- Why is international trade important to a nation's economy?
BackgroundA 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?
- 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?
- 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"?
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?
- 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.)
- 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.
- 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.
- 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.