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The level of output in an economy can be increased through specialization. Economic specialization occurs when people produce different goods and services than they consume. It requires people to exchange goods and services.

KEY CONCEPTS

Absolute Advantage, Comparative Advantage, Exchange, Goods, Interdependence, Services, Specialization

STUDENTS WILL

[Note to the teacher: The level of output in an economy can be increased through specialization. Economic specialization occurs when people produce different goods and services than they consume. It requires people to exchange goods and services, thus increasing interdependence.

Specialization and exchange occur when there is unequal distribution of productive resources and when one party can produce a product at a lower opportunity cost than another party. This latter condition, known as comparative advantage, allows nations (or individuals) to benefit from specialization and trade, even though productive resources are unevenly distributed.]

INTRODUCTION

The cover from the December 11, 1999, issue of The Economist displays a photo of a poor child from a third world country. The caption reads: "The real losers from Seattle--Who won the battle of Seattle? It doesn't much matter. The real concern should be for the losers from that fiasco: the world's poor." What does this caption mean?

Learn more about the WTO Talks at the Free Trade and Globalization web site. Read the article called "WTO Protests in Seattle, 1999 ."

Why were people protesting the trade talks? [Some say that the WTO does not do enough to protect workers around the world. Others say that the WTO does not do enough to protect the environment.]

Do officials at WTO agree or disagree with the protesters' claims? Why? [Disagree. The WTO helps workers around the world by promoting trade.]

The protesters in Seattle want to limit trade by making it harder for certain countries to sell their goods and services to the rest of the world. Environment and worker protection are important issues and deserve attention. However, tying accomplishment of these goals to free trade may not be in everyone's best interest.

Who would benefit if there were less trade in the world? [Special interest groups, industries that benefit from decreased competition.]

Who would be hurt? [Most of the people in the world, especially the very people the protesters claim to help.]

Why is this? Let's go back to simpler times and see why...

RESOURCES


PROCESS

Activity 1

Pretend the year is 1840. Your family moved one year ago to a sparsely populated area west of the Mississippi River. Only one other family lives within 10 miles of your house, and it is 50 miles to the next town. Each family has 50 acres of land.

Each family has been producing all its own food and clothing for the past year. As the families have come to know each other, Mr. Sanchez notices that each family has some special skills and resources. The Jacobsons seem to have an absolute advantage in growing corn and the Sanchez family an absolute advantage in hunting meat. (A person has an absolute advantage if he or she can produce more of a product with the same amount of resources.) The following chart represents current production.

Food Production Without Specialization: (Units)

Family

Corn

Meat

Sanchez

8

10

Jacobson

35

6

TOTAL

43

16

The families meet to exchange information. Members from both families want to see if they would be better off if each family specialized in what it did best and exchanged the extra goods they produced for other items they need. The following chart represents what they found.

Food Production With Specialization: (Units)

Family

Corn

Meat

Sanchez

0

20

Jacobson

50

0

TOTAL

50

20

Questions:

1. In which case does each family have an absolute advantage? [Sanchez in the production of meat and Jacobson in the production of corn.]

2. Would the families be better off if each family produced only one item and traded with the others? Explain? [Yes. They could produce more total units of each item; by trading they will each have as much, or more of it, of each item than they had before.]

3. What will happen if one of the families does not produce all it can? [If either family does not produce fully, the others will not receive as much of that good as they want.] 

Activity 2

The Jacobson's have moved, and a new family, the Martins, now live near the Sanchez farm. The two families are interested in trading cloth and meat. The following is the new production schedule:

Food Production Without Specialization: (Units)

Family

Cloth

Meat

Sanchez

5

10

Martin

4

6

TOTAL

9

16

 

One family has a comparative advantage here if it can produce a product at a lower opportunity cost than the other family. Comparative advantage is a primary basis for specialization and trade. To see if both families will benefit, we must see what each family would give up--the "cost" of one item in terms of the other item. The "cost" of one item in terms of the other is found by calculating the ratio between the two items. The ratio of meat to cloth for Sanchez is 2:1; for Martin 1.5:1. In other words, for the Sanchez family to produce one additional unit of meat, they must give up some cloth.

Questions:

1. Which family has the absolute advantage in producing cloth? Meat? [The Sanchez family for both.]

2. Can the Sanchez family still benefit from trading? [Students are likely to answer no, since the Sanchez family is better at producing both items, but remember the positive results of specialization.]

3. How much cloth would the Sanchez family give up to produce one additional unit of meat? [A half unit of cloth.]
The Martins? [Two-thirds unit of cloth.]

4. Which family has a comparative advantage in meat (has to give up the least cloth)? [Martin family.]

5. How much meat would the Sanchez family give up to produce one additional unit of cloth? [2 units of meat.]
The Martins? [1.5 units of meat.]

6. Which family has the comparative advantage in cloth? [Martin family.]

7. Should the two families specialize and trade?

8. Which family should produce cloth and which should produce meat? Complete the following production schedule to find your answer.

[It would benefit both families to specialize and trade. If the Sanchez family produces all meat, it can produce a total of 20 units of meat. If the Martins produce all cloth, they can produce a total of 9 units of cloth. Total production for the two families increases and they will be better off.]

Food Production With Specialization: (Units)

Family

Cloth

Meat

Sanchez

0

20

Martin

9

0

TOTAL

9

20

CONCLUSION

Write a short magazine article that might follow from the headline in The Economist publication: "The real losers from Seattle--Who won the battle of Seattle? It doesn't much matter. The real concern should be for the losers from that fiasco: the world's poor."

For more information refer to the following resources:

"It is Vital to Maintain and Consolidate What has Already Been Achieved ."

For anti-WTO information go to "Top Reasons to Oppose the WTO ."

"Top 10 Reasons to Oppose the World Trade Organization? Criticism, Yes...Misinformation, No! "

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