 6 Specialization in Production 32
    33. 33. note (a): CURRENCY FLUCTUATIONS A currency has value, or worth, in relation to other currencies, and those values change constantly. For example: part one, if demand for a particular currency is high because investors want to invest in the country’s stock market or buy exports, the price of its currency will increase.03/14/13 Unit 6 Specialization in Production 33
    34. 34. note (b): CURRENCY FLUCTUATIONS For example: part two, just the opposite will happen if the country suffers an economic slowdown or investors lose confidence in its markets. While some currencies fluctuate freely against each other, others are pegged or linked to a currency or a basket of currencies.03/14/13 Unit 6 Specialization in Production 34
    35. 35. CURENCY FLUCTUATIONS: example(a)@START: the “same” widget costs $1 inthe USA and Y100 in Japan. $1.00 = Y100THEN: the dollar strengthens (the samedollar now allows you to buy more yen)to the point where $1.00 = Y12503/14/13 Unit 6 Specialization in Production 35
    36. 36. CURENCY FLUCTUATIONS: example(b)Now the widget still costs Y100 in Japanbut an American needs to spend $0.80 tobuy the Japanese widget.SO: Imports of comparable goods areless expensive ~ so demand for“imported” goods would be expected toincrease and importers would be helped.(Q. To what extent and then what?)03/14/13 Unit 6 Specialization in Production 36

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