Why Do Nations Trade? Absolute advantage – a person or nation has an absolute advantage when it can produce more of a given product using a given amount of resources. (THEY CAN PRODUCE MORE OF SAME PRODUCTS!) Comparative advantage – the ability to produce a product most efficiently given all other products that could be produced

Law of Comparative Advantage – The idea that a nation is better off when it produces goods or services for which it has a comparative advantage –Nations produce goods for which they have a Comparative advantage & trade for other goods. Consider the Production Possibility Curve – a graph that shows alternative ways to use an economy’s resources. (see board). Even if a country can produce several products, if the opportunity cost (the sacrifice) it pays to produce one product is lower than other countries it will a comparative advantage. Therefore it will produce the one product and trade for the other. The product that it produces more efficiently will be the preferred product.

Why Do Nations Trade? Nations produce goods for which they have a Comparative advantage & trade for other goods. –They export goods for which they have the comparative advantage. Efficiency, specialization, human capital, & technology, and available resources all play a part in comparative advantage. –They import other goods & services.

How Do Trade Barriers & Trade Agreements Affect Trade?

How Do Trade Barriers Affect Trade? Trade Barrier – any restriction that prevents a foreign good or service from entering a nation’s territory Types of Trade Barriers – KNOW, KNOW!!! –Import Quotas – a limit on the amount of goods that can be imported. –Voluntary Export Restraints – a self imposed limitation on the number of products that one country ships to another. A country voluntarily reduces the number of its exports to a country to reduce the chances that the country will set up a trade barrier

How Do Trade Barriers Affect Trade? Types of Trade Barriers – KNOW, KNOW!!! –Import Quotas – a limit on the amount of goods that can be imported. –Voluntary Export Restraints – a self imposed limitation on the number of products that one country ships to another. –Tariffs – a tax on an imported good Customs duty –a tax on items purchased abroad –Other barriers – High licensing fees to sell. Health & safety regulations

How Do Trade Barriers Affect Trade? The Effect of Trade Barriers – –Increased prices for foreign goods. –Trade wars – a cycle of increasing trade restrictions. Arguments for trade barriers – why do countries impose trade barriers? –Protectionism – the use of trade barriers to protect a nation’s industries from foreign competition. Protect jobs Protects infant industries Safeguards national security

How Do Trade Agreements Affect Trade? An International Trade Agreement – The cooperation of at least two countries to reduce trade barriers and tariffs in order to trade with each other. KNOW!!!! –World Trade Organization (WTO)– a world wide organization whose goal is freer global trade and lower tariffs. –(EU) European Union – a regional trade organization made up of European nations –NAFTA (North American Free Trade Agreement) – an agreement to eliminate trade barriers between U.S, Mexico, & Canada. KNOW!!!!

Assume that you are planning a trip to a foreign country. Aside from the plane fare you have two thousand dollars to spend. You really want to go to the country where you can buy the most souvenirs and gifts. How will you decide which country to visit? BELL RINGER

Measuring Trade? EXCHANGE RATES – The value of a foreign nation’s currency in terms of the home nation’s currency. –The exchange rate enables you to convert prices in one currency to prices in another currency. For example if you were going to Mexico and the exchange rate was 10 pesos = $1.00 and a hotel room cost 500 pesos you would pay $50.00 American dollars for the hotel room. In the same example if the exchange rate was 5 pesos =$1.00 and a hotel room cost 500 pesos you would pay $ for the same room.

–In the first example the American dollar would be stronger against the peso and would buy twice as much as in the second example. Therefore travel to Mexico from America would be a good thing. –In the second example the American dollar would be weaker against the peso. It would take twice as much money to buy the same thing. Therefore travel to Mexico from America would not be a good thing.

Lets consider the same example but this time you live in Mexico. You are traveling to America and the exchange rate was $1.00 = 10 pesos and a hotel room cost $50 you would pay 500 pesos for the hotel room. If the exchange rate was $1.00 = 5 pesos and a hotel room cost $50.00 you would pay 250 pesos for the same room. In this case it is cheaper to travel from Mexico to America because the pesos will buy more of U.S. dollars.

Value of 1 American Dollar Argentine Peso ARS Australian Dollar AUD Botswana Pula BWP Brazilian Real BRL British Pound0.6378GBP Brunei dollar1.2956BND Bulgarian Lev BGN Canadian Dollar CAD Chilean Peso CLP Chinese Yuan CNY Colombian Peso COP Croatian Kuna HRK Danish Krone DKK Euro EUR Hong Kong Dollar HKD Hungarian Forint HUF Iceland Krona ISK Indian Rupee INR Indonesian Rupiah IDR Iranian Rial10855IRR Israeli New Shekel ILS Japanese Yen JPY Kazakhstani Tenge147.72KZT Kuwaiti Dinar0.277KWD Latvian Lat LVL Libyan Dinar1.9324LYD Lithuanian Litas LTL Malaysian Ringgit MYR Mauritius Rupee MUR Mexican Peso13.572MXN Nepalese Rupee83.26NPR New Zealand Dollar NZD Norwegian Kroner NOK Omani Rial0.3845OMR Pakistan Rupee PKR Philippine Peso PHP Qatari Rial3.64QAR Romanian Leu RON Russian Ruble30.964RUB Saudi Riyal3.75SAR Singapore Dollar SGD South African Rand8.1659ZAR South Korean Won KRW Sri Lanka Rupee LKR Swedish Krona SEK Swiss Franc CHF Taiwan Dollar TWD Thai Baht THB Trinidad/Tobago Dollar6.3891TTD Turkish Lira1.835TRY Venezuelan Bolivar VEF

Measuring Trade? EXCHANGE RATES – are measured in terms of “strong” or “weak” currencies. –An increase in the value of a currency is called appreciation. A currency has a higher value when it buys more of another nation’s currency. For example if the $1.00 buys 100 yen and the dollar appreciates it will buy 120 yen. It buys more yen for the same value. –The dollar is stronger against the yen. If the dollar depreciates it will buy 75 yen. It buys less yen for the same value. –The dollar is weaker against the yen

Balance of Trade – the relationship between a nation’s imports and exports. –When a nation export more than it imports it has a trade surplus. If a country’s exports exceed imports the value of its currency remains high. –When a nation imports more than it exports the imbalance results in a trade deficit. If a country’s imports exceed exports the value of its currency falls. The higher the deficit the weaker the currency.

Assume that you are planning a trip to a foreign country and everything in the country cost 100 dollars in that country’s currency. From the list shown choose five countries that will allow you to buy the most for your American dollars. Afterwards choose five countries that will cause you to pay out more of your American dollars. BELL RINGER