Purpose and Overview Time required 6–8 class periods Project scenario: When economic production is limited to a single country, it is less than it would be if production and manufacture were specialized and goods were traded with other countries. With trade and voluntary exchange, countries can specialize and produce only their lower-cost goods, which will net them a comparative advantage in production, then trade with other countries for goods that have a higher relative cost. The trade process increases the goods and services that can be produced with a given amount of resources. However, trade can raise concerns in a country about the effect on workers, the environment, and natural resources.
To explore these concepts and issues, students are presented with the following problem-solving scenario: Two island nations, Hatfield and McCoy, have an unfriendly relationship with each other but friendly relationships with their neighboring island nations. Their two island neighbors have just ended a long war, opening the possibility for trade. Hatfield and McCoy each pursue the possibility of trade with the two neighboring islands by analyzing each island’s data on the hours it takes to produce goods, and discover economic benefits that occur with specialization of production and trade. When war once again breaks out between the two neighboring islands, Hatfield and McCoy decide to negotiate a trade agreement with each other. Protests about the agreement arise on both islands, led by labor and environmental groups, and the leaders of the islands must create public awareness materials that justify their reasons for trade. Concepts to be learned To successfully resolve the problem and complete the products required in this project, students need to understand and be able to apply the following economic concepts:
Voluntary restraint agreement Although an understanding of the following economic concepts is not essential to complete project tasks, teachers can use the unit to explain additional economic concepts, including: Division of labor Exchange rate Trade deficit
What is Trade? Trade occurs because nations can specialize and produce the goods they make at lower costs and trade for those goods they produce at a relatively higher cost. Total output increases over what would occur if items were produced only within one country. Nations can increase output by specializing in goods and services they produce with greatest relative efficiency and trading for goods they cannot produce as efficiently. Trade is not undertaken as a competition to see who can connive another nation (or person) out of its resources. With trade, current resources are used more productively and output is increased for at least two reasons. The distribution of economic resources—land, labor, capital, and entrepreneurship—is uneven between countries. For example, some nations have better access to land resources while other nations have better access to human capital (labor). By increasing the supply of a resource through trade (i.e., having the country with relatively better access to a particular resource produce the goods), goods relying on one particular input for production can be made at a lower cost. Efficient production of different goods may require different technologies. Technology is simply a way of combining resources. For example, clothing can be designed using many laborers (fashion designers and stitchers) or using relatively little labor and much capital (computer-designed and machine-produced). These are different technologies. Some goods are produced with relatively labor-intensive technologies (e.g., education, health) while others routinely rely on relatively capital-intensive technologies (e.g., airline transport). Nations hold an advantage in using certain technologies and, as a result, producing goods that use these technologies can lower costs.
The relevance of these points can be seen in the production schedules of Hatfield and McCoy (“Hours Needed to Produce Each Good,” Teacher Table 1). The following table, which shows the island with the lowest opportunity costs for each good, suggests that McCoy has a larger, better-educated labor force than does Hatfield, while Hatfield has better land resources. As a result, McCoy can produce goods that rely heavily on educated labor at a relatively lower cost, while Hatfield can produce goods that rely heavily on land resources at a relatively lower cost.
The project is designed to teach the following concepts: Absolute advantage: The comparison among producers according to their productivity or cost of producing a good or service. The producer with the lowest cost of production holds the absolute advantage. Comparative advantage: Having a lower relative (comparative) cost than another producer. A comparative cost is the amount of production of one product that must be reduced to increase the production of another (opportunity cost). This can be determined by comparing the opportunity cost of production between producers. The producer with the lowest opportunity cost of production holds the comparative advantage. Costs: The measure of what has to be given up in order to produce something. Total costs include both opportunity costs, the cost of alternative uses of resources, and direct costs, or total money outlays. Export and import: A good that is produced by one country but sold in another country. The good is an import in the country in which it is sold and an export in the country in which it is produced. Free trade: The absence of artificial (e.g., government-imposed) barriers to trade among individuals and firms Market economy: An economic system (method of organization) in which only the private decisions of consumers, resource suppliers, and producers determine how resources are allocated Opportunity costs: The real sacrifice involved in achieving something. The value of the alternative that would have to be foregone in order to achieve a particular thing Protectionism: A policy (e.g., tariff or quota) that is designed to protect domestic producers of a good from the competition of foreign producers Quota: A limit imposed on the quantity of a good that can be brought into a nation from a foreign nation Resources (factors of production): Land, labor, capital, and entrepreneurial ability that are used to produce things to satisfy human wants Scarcity: A condition where less of something exists than people would like if the good had no cost. Scarcity arises because resources are limited and cannot accommodate all of our unlimited wants.