International Trade SFLS part1

1. International Trade
Part 1

2. International Trade:
3.) Graphing International Trade
1.) Specialization & Comparative Advantage
2.) PPC and Trading Possibilities
4.) Terms of Trade
5.) Arguments about International Trade

3. 1.) Resources are Scarce.
2.) Trade - Offs
3.) Opportunity Costs
4.) Marginal Thinking.
5.) Rational Thinking
6.) Specialization
- there is not enough stuff
for everyone.
- 鱼与熊掌不可兼得
- What you must give up when
you make a decision
- 最后的东西之一
- 合理的
- Productivity and the Division
of Labor
Basic ideas of Economics
Focusing in on this one…

4. 0
1,000
2,000
3,000
4,000
5,000
6,000
0 100 200 300 400 500 600
AxisTitle
Axis Title
More Details about the PPC
Consumption
goods
Capital
goods
Economic Growth
- Sustained expansion of
the production
possibilities frontier
- to have economic
growth means to
increase the PPF so
more can be produced
without having to
trade-off for as much.
And using the PPC graph to
show comparative
advantage

5. 0
1,000
2,000
3,000
4,000
5,000
6,000
0 100 200 300 400 500 600
AxisTitle
Axis Title
More Details about the PPC
Consumption
goods
Capital
goods
A
B
C
Any point that is
OUTSIDE the PPC is
Impossible!
Impossible!
Now this is NOT true
actually!

6. 0
1,000
2,000
3,000
4,000
5,000
6,000
0 100 200 300 400 500 600
AxisTitle
Axis Title
More Details about the PPC
Consumption
goods
Capital
goods
A
B
C
Any point that is
OUTSIDE the PPC is
Impossible!
Impossible!
Also this is NOT true!
With trade it is possible
to CONSUME outside of
your PPC.

7. Production Possibilities Curve
Why the PPC line is curved and not straight?
Increasing
Opportunity
Costs
- At a certain point the
resources used to make
something are less
effective.
Will pretend this isn’t the case to make this
easier to do, remember this is true and will
always be true just removed to make this
easier to understand.
Remove this concept now to
make it easier.

8. 4,000
100
5,000
2,000
1,000
3,000
500200 300 400
0
Graph shows the
trade offs of what
can be produced
in the country.
Production Possibilities Curve
枪炮
黄油

9. - when someone is more
productive than another in
everything.
Absolute
Advantage
(AA)
1.) Specialization & Comparative Advantage

10. {
For example, this country can
always be able to produce more
of most things then this country.

11. Or these guys can always reach
higher then the smaller guys.

12. Absolute
Advantage
1.) Specialization & Comparative Advantage
Comparative
Advantage
(CA)
- the ability to produce at a lower
opportunity cost then someone
else.
- You produce what you have
(CA) in and trade for the other
things that you don’t.

13. Like him or not, he is
really good at running
and jumping…

14. Or course, he could be a
dance too, but maybe
not as good.

15. One of the all time best
basketball players.

16. He could skate if he
wanted, but not likely to
be one of the best.

17. A good musician?

18. Or a good bus driver?

19. If you want tea, go to
Hangzhou, where it is easy to
produce it

20. Harbin could produce tea, but
not much and it wouldn’t be
as good.

21. International Trade:
3.) Graphing International Trade
1.) Specialization & Comparative Advantage
2.) PPC and Trading Possibilities
4.) Terms of Trade
5.) Arguments about International Trade

22. Comparative Advantage Trade Example:
Two countries: India and France
Two goods: cloth and cheese
We will look at how much of both goods
each country produces and consumes:
1.) If the country chooses to be self-sufficient 自给 and does not
trade.
2.) If it trades with the other country.

23. -- Can produce 400 units
of cloth and 0 units of
cheese.
-- Can produce 0 units of
cloth and 100 units of
cheese.
-- Can produce 0 units of
cloth and 400 units of
cheese.
-- Can produce 100 units of
cloth and 0 units of cheese.
INDIA: FRANCE:
Comparative Advantage Trade Example:

24. Cheese
Cloth
400
200
300
0
100 400
India’s PPF
100
300
200
-- Can produce 400 units
of cloth and 0 units of
cheese.
-- Can produce 0 units of
cloth and 100 units of
cheese.

25. Cheese
Cloth
400
200
300
0
100 400
India’s PPF with no trade
100
300
200
Suppose India uses half its
resources to produce each of
the two goods.
Then it will produce and consume
200 cloth and 50 cheese for a
total consumption of 250 units.

26. Cheese
Cloth
400
200
300
0
100 400
France’s PPF
100
300
200
-- Can produce 0 units of
cloth and 400 units of
cheese.
-- Can produce 100 units of
cloth and 0 units of cheese.

27. Cheese
Cloth
400
200
300
0
100 400
France’s PPF with no trade
100
300
200
Suppose France uses half its
resources to produce each of
the two goods.
Then it will produce and consume
50 cloth and 200 cheese for a
total consumption of 250 units.

28. Consumption With and Without Trade
Without trade
 India consumers get 200 units
of cloth and 50 units of
cheese.
 France consumers get 50 units
of cloth and 200 units of cheese.
Total of 500 units produced

29. Cheese
Cloth
400
200
300
0
100 400
India’s (CA)
100
300
200
Let’s now say India only
produces what it is good at.
-- Can produce 400 units of
cloth and 0 units of cheese.

30. Cheese
Cloth
400
200
300
0
100 400
France’s (CA)
100
300
200
Let’s now say France only
produces what it is good at.
-- Can produce 0 units of
cloth and 400 units of cheese.

31. Consumption With and Without Trade
 India makes 400 units of
cloth and 0 units of cheese.
 France makes 0 units of cloth
and 400 units of cheese.
With trade
Total of 800 units produced, both can trade
and consume 200 of cloth and cheese.
Without trade
 India consumers get 200 units
of cloth and 50 units of
cheese.
 France consumers get 50 units
of cloth and 200 units of cheese.
Total of 500 units produced

32. Comparative Advantage Trade Example:
Two countries: U.S. and Japan
Two goods: computers and wheat
One resource: labor, measured in hours
We will look at how much of both goods
each country produces and consumes:
1.) If the country chooses to be self-sufficient自给
and does not trade.
2.) If it trades with the other country.

33. The U.S. has 50,000 hours of
labor available for production
per month.
--Producing 1 computer
requires 100 hours of labor.
--Producing 1 ton of wheat
requires 10 hours of labor.
Japan has 30,000 hours of labor
available for production, per
month.
--Producing 1 computer requires
125 hours of labor.
--Producing 1 ton of wheat
requires 25 hours of labor.
USA: JAPAN:
Comparative Advantage Trade Example:

34. 4,000
100
5,000
2,000
1,000
3,000
500200 300 400
0
Computers
Wheat
(tons)
The U.S. PPF
The U.S. has enough labor
to produce 500 computers,
or 5000 tons of wheat,
or any combination along
the PPF.

35. 4,000
100
5,000
2,000
1,000
3,000
500200 300 400
0
Computers
Wheat
(tons)
The U.S. Without Trade
Suppose the U.S. uses half its
labor to produce each of the
two goods.
Then it will produce and
consume
250 computers and
2500 tons of wheat.

36. Computers
Wheat
(tons)
2,000
1,000
200
0
100 300
Japan’s PPF
Japan has enough labor to
produce 240 computers,
or 1200 tons of wheat,
or any combination
along the PPF.

37. Japan Without Trade
Computers
Wheat
(tons)
2,000
1,000
200
0
100 300
Suppose Japan uses half its labor to
produce each good.
Then it will produce and
consume
120 computers and
600 tons of wheat.

38. Consumption With and Without Trade
 U.S. consumers get
250 computers and
2500 tons wheat.
 Japanese consumers get
120 computers
and 600 tons wheat.
Without trade
Total of 3470 units

39. Consumption With and Without Trade
 U.S. consumers get
250 computers and
2500 tons wheat.
 Japanese consumers get
120 computers
and 600 tons wheat.
Without trade
Total of 3470 units
1. Suppose the U.S. produces 3400 tons of wheat. How many
computers would the U.S. be able to produce with its remaining
labor?
2. Suppose Japan produces 240 computers.
How many tons of wheat would Japan be able to produce with its
remaining labor?

40. 4,000
100
5,000
2,000
1,000
3,000
500200 300 400
0
Computers
Wheat
(tons)
U.S. Production With Trade
Producing 3400 tons of
wheat requires 34,000 labor
hours.
The remaining 16,000
labor hours are used
to produce 160
computers.

41. Japan’s Production With Trade
Producing 240 computers
requires all of Japan’s
30,000 labor hours.
Computers
Wheat
(tons)
2,000
1,000
200
0
100 300
So, Japan would produce
0 tons of wheat.

42. Suppose the U.S. exports 700 tons of wheat to
Japan, and imports 110 computers from Japan.
(So, Japan imports 700 tons wheat and exports
110 computers.)
1. Suppose the U.S. produces 3400 tons of wheat. How many
computers would the U.S. be able to produce with its remaining
labor?
2. Suppose Japan produces 240 computers.
How many tons of wheat would Japan be able to produce with its
remaining labor?

43. 4,000
100
5,000
2,000
1,000
3,000
500200 300 400
0
Computers
Wheat
(tons)
U.S. Consumption With Trade
2700270
= amount
consumed
0110+ imported
7000– exported
3400160produced
wheatcomputers

44. Japan’s Consumption With Trade
Computers
Wheat
(tons)
2,000
1,000
200
0
100 300
700130
= amount
consumed
7000+ imported
0110– exported
0240produced
wheatcomputers

45. Consumption With and Without Trade
 U.S. consumers get
250 computers and
2500 tons wheat.
 Japanese consumers get
120 computers
and 600 tons wheat.
Without trade
Total of 3470 units
With trade
 U.S. makes 160 computers
and 3400 tons wheat.
 Japan make 240 computers
and 0 tons wheat.
 Total of 3800 units
 400 computers
 3400 tons of wheat

46. 46
Trade Makes Both Countries Better Off
2002,7002,500wheat
20270250computers
gains from
trade
consumption
with trade
consumption
without trade
U.S.
100700600wheat
10130120computers
gains from
trade
consumption
with trade
consumption
without trade
Japan

47. International Trade:
3.) Graphing International Trade
1.) Specialization & Comparative Advantage
2.) PPC and Trading Possibilities
4.) Terms of Trade
5.) Arguments about International Trade
2.5) Limitations of CA and
the PPC

48. 2.5) Real World Limitations
1.) PPF are not linear直线
Production costs are not constant 不恒定
2.) Prices, Inflation 通胀, Exchange rates 汇率
change the equation
3.) Other costs are not included
ex - Transportation costs
Even though this is far from realistic 实际 it still is the
starting point that explains that trade is good!
4.) Trade Barriers贸易壁垒

49. {So to Summarize…

50. Absolute
Advantage
1.) Specialization & Comparative Advantage
Comparative
Advantage
(CA)
- the ability to produce at a lower
opportunity cost then someone
else.
- You produce what you have
(CA) in and trade for the other
things that you don’t.

52. 4,000
100
5,000
2,000
1,000
3,000
500200 300 400
0
Computers
Wheat
(tons)
U.S. Consumption With Trade
2700270
= amount
consumed
0110+ imported
7000– exported
3400160produced
wheatcomputers

53. 2.5) Real World Limitations
1.) PPF are not linear直线
Production costs are not constant 不恒定
2.) Prices, Inflation 通胀, Exchange rates 汇率
change the equation
3.) Other costs are not included
ex - Transportation costs
Even though this is far from realistic 实际 it still is the
starting point that explains that trade is good!
4.) Trade Barriers贸易壁垒

54. {
The End of part 1
Thank you