Chapter 1: Introduction

• Econ students

• Knowing how to calculate opportunity costs

• Using charts to determine comparative advantage

If you don't know how to do go back and watch one of my practice videos because in this video, we're gonna cover the hands down hardest, most difficult thing in Unit 1. Terms of trade. The concept here is really simple.

Countries can decide to produce things themselves, or they can specialize in a few things and trade with other countries.

Countries will only trade if they can get something else at a lower opportunity cost than if they produced it themselves.

Question: If Italy can produce 10 cars or 30 trucks, would they be willing to import cars from Germany if they can trade one car for 5 trucks?

Ground rules:

• Ignore transportation costs

• Ignore politics or trade barriers

Chapter 2: Terms of Trade

Terms of trade refer to the conditions under which countries engage in trade with each other.

Countries will trade if they can obtain goods at a lower opportunity cost than if they produced them themselves.

Example: Italy can produce 10 cars or 30 trucks.

• Question: Would Italy be willing to import cars from Germany if they can trade one car for 5 trucks?

• Transportation costs and political factors are ignored in this scenario.

Chapter 2: Terms Of Trade

• Countries don't specialize in producing only one thing

• Countries don't barter to other countries at a set terms of trade

• Italy would not accept the terms of trade

Reasons for not accepting the terms of trade

• Calculate per unit opportunity cost

  • Italy's opportunity cost of producing cars themselves is 3 trucks per car

• Comparison with terms of trade

  • Terms of trade: one car for five trucks

  • If Italy produces cars themselves, it will cost them 3 trucks (opportunity cost)

  • If they trade, it will cost them 5 trucks to get one car

Chapter 3: Lower Opportunity Cost

Main Ideas:

• Countries will only trade if they can get something else at a lower opportunity cost than if they produced it themselves.

• Italy would go for a trade deal if the terms were one car for 2 trucks, as it would be a lower opportunity cost for them.

• China has a competitive advantage in producing TVs, while India has a comparative advantage in producing phones.

Supporting Details:

Trade and Opportunity Cost:

• Countries will only engage in trade if they can obtain a good or service at a lower opportunity cost than if they produced it themselves.

• Opportunity cost refers to the cost of forgoing the production of one good in order to produce another.

• Italy would consider a trade deal if the terms were one car for 2 trucks, as it would be more beneficial for them to import a car from Germany at a lower opportunity cost.

Example of China and India:

• Assuming two countries, China and India, with the same amount of resources.

• China has a competitive advantage in producing TVs, meaning they can produce TVs at a lower opportunity cost compared to India.

• India, on the other hand, has a comparative advantage in producing phones, meaning they can produce phones at a lower opportunity cost compared to China.

Chapter 4: Terms Of Trade

• China specializes in TVs, India specializes in phones

• Knowing which country wants what and their opportunity costs is key

Terms of Trade

• Four different terms of trade

• Objective: Determine if each term is acceptable to China and/or India

Term 1: One TV for 4 phones

• Convert to see the trade ratio: 1 TV for 4 phones = 1 phone for 1/4 TV

Term 2: One TV for 2 phones

• Convert to see the trade ratio: 1 TV for 2 phones = 1 phone for 1/2 TV

Term 3: One TV for 1 phone

• Convert to see the trade ratio: 1 TV for 1 phone = 1 phone for 1 TV

Term 4: One TV for 1/2 phone

• Convert to see the trade ratio: 1 TV for 1/2 phone = 1 phone for 2 TVs

Chapter 5: Lower Opportunity Cost

• China wants phones

  • Opportunity cost of producing phones themselves: 1/2 TV

  • Terms of trade: 1/4 TV for 1 phone

  • Lower opportunity cost for China

• India wants TVs

  • Opportunity cost of producing TVs themselves: 5 phones

  • Terms of trade: 4 phones for 1 TV

  • Lower opportunity cost for India

• Mutually beneficial terms of trade

• Both countries benefit and get each product at a lower opportunity cost

Chapter 6: Lower Opportunity Cost

• China's perspective:

  • If China produces phones themselves, it costs 1/2 a TV

  • If they trade, it costs 1 TV

  • Trading at 1 TV is not beneficial for China

• India's perspective:

  • If India produces TVs themselves, it costs 5 phones

  • If they trade, it costs 1 phone

  • Trading at 1 phone is a great deal for India

• China's perspective (continued):

  • If China produces phones themselves, it costs 1/2 a TV

  • If they trade, each phone costs 1/3 a TV

  • Trading at 1/3 a TV is a lower opportunity cost for China

  • China benefits from this terms of trade

• India's perspective (continued):

  • If India produces TVs themselves, it costs 5 phones

  • If they trade, they can get a TV by trading 3 phones

  • Trading at 3 phones for a TV is a good deal for India

• In this case, both India and China can get the goods they want at a lower opportunity cost

• This is a mutually beneficial terms of trade

Chapter 7: Lower Opportunity Cost

• China wants phones

  • Cost of making phones themselves: 1/2 a TV

  • Cost of trading for phones: 1.6 of a TV

  • China benefits from trade because it has a lower opportunity cost

• India wants TVs

  • Cost of trading for TVs: 6 phones

  • Cost of making TVs themselves: 5 phones

  • India does not benefit from trade because it can produce TVs at a lower opportunity cost