Unit 4 – International Economics. Standard SSEIN1 The student will explain why individuals, businesses, and governments trade goods and services. a. Define.

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