- Why is international trade important to a nation’s economy?
A basic assumption in economics is the one that suggests that people are motivated by the desire to improve their situations. A method that both people and nations use to fulfill this desire is trade, specifically international trade.
However, all nations, like all people, are not equally blessed with the resources necessary to meet the wants and needs of the specific situation. So, trade is an option to acquire what is lacking, while exchanging what is abundant for what is scarce or desired highly. The ability to produce all we need is limited, the ability to want more is not. Since all nations differ in their resource allocation, it is no surprise that they also differ in their ability to make a variety of goods and services as well.
Application to Real Life
Put the following question on the board:
- What absolute advantage do you have over other students who have never studied economics?
Talk about what absolute advantage means in terms of their special knowledge of economics. Talk about how they are better able to share this service with others in terms of cost–time needed to gather the requested information. Discuss how others might want to come to them for this specialized information.
- Might you want to trade your information with others who have information in other areas? For, example, might you need information in math and science from others who have “specialized” in these subjects?
Have the class move into four groups based on their strengths in math, science, social studies, and English. Discuss:
- Why are some groups larger then others? Do some nations have more resources and/or skills then others?
- How does your group represent a factor of production: “capital skill”?
- What would be the advantages and disadvantages of forming a “homework” club in which each group would exchange expertise in doing assigned homework? Would these same advantages and disadvantages apply to trade among nations? Define absolute and comparative advantage in each situation.
Discuss the following idea with the class.
- Sometimes people or countries specialize in producing the same product or providing the same service. How do we decide from whom to buy the product or service?
Divide the class into two groups:
- The Producers
- Domestic Producers – These producers will produce jeans at a cost of $60-$100. (The cost will be represented by 10 slips of paper ranging by 10’s from $60-$100. The group will make a duplicate set so that there will be two $60 two $70, etc.)
- Foreign Producers – These producers will produce jeans at a cost of $10-$50. (The cost will be represented by 10 slips of paper ranging by 10’s from $10-$50. The group will make a duplicate set so that there will be two $10, two $20, etc.)
Note: Put the cost of the jeans from both groups in a box. Have each member of the group draw from the box. This is the subgroup you belong to and the amount you are charging for your jeans.
- The Consumers
- The consumers will create money to buy the jeans. Using two different colors of paper, they will create money from $20-$120, by fives. Put the money in a box. Have each member of the group draw from the box – this is the maximum amount you are willing to pay for a pair of jeans.
Conduct one trading period. Your goal is make the best deal/trade you can.
- If you are a consumer, your score is your saving – the difference between your maximum price and your actual price.
- If you are a producer, your score is your profit – the difference between your cost to make the jeans and the price at which you sold it.
- Consumers and producers meet to make deals.
- Each student can sell or buy one pair of jeans in a trading period.
- The trading period ends when no more pairs of producers and consumers can make a deal.
- The teacher records the deals.
Conduct two more trading periods
- In the first trading period, place a tariff of $20 on each pair of imported jeans. This cost must be added to the price of foreign-made jeans.
- In the second trading period, a ban has been imposed on imported jeans. Foreign producers cannot play in this round.
- In which trading period were the most jeans sold?
- What was the impact of the tariff on foreign producers? How did the domestic producers react?
- Thought Question: Would it be a good idea to ban the foreign import of jeans? Why or why not?