This lesson explores the relationship between productivity and international trade. Specifically, this lessons shows why there should be fewer trade restrictions rather than more.
- Explain why countries that trade freely with each other are better off than countries that restrict international trade.
- Discuss the advantages of specialization.
- Explain comparative advantage.
As necessary, introduce the lesson by presenting these points: If asked, most Americans would say they favor a government policy that increases their own prosperity as well as helping those who live in other countries, especially poorer countries. There is such a policy, but many Americans oppose it because they don't understand basic economics. The policy is free international trade. Through international trade, Americans are free to exchange goods and services with people in other countries. Free international trade increases wages in all countries, especially low wage countries, by creating more productive jobs everywhere. The advantages of international trade are based on the theory of comparative advantage, which is one of the best-established and widely accepted (by economists) theories in economics.
This lesson will help students understand that international trade does not destroy job opportunities in America, as some people fear. As a result, the students will understand that voluntary exchange between countries is a good policy because it creates more productive jobs that pay higher wages by motivating workers to specialize in producing the goods in which they have a comparative advantage. It is true that international trade will eliminate some jobs, which harms some workers, at least in the short-run. But even those workers who are harmed because they lose their jobs and have to find new ones would be worse off if everyone's job was protected against the competition of international trade.
International Trade Creates More and Better Jobs: Provides information on international trade and its benefits.
International Trade Flash
International Trade PDF
The Fruits of Free Trade: This is the 2002 annual report from the Federal Reserve Bank of Dallas.
The students should read this lesson on international trade: International Trade Creates More and Better Jobs It is available as a handout should they want to read the lesson material in advance.
[NOTE: You might consider developing an activity sheet that would allow the students to record their information. You might also create some additional examples that demonstrate how nation "A" can be better off by specializing and trading with nation "B".]
QUESTION FOR DEBATE: Can the U.S. government improve job opportunities for Americans by passing legislation that restricts Brazilian car imports, or by subsidizing domestic car production?
Divide the class into two groups for the debate. Group 1 represents the American car manufacturers who are losing sales to Brazil and will go out of business without restrictions on car imports; they are lobbying their U.S. government representatives for more trade restrictions against Brazil. Group 2 represents American computer manufacturers who want to sell more computers and hire more workers; they are lobbying with their U.S. government representatives for less trade restrictions with Brazil.
One student from each group will keep a written record of your groups discussion over International Trade, and as a group present their views to the class.
Possible arguments for Group 1 (more trade restrictions):
1. The American car manufacturers' group favors some type of import restriction (barrier to trade) - a tariff, quota, or subsidy that will lower their costs of production. Any of these measures will allow them to compete more successfully with lower-cost foreign producers, such as Brazil.
2. Any import restriction will raise the incomes of the car manufacturers.
3. Import restrictions or subsidies allow car manufacturers to hire more workers and not lay off existing workers.
Possible arguments for Group 2 (less trade restrictions):
1. The group representing computer manufacturers favor free trade because this will allow its members to continue producing large numbers of computers for both American consumers and Brazilian consumers.
2. With free trade, American consumers can get both computers and cars cheaper.
3. The car workers who are laid off will find more productive job opportunities in the computer industry.
4. Attempts to subsidize car production in America will lower the price of cars, but not the cost of producing them in terms of foregone computer production. Also, the subsidies will have to be paid for through higher taxes.
[Restricting car imports to America, or subsidizing car production in America, would not increase employment opportunities in America. Rather, it would direct more workers into car manufacturing where their productivity is less, and direct workers out of computer manufacturing where their productivity is greater; thus, restrictive trade policy would lower the overall productivity, and wages, of workers in America.]
Have the students share their conclusions that they have drawn based on their group discussions with the class. Conclude the class discussion with the following statement:
Americans realize enormous benefits from voluntary exchange, or trade with other countries; and the fewer restrictions on that trade, the greater the benefits. Trade is even better for small countries that, unlike America, don’t have a large internal market and a diverse and abundant resource base. They can produce efficiently only by specializing in a very few goods, and that is impossible without trade with other countries. So we can greatly help people in small, and often poor, countries with international trade, while improving our own well being at the same time.
International trade directs workers into jobs in which they have a comparative advantage—in which they are most productive. Because greater productivity means higher pay, the result of international trade is higher pay for American workers, not lower pay, which many fear.
The students will answer the following questions and turn in their answers.
If a country imposes a barrier (such as tariffs) against imports what is likely to happen to the price and amount of imported goods? [The price rises and the quantity imported falls if a country imposes a barrier against imports.]
Is anyone made worse off as a result of tariffs on imports? [Domestic consumers pay more for what they want and have fewer choices, and foreign producers lose sales/profits. Also, domestic producers who produce goods that complement the imported goods will lose sales, as will those domestic producers who would have sold more to foreign consumers because of the dollars they would have earned selling products to Americans.]
What are some arguments in favor of imposing trade tariffs? [Some arguments in favor of imposing trade tariffs are to protect specific domestic industries, to ensure diversity in national production, to reduce a nation's vulnerability to threats to its national security.]
- Why are industries (a relatively small group of people compared to the group of consumers affected by trade barriers) so effective in lobbying for trade restrictions? [The benefit to each person will be significant, and it will be relatively easy to organize the small number of beneficiaries for political action.]
Extra discussion question: If the price of the imported good rises when a barrier (such as tariffs) is erected, what is likely to happen to the output of competing domestic firms, or of domestic firms that produce goods which can be substituted for the imports?
[The output of such firms will rise and their profits will increase.]
For additional reading, see The Fruits of Free Trade: 2002 Annual Report Federal Reserve Bank of Dallas 2002 Annual Report—Federal Reserve Bank of Dallas (click on The Fruits of Free Trade, a pdf report).
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