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Unit 4 – International Economics
Standard
SSEIN1 The student will explain why individuals, businesses, and governments trade goods and services.
a. Define and distinguish between absolute advantage and comparative advantage.
b. Explain that most trade takes place because of comparative advantage in the production of a good or service.
c. Explain the difference between balance of trade and balance of payments.
What is Trade?
The voluntary exchange of goods/services
Also known as commerce
Why Trade?
Resources are not distributed equally around the globeLand – agriculture vs. oilLabor – high literacy rate = skilled
workforceCapital – factories, infrastructure(Entrepreneurship)
Trade
Because countries differ in resources, they differ in the production of g/s
Leads to specialization Specialization – producing certain g/s
rather than what you need
Do what you are good at…trade for what you’re not!
Trade
Countries then rely on each other for the production of g/s.
This is known as interdependence.
Absolute vs. Comparative Advantage Absolute Advantage – when a
nation/person can produce more of a g/s with given resources
Who has the absolute advantage?
Pizza Salads
9 36
6 12
Nino
Tony
Comparative Advantage – the ability to produce most efficiently given all the other products that could be produced
Specialization in what you do best given the resources available
Opportunity cost determines comparative advantage.
Lower opportunity cost is where you have comparative advantage.
Who has the comparative advantage in Pizza? Salads?
(Opportunity Cost of a)
Pizza(Opportunity Cost of a)
Salad
4 salads ¼ pizza
2 salads ½ pizza
Nino
Tony
International Trade and Comparative Advantage
Cheese Wheat
United States 3 12
France 2 4
Which country has the absolute advantage in cheese? Wheat?
Which country has the comparative advantage in cheese? Wheat?
Would these countries benefit from trade?
US has absolute advantage in both cheese and wheat. (They produce more than France.)
France has the comparative advantage in cheese. (They produce cheese more efficiently. They have a lower opportunity cost…don’t have to sacrifice as much wheat as the US.)
(Opportunity Cost of) Cheese
(Opportunity Cost of) Wheat
United States 4 units of wheat
¼ unit of cheese
France 2 units of wheat
½ unit of cheese
The United States has a comparative advantage in the production of wheat.( They produce it more efficiently. The opportunity cost of producing wheat is lower…give up less cheese than France.)
(Opportunity Cost of) Cheese
(Opportunity Cost of) Wheat
United States 4 units of wheat
¼ unit of cheese
France 2 units of wheat
½ unit of cheese
Barriers to Trade
Most countries have some sort of trade restrictions which prevents foreign goods from moving freely into the country
Most common types: tariffs, quotas The idea is to “protect” domestic
industries
Protectionism
The use of trade barriers to protect industries from foreign competition
Ex. US Steel (tariff)
Tariff: Tax on imported goodsUS Steel
Quota: a limit on the amount that can be imported
Embargo
Boycotting trade with another country Typically for political reasons
Ex. Trade embargo with Cuba
Other Barriers to Trade
Standards – certain requirements set by governments that must be met in order to import a good (sometimes too strict)
Subsidies – payments by a government to a business that helps keep it going (thus preventing trade at fair market prices)Canada and softwood timber
Free Trade Agreements
Trading Blocks – countries who have agreed to limit or restrict trade barriers
NAFTA – North American Free Trade AgreementGoal is to eliminate all tariffs/trade
barriers between Canada, United States, and Mexico by 2009
EU – European Union Group of (Western)
European countries that abolished trade restrictions among member countries
Replaced individual currencies with the Euro
Very competitive with the US dollar
ASEAN – Association of Southeast Asian NationsPromotes economic and social growth10 member countries including
Philippines, Thailand, VietnamGoal is to complete free trade
agreements with Japan, China, India, South Korea, Australia, and New Zealand by 2013
Exchange Rates
The value of a foreign nation’s currency in terms of the home nation’s currency
Exchange rates fluctuate on a daily basis
Tuesday, October 02, 2007
1 USD in USD
Australian Dollar 1.13045 0.884603
British Pound 0.489788 2.0417
Canadian Dollar 1.0002 0.9998
Chinese Yuan 7.5093 0.133168
Euro 0.706065 1.4163
Hong Kong Dollar 7.7625 0.128824
Indian Rupee 39.65 0.0252207
Japanese Yen 115.83 0.00863334
Mexican Peso 10.9101 0.0916582
South African Rand 6.9091 0.144737
South Korean Won 915.7 0.00109206
Swiss Franc 1.175 0.851064
Downloaded from http://www.x-rates.com
Appreciation – an increase in value of a currency
“Strong” Ex. Strong US dollar…
Increase importsDecrease exports
Depreciation – a decrease in the value of a currency
“Weakening” Ex. Weak US dollar…
Decrease importsIncrease exports
Calculating Exchange Rates
If converting to US dollars…
Foreign Currency
Foreign Currency per dollar
Practice
A new sweater in England costs £50. What is the cost in US dollars?
A dinner in France costs €25. What is the cost in US dollars?
A hotel room in Japan costs ¥20,000. What is the cost in US dollars?
Balance of Trade vs. Balance of Payments
Balance of Trade: the relationship between a nation’s imports and exports
Balance of Payments: the financial record of all financial payments between countries Tracks the flow of money in or out of a
country