Download Factors of Production

Teaching the Economics Content
TEACHING THE ECONOM ICS CONTENT ON
THE OHIO GRADE SIX PROFICIENCY TEST
Producing Ohio: Creating Our Economy offers multiple cross-curricular activities.
These activities primarily address the Decision Making and Resources strand of the
Citizenship Learning Outcomes (economics) on the Ohio Grade Six Proficiency
Test.The lessons and activities also incorporate skills that students need for
Mathematics, Reading and Writing Learning Outcomes. (See the Lesson Correlations
spreadsheet included in this kit.)
Decision Making and Resources strand of the Citizenship Learning
Outcomes:
■ Factors of Production (Ohio Grade Six Citizenship Learning Outcome #12)
■ Supply and Demand (Ohio Grade Six Citizenship Learning Outcome #13)
■ Competition and Markets (Ohio Grade Six Citizenship Learning Outcome #14)
■ International Trade (Ohio Grade Six Citizenship Learning Outcome #15)
In the following sections, each of the economics Learning Outcomes named above
are described and an overview is provided of the content that may be included in
each outcome. Each of the following sections indicates key terminology and some
of the important ideas about the concepts and their use in teaching the lessons
included in this kit. Student Learning Statements—the statement that a student
should be able to make about a concept after a lesson has been taught—are
also included.
Note: In the following section, the boxed-in phrases state the official language of the
Learning Outcomes as they appear in the Pre-kindergarten-through-Grade 12 Standards
for Ohio Schools, Ohio Department of Education, 1995.Where applicable, the information
following the Learning Outcome statements are the examples and content suggestions
from the Ohio Model Competency-based Social Studies Program.Together, these are the
specific Learning Outcomes as included in the Ohio Grade Six Proficiency Test.
Factors of Production
The first economics item for the grade six test asks students to understand how
factors of production are used to produce goods and services.The concepts, ideas
and definitions in this section will help students prepare for this item.
Ohio Grade Six Citizenship Learning Outcome #12:
Factors of Production
Describe the role of each factor of production in producing a specific good
or service and suggest alternative uses for the resources involved.
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Teaching the Economics Content
Examples and content suggestions from the Ohio Model Competency-based Social
Studies Program:
Collect and organize data pertaining to desired goods and services, and represent
the information with a picture or bar graph. Select the most popular good or
service and create a chart of alternative uses for resources needed to produce
the good or service.
DEFINING FACTORS OF PRODUCTION
“Factors of production” are resources used to produce goods and services—
i.e., land, labor, capital and entrepreneurship resources. Factors of production are
also called “productive resources.”
■
Land: Productive resources occurring in nature, such as water, soil, plants
and minerals.
■ Labor: The talents, training and skills of people that contribute to the
production of goods and services.
■ Capital: Productive resources made by past human efforts, including resources
such as buildings, machinery, vehicles and tools.
■ Entrepreneurship: The activities of profit-seeking decision makers who
determine which economic activities to undertake and how they should
be implemented.
Land
“Land” is a term used to include natural resources, such as soil, water, plants and
minerals. Like all factors of production, land is limited. Nature just isn’t inclined to
make more resources at the pace producers might want. If a barrel of petroleum is
used to produce gasoline, that material is not available to produce something else.
Each time an additional barrel of petroleum is used for production, the amount of
this resource available for future use is reduced.
Usually producers will try to use the most accessible and lowest-priced resources
first. As the resources become less available (as supply decreases), the price of the
resource will increase, giving the producers the incentive to look for more sources
or to develop substitutes. For example, as the price of gasoline increases, producers
have an incentive to supply more oil to the market and/or to seek substitutes.
This might lead to the development of solar-powered vehicles or better mass
transit systems.
Student Learning Statement:
Land resources are found in nature. Examples are soil, water, plants and minerals.
Labor
The terms “labor” and “human resources” have essentially the same meaning in
this context and are often used synonymously.These terms refer to the productive
abilities of people. Labor, or human resources, is also limited.There are only so
many people at any given time. However the skills, knowledge and talents of people
can be improved or made more productive through education and training.
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Teaching the Economics Content
Labor can also be made more productive through the use of capital (see definition
below). For example, a person with a calculator can do mathematics problems
more quickly and accurately than a person without a calculator.
Student Learning Statement:
Labor resources are the skills, talent and knowledge provided by people.
Capital
“Capital” consists of tools, equipment, machines and buildings that producers use
to produce something else.These products are produced in order to help make the
goods and services that people consume. For example, the machine that is used to
smooth the top of a school desk is a capital resource. It is a resource used in the
production of the desk.The furniture maker uses the machine to produce desks
more efficiently.The producer invested in the machine because this was more
productive than hiring many workers to smooth the tops of the desks by
hand. Generally, the use of capital makes labor more productive.
!
TEACHER TIP:
Students should not
confuse the economic
concept of “capital”
(i.e., tools and machinery)
with the use of the term
“capital” in the financial
world, where capital is
used to describe money.
!
Student Learning Statement:
Capital resources are goods used to produce other goods and services for consumers.
Entrepreneurship
There are a variety of definitions of the concept of “entrepreneurship.” Most
commonly it is thought of as creative decision making, risk taking or starting a
business venture.The entrepreneur can be an individual or a group. For the purposes
of the sixth grade test, the definition of entrepreneurship focuses on the decisions
about the use of resources, the most common example being those made by
individuals or groups who start a business.
When William Procter and James Gamble started making candles and soap, they were
providing entrepreneurial resources.Today, those who make decisions about new products
that Procter & Gamble will produce or new methods for producing these products might
be considered entrepreneurs.The entrepreneur is a profit-seeking decision maker who
decides how to use the resources to produce something.
Understanding the factor of entrepreneurship is an important part of understanding
the dynamics of the market economy. It is the entrepreneur who sees new
opportunities to satisfy demand. It is the entrepreneur who finds new, better or
less-costly ways to use resources. It is the entrepreneur who finds new ways to
meet consumer demands in order to earn a profit. It is entrepreneurship that
keeps markets competitive.
Student Learning Statement:
Entrepreneurial resources consist of the decisions people make about how to use
resources to produce goods and services.
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Teaching the Economics Content
PRODUCTIVITY AND THE FACTORS OF PRODUCTION
“Productivity” is a measure of how much is produced for each unit of resource
that is expended. Productivity increases when more is produced with the same
amount of resources. It can also increase if the same amount is produced with
fewer resources.
■
If a business adds (hires) a worker, it is with the expectation that the worker will
produce more value in goods and services than the cost of retaining the worker.
■ If a business pays to train workers, it is with the expectation that the training
will result in greater output.
■ If a business invests in a new machine, it is with the expectation that the benefit
from the new machine will be greater than the cost—that productivity will increase.
IMPROVING PRODUCTIVITY
There are several ways to improve the productivity of the Factors of Production:
■ Invest in human resources, or labor. Better health, education and training for
workers often contribute to increased worker productivity.
■ Invest in capital.This is done through the purchase of more machines, improved
technologies or better tools.With those capital goods, more consumer goods
and services can be produced—the workers will become more productive.
Initially, capital goods might be expensive, but they usually last for a long time.
A machine might be used to produce goods and services for many years.
The success of the investment decision in capital is dependent on accurately
determining how much more can be produced over the life span of the capital.
■ Engage in research and development of new technologies. Producers undertake
research and development because they expect to make more profit. It is this
expectation of profit that is the incentive to invest in research and development.
Government policies that promote investment and savings, reward research
and encourage development of new technologies are helpful. A strong market
economy must also have a legal system that supports private property rights,
freedom and private initiatives. Government can play an important role in
assuring that the market is allowed to work freely and that people can benefit
from using their resources.
Often the investments in education, capital or research and development are costly.
There are no guarantees that the investments will result in substantial increases in
productivity. Some investments may be worth the costs. Others may not be. It is
important to consider both benefits and costs when making investment decisions.
Student Learning Statement:
Improving or more efficiently using land, labor, capital or entrepreneurial resources
can increase productivity.
ALTERNATIVE USES OF RESOURCES AND OPPORTUNITY COSTS
Most resources have several possible uses. A tree for instance, can be used to
frame a house, build a table, be ground into pulp for paper, burned in a fireplace or
be left in the forest for people to admire and birds to use for nesting.
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Teaching the Economics Content
When a resource is used for production of a good or service, it is no longer
available for another use. A worker can only do one job at a time. A machine can
only serve one purpose at a time. If a worker is sanding a desk, he or she can’t be
loading a truck. If a bulldozer is digging a basement, it can’t be building a road. Even
an entrepreneur can only do one thing at a time.
The real cost of using a resource is that it cannot be used to produce something
else.The value of a resource’s best alternative use is the real cost of using that
resource.This is often called “opportunity cost.” Producers should make the best
use of resources, given consumer demand.To do this, an understanding of alternative
uses (opportunity costs) is very valuable to the decision.
Student Learning Statement:
If you use a resource to produce something, you can’t use it to produce
something else.
WHICH RESOURCES TO USE?
Most things can be produced in a variety of ways.The producer has the option of
using few machines and much labor or vice versa.The producer makes the choice
based on which use of resources best achieves his or her goal to produce what
people want and make a profit. Key considerations are the price and productivity
of the resource.
DERIVED DEMAND
Producers use the factors of production (resources) to produce the goods and
services consumers would like to use to satisfy their wants.The producers’ desire
for resources is based on their belief that consumers will want the product that
will be produced. For instance, if society did not want to educate children, there
would probably be no demand for the specific skills and knowledge of a sixth grade
teacher. Economists refer to this concept as “derived demand.” It simply means that
resources are demanded or valued only if they can be used to produce desired
goods and services.
Student Learning Statement:
The demand for a resource is derived from the demand for a good or service.
GOODS AND SERVICES IN THE MARKET
A market is a coming together of buyers and sellers. A market can be a physical
location, such as a grocery store, a farm market or a public auction. However,
markets exist even when producers and buyers do not meet directly.
Markets are influenced by the wants and preferences of consumers—sometimes
only a few, but often millions—and the wants and desires of the producers. As a
result of the interaction of these wants, prices are determined.Thus, the market is
a mechanism that coordinates the wants and preferences of many people.
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Teaching the Economics Content
If market prices rise, incentives are created for producers to supply more to
the consumers. If prices fall, there are incentives to produce less. Likewise with
consumers, high prices create incentives to buy less, while low prices create
incentives to buy more. Competitive markets allocate resources, create incentives
for producers to give consumers the goods and services they want and provide
information for consumers to make purchasing decisions.
Student Learning Statement:
A market exists when people exchange resources, goods or services.
Supply and Demand
The second economics item for grade six is concerned with the things that influence
consumers’ demand for (willingness and ability to buy) goods and services and what
influences the producers’ willingness to supply (produce) goods and services.
Ohio Grade Six Citizenship Learning Outcome #13:
Supply and Demand
Identify the factors that influence:
a. consumer decisions to demand goods or services
b. producer decisions to supply goods or services
Examples and content suggestions of demand from the Ohio Model Competency-based
Social Studies Program:
Costs, benefits, substitutes, self-interest, advertising, social pressure, goals, rules
Examples and content suggestions of supply from the Ohio Model Competency-based
Social Studies Program:
Market price, cost of resources, competition
DEFINING DEMAND
“Demand” is the quantities of a good or service that consumers are willing and able
to buy at various prices at any given time. Demand begins with a want or some use
(utility) for a good or service. Suppose people want to get from home to the job
site each day.To satisfy this want they will have to make a choice—take a bus, car,
train, taxi, car pool, ride a bicycle, walk. Based on the costs and benefits of the
alternatives, consumers will reach a decision.
The Law of Demand
The “law of demand” states that consumers will buy less at higher prices and more
at lower prices. Drivers that determine the strength (or weakness) of consumer
demand are often called “determinants of demand.”
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Teaching the Economics Content
Student Learning Statement:
Demand is the quantities of a good or service that consumers are willing and able
to buy at various prices at any given time.
Student Learning Statement:
The law of demand states that consumers will buy less at higher prices and more
at lower prices.
Determinants of Demand
Several factors influence consumers to buy more or less of a product, even when
the price of the product does not change:
■ Income
■ Tastes and preferences
■ Substitutes
■ Complementary goods
Income
Demand is limited to what people can purchase with their income. “Income”
consists of the wages, rents, interest and profits received by people. Greater
income allows consumers to buy more of the things they want. Lower income
restrains demand.
Student Learning Statement:
Income is the payment that people receive for the use of their resources.They use
their income to demand goods and services.
Tastes and Preferences
“Tastes and preferences” are the likes and dislikes of consumers. People have
different tastes and preferences, and tastes and preferences often change over time.
Many things determine likes—climate, religion, friends, laws, values, community.
When tastes and preferences change, the quantities purchased of products will
change accordingly.
Student Learning Statement:
Tastes and preferences are people’s likes and dislikes.
Substitutes
Seldom are consumers in a situation where only one good or service will satisfy
a want.There are always “substitutes.” If people are hungry in the middle of the
afternoon, an apple, orange, candy bar, bag of chips or a hamburger might satisfy
that want. Some consumers will prefer apples. But consider what would happen if
the price of oranges fell. Some of the consumers would decide to buy the oranges
rather than the apples.This shows that when the price of a substitute (oranges)
falls, the demand for the original preference (apples) will decrease.When the price
of the substitute oranges increases, the demand for apples will increase.
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Teaching the Economics Content
Student Learning Statement:
The demand for a product will change when the price or demand for one of its
substitutes changes.
Complementary Goods
Sometimes the demand for a good or service is directly related to the demand
for another good or service. Usually these two products are consumed together.
In such cases, the goods or services are said to be complementary. Examples of
“complementary goods” are tennis rackets and tennis balls, compact disk players
and compact disks, automobiles and gasoline, and for many people, peanut butter
and jelly.
When the price of one complement changes, it will affect the demand for the other.
Think about a group of people who like peanut butter and jelly sandwiches.They
always use the two products together.What will happen if the price of peanut
butter increases? The demand for jelly will decrease.Why? When people buy less
peanut butter, they will then want less jelly. Since complements are used together,
a change in the demand or price of one will result in a change in the demand for
the other.
Student Learning Statement:
The demand for a product will change when the demand for or price of its
complement changes. Complementary goods are consumed together.
DEFINING SUPPLY
“Supply” is the quantities of a good or service that producers are willing and able
to sell at various prices at any given time.
■ Producers are willing to supply a good or service if they can make an acceptable
profit. Profit is equal to all revenues (total sales) minus total costs.
■ The greater the expectation of profit, the more willing producers will be to
purchase the resources that are required to produce a good or service.
■ The price at which producers can sell their product will strongly influence
profit. As the price of the product increases, producers will be willing to supply
more to the market.
The Law of Supply
The “law of supply” states that at high prices producers are willing to supply more
and at low prices they will supply less.
Student Learning Statement:
Supply is the quantities of a good or service that producers are willing and able to
sell at various prices at any given time.
Student Learning Statement:
The law of supply states that at high prices producers are willing to supply more
and at low prices they will supply less.
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Teaching the Economics Content
Determinants of Supply
In addition to price, there are other factors that will strongly influence the amount
of a good or service supplied to the market:
■ Number of producers
■ Resource prices
Number of Producers
One determinant of supply is the number of producers in the market. In general, if
there are more producers, more goods and services will be supplied to the market.
When additional producers enter the market, supply increases.
Student Learning Statement:
Normally the greater the number of producers, the greater the supply.
Resource Prices
■ If the prices of resources (factors of production) rise, producers will have to
obtain a higher price for their product in order to maintain their profits. If the
product prices do not rise, producers will supply less to the market.
■ If the cost of factors of production decreases, producers will supply more to
the market.
For example, an improvement in technology will increase productivity and decrease
costs. Producers, in attempting to increase their profits, will supply more. A good
example in U.S. history is agriculture. Improvements in technology and capital
(fertilizers, tractors, pesticides, etc.) have greatly increased the productivity of each
farmer and each acre of land.With these improvements, it takes fewer farmers to
produce more food.
Student Learning Statement:
The price of resources determines the price at which producers are willing to sell
their goods and services. Improvements in technology reduce the cost of production.
MARKET PRICES
Supply and demand act in concert to establish “market prices.” Supply and demand
are constantly changing, causing the market to make frequent adjustments.
■ When demand increases (and supply remains constant) prices tend to rise.
■ When demand decreases, prices tend to fall.
■ When supply increases (and demand remains constant) prices tend to fall.
■ When supply decreases, prices tend to rise.
A “market price” (sometimes called a “market-clearing price” or an “equilibrium
price”) occurs when the quantity consumers demand of a good exactly equals the
quantity producers supply of that good.
■ If the price were higher, producers would supply more than consumers would
buy (a “surplus”).
■ If the price were less, consumers would demand more than producers would
supply (a “shortage”).
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Teaching the Economics Content
Student Learning Statement:
Market prices are determined by the interaction of supply and demand.The market
price is the price at which the quantity demanded and the quantity supplied is
the same.
Interpreting a Supply and Demand Graph
The Ohio Grade Six Proficiency Test will assess students’ ability to read and
interpret information from graphs. A good example of a potential test item would
be the use of a supply and demand graph to illustrate the quantities supplied and
demanded at various prices.
■ A supply graph is a representation of the quantities that will be supplied at
each price.
■ A demand graph is a representation of the quantities that will be demanded at
each price.
In the example graph on the next page, the vertical axis is the range of possible
prices.The horizontal axis shows the quantity of product supplied and demanded.
The prices range between $1 and $10.The possible quantities range between
0 units and 100 units.
The following Supply and Demand Schedules list the quantities that will be supplied
and the quantities that will be demanded at each price.
SUPPLY AND DEMAND SCHEDULES
20
Price
Quantity Supplied
Quantity Demanded
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
0
10
20
30
40
50
60
70
80
90
100
90
80
70
60
50
40
30
20
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Teaching the Economics Content
When plotted together, the combined graph will illustrate the market price.When
each quantity demanded and each quantity supplied are plotted on the graph, it
looks like this:
Supply and Demand Graph
S
$10
$9
$8
PRICE
$7
$6
$5
$4
$3
$2
D
$1
10
20
30
40
50
60
70
80
90
100
QUANTITY SUPPLIED AND DEMANDED
In this example, the market price is $6.This is the price at which the quantity
supplied and the quantity demanded are the same—50 units are supplied and
50 units are demanded at the price of $6.
Competition and Markets
The third economics item for the grade six test asks students to understand the
factors that determine the degree of competition in a market and the impact of
competition on a market.
Ohio Grade Six Citizenship Learning Outcome #14:
Competition and Markets
Identify the factors that determine the degree of competition in a market
and describe the impact of competition on a market:
a. identify advantages and disadvantages of competition in the marketplace
b. explain the general relationship between supply, demand and price in a
competitive market
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Teaching the Economics Content
!
TEACHER TIP:
A competitive market
is one with many
buyers and sellers of
the same product.
TEACHER TIP:
The advantages of
competition are lower
prices and higher quality.
Examples of the impact of competition from the Ohio Model Competency-based
Social Studies Program:
Categories of competition, reducing prices, improving quality, offering a
variety of styles, etc.
!
DEFINING COMPETITION
The extent of “competition” in a market is influenced strongly by the
type of market that exists. Economists refer to this as “market structure.”
Generally, the more competitive a market, the lower the price or the
higher the quality of the product.
!
MARKET STRUCTURES
The primary distinguishing characteristic of markets is the number of producers in
the market. A truly “competitive” market has a large number of producers, few
barriers to entry and easy access to technology and market information.Typically,
the products of competitive markets are homogeneous—not distinguishable from
producer to producer.
At the other end of the spectrum is a “monopoly” market. A monopoly is a market
with just one producer controlling supply, market entry and information.
Between monopoly and competitive markets there are a variety of structures
with mixtures of characteristics. Some markets are dominated by just a few large
producers. Some have large and small businesses that share market segments and
differentiate their products.
Student Learning Statement:
Competition among many businesses reduces prices and/or increases the quality
of goods and services. Markets with fewer businesses are less competitive.
UNDERSTANDING COMPETITIVE BEHAVIORS
■ Price
■ Advertising
Producers’ decisions are influenced by the type of market structure in which they
compete.Very competitive producers have few ways to compete except increasing
productivity. A wheat grower, competing against all other wheat growers, can only
make decisions to reduce costs or increase production in order to increase profits.
Each producer must accept the market price.Those who cannot sell goods and
services at a price that includes an acceptable profit are not able to compete.
Student Learning Statement:
Producers in less competitive markets may be able to compete by changing the
price of their products or differentiating their products through advertising.
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Teaching the Economics Content
PRICE
“Price” is what people pay when they buy a good or service and what they receive
when they sell a good or service. In markets where there is less competition and
products are not homogeneous, producers may wish to increase their prices.This
may (but not necessarily) increase the revenues they get from sales.These producers
may also wish to lower prices in order to attract more business.
Student Learning Statement:
Producers can compete by changing the price of their products.
ADVERTISING
“Advertising” provides helpful information to consumers about price, product
availability or quality. It is a mistake to ignore these positive points and focus
primarily on the negative behaviors of some advertisers (such as propaganda,
manipulation and misleading information). Producers also advertise how their
products are different from other similar products. For example, similar breakfast
cereals are advertised as coming in different shapes or flavors. A producer may
advertise a product differently to children than to their parents.
Many people base some of their demand on image or status that is communicated
in advertisements.When the prices of alternatives are equal, the consumers’
tastes and preferences for even small differences between products become the
deciding factors.
Student Learning Statement:
Businesses compete by advertising their products.
A MONOPOLY MARKET
A monopoly exists when one producer has control over resources, special
technology or some other advantage that restricts competition in a market. A
monopoly may result when one producer is the most efficient producer and other
businesses cannot make a profit at the market price.
In some cases, the society has decided that it is desirable to have a monopoly
market. In these cases, some social goal is more important to the group of people
than having a free market without government controls. Of course, privately owned
regulated monopolies still must have the incentive of profit to stay in business.
■ Regulated monopolies are often found in utilities and local transportation.
■ Governments directly operate some monopolies, such as fire and police
protection.
Student Learning Statement:
A monopoly is a market with only one seller of a product.
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Teaching the Economics Content
THE ADVANTAGES OF COMPETITION
Competition usually reduces prices and/or improves quality.
Producers will seek to reduce costs, and thereby market price, in order to increase
profits. Producers may also differentiate the product or improve quality to increase
profits. Competition is a strong force in influencing the producer to meet the wants
and desires of the consumer.
Competition, of course, is not good for everyone. Businesses that cannot produce
at a profit will not survive. People’s lives may be disrupted when businesses fail, but
the result is that the stronger competitors survive.The strongest competitors are
typically the efficient producers.
Many small towns have lost small, local grocery stores, pharmacies or hardware stores to
competition from Wal-Mart® or Kmart® stores.While the citizens of a small town may
value the friendship of the local proprietor or like the personal service they receive, many
of these consumers decide to purchase from the producer who offers the lowest prices or
the best selection. Although the citizens may value the service from the local store, they
are not willing to pay substantially higher prices at those stores.
Furthermore, competition does not guarantee equal results for everyone. Because
all people do not have equal resources, they do not have the same ability to earn
income and to demand goods and services. If society values equal access to goods
and services, it may establish a public policy that controls prices, restricts the
number of competitors or redistributes income.
Student Learning Statement:
A more competitive market with more producers will result in lower market
prices, better quality products or both.
International Trade
The fourth economics item for the grade six test asks students to understand the
principles at work in the international economy.These economic principles are
essentially the same as in the domestic economy.The main rational for international
trade is the principle of comparative advantage—the same principle most people
use every day of their lives to earn income and consume goods and services.
Ohio Grade Six Citizenship Learning Outcome #15:
International Trade
Use information about global resource distribution to make generalizations
about why nations engage in international trade.
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Teaching the Economics Content
!
DEFINING TRADE
“Trade” is a term that refers to the exchange of something of value. A trade can be
a barter (without money) or a transaction using money.Trade is necessitated when
people specialize, since specialization makes people interdependent.
TEACHER TIP:
Potential topics for
international trade
discussions include:
• uneven distribution
of resources
• a nation’s endowment
of resources affects
its economy
• trade-offs of
resource uses
• comparative
advantage
• more efficient use
of resources, imports
and exports
!
DEFINING IMPORTS AND EXPORTS
Examples of trade on the Proficiency Test will focus on goods or services
that are produced in other countries and purchased by people in Ohio or the
United States or goods and services that are sold to people in other countries.
■ To a person in Ohio, an “import” is a good or service produced in another
country and purchased by someone in this country.
■ An “export” is a good or service produced in this country that is purchased by
someone in another country.
Some nations export more goods and services than they import. Others import
more goods and services than they export.The difference between a country’s
imports and exports determines its “balance of trade.”
■ A country that imports more than it exports has a “trade deficit.”
■ A country that exports more than it imports has a “trade surplus.”
!
TEACHER TIP:
Although the concepts
of trade deficits and
surpluses are not in the
Ohio Grade Six Learning
Outcomes, they are very
commonly in the news
that students will hear
or read.
EXCHANGE RATES
Trades between different countries are complicated by the fact that different
countries use different forms of money (currency)—with different monetary values.
The currencies of different nations are exchanged according to their relative values,
or their “exchange rates.”
Suppose that the exchange rate between the United States and Canada is that $1 U.S.
equals $1.50 in Canadian currency. A person in the United States can exchange $1 U.S.
for $1.50 in Canadian money or purchase Canadian goods worth $1.50 Canadian.
On the other hand, the Canadian will have to pay $1.50 in Canadian money for
U.S. goods priced at $1 U.S.
!
TEACHER TIP:
Exchange rates are not
part of the Ohio Grade
Six Learning Outcomes,
but are very commonly
in the news.
Student Learning Statement:
An import is a good or service produced in another country and purchased by
someone in this country. An export is a good or service produced in this country
that is purchased by someone in another country.
TEACHER TIP:
The term “comparative
advantage” does not
appear in the Ohio Grade
Six Learning Outcomes. It
is, however, the economics
concept that explains why
nations engage in trade.
COMPARATIVE ADVANTAGE AND TRADE
A man may choose to be self-sufficient and produce all of his own goods and
services. A woman may grow her own food, build a house, weave cloth and set her
own broken leg. However, it would be easier and more efficient to develop one skill
well, earn an income from that skill and use the income to purchase other goods
and services.When people specialize in one job for which they have a “comparative
advantage” and trade with others, productivity generally increases and people are
better off. Businesses in different regions make these very same choices.
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Teaching the Economics Content
Each region, with its unique set of resources, has a comparative advantage to
produce certain goods or services.When resources are used most efficiently,
everyone benefits—directly or indirectly. If a resource is used more efficiently, the
gain from efficiency (the unused resources) can be used for something else.
Student Learning Statement:
People and nations trade because they do not have all of the resources to
produce efficiently all of the goods and services they want.When two nations trade,
both will benefit.
WHY PEOPLE TRADE
A producer has a comparative advantage in producing a product when his or her
opportunity cost for producing the product is lower than that of other producers
of the same product. Comparative advantage is most often used to explain why
people trade.The following example applies this principle to international trade:
Assume that people in Brazil and Ohio want steel and wheat and that they both have the
resources to produce both products. But the two nations’ costs of producing these products
are different. Enter the benefits of using comparative advantage.
In Ohio, it takes 8 hours of labor to produce one ton of steel and 10 hours of labor
to produce one ton of wheat.Therefore, Ohio must use 18 hours of labor to produce both
products. In Brazil, it takes 15 hours of labor to produce one ton of steel and 12 hours
of labor to produce one ton of wheat. Brazil must use 27 hours to produce both.
If the people in Brazil specialize and produce only wheat, it requires 24 hours of labor to
produce two tons. If the Brazilians trade one ton of wheat to Ohio for a ton of steel, they
will be able to have both goods for three fewer hours of labor.
If people in Ohio specialize and produce only steel, it requires 16 hours to produce two
tons of steel. If they trade one ton of steel to Brazil for a ton of wheat, they can have
both products, saving two hours in production costs.The result is people from both
countries benefit.
Student Learning Statement:
When any two people, businesses or nations specialize and trade, both parties will
benefit from the trade.
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Teaching the Economics Content
SPECIALIZATION
People “specialize” in those things for which they have a comparative advantage.
Students will recognize specialization at home, where different members of the
family specialize in different tasks like cooking, cleaning, repairing the home, etc.The
fact that parents work at a job to earn income is specialization.They specialize in
one kind of work and purchase products they want from specialists in other fields.
Students may experience specialization at school, where one teacher specializes in
science and another specializes in social studies.They will even see it on the
playground, as children with specific skills play one position in soccer, basketball or
other games.Why does the tallest person usually play center on a basketball team?
Student Learning Statement:
When any two people, businesses or nations specialize and trade, resources are
used more efficiently.
SPECIALIZATION AND THE LOCATION OF RESOURCES
A region’s specialization is often influenced by the physical availability of resources.
For example, bananas grow best in tropical climates. It is possible to grow bananas in
Ohio, but the cost of building greenhouses and investing in climate-control equipment to
do so just isn’t worth it. However, entrepreneurship is also important in the production of
bananas. Cincinnati, Ohio, is the headquarters of Chiquita Brands International, Inc., one
of the world’s leading banana growers.The company’s entrepreneurial decisions are made
in Ohio.
It is not unusual for a product to be made from resources found in several parts of
the world. Resources are traded, just as goods and services are traded.
TRADE AND INTERDEPENDENCE
When two or more people, firms or regions specialize and trade to satisfy their
wants, they become interdependent. “Interdependence” in terms of international
trade simply means that the trading partners rely on each other to satisfy wants.
Trading partners rely on each other because either they do not have the resources
or it is less costly to purchase them from someone else.
The world is a network of trade and interdependence. As each region produces
goods to trade with others, interdependence increases. More trade, and the
resulting interdependence, creates a need for greater political cooperation among
nations and social understanding among people of various regions.
Student Learning Statement:
When people specialize and trade to satisfy their wants, they become
interdependent.
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