International Trade

Trade-Offs  Sacrificing one good or service to produce or purchase another.  Opportunity Cost – Value of the next best alternative that was given up for what was chosen. ◦ Ex. If you have a job that requires you to work after school your opportunity cost is what you could have done instead (play a school sport perhaps)

Production Possibilities Curve  PPC – Graph showing the maximum combinations of goods and services that can be produced from a fixed amount of resources in a given period of time. ◦ Production Possibilities Curve can help show trade-offs and opportunity cost ◦ Other factors sometimes need to be considered.  How long it takes to make a switch  Future outlook  Benefits received or lack there of for government goods and services.

Consumer Vehicles Military Supplies

 Imports – Bringing goods in  Exports – Sending goods out

 Absolute Advantage – Ability of one country to produce more output per unit of input than another country.

 Comparative Advantage – Ability of one country to produce a product at a lower opportunity cost than another country.

 Specialization – Produce and export a limited assortment of goods for which the nation is particularly well suited to most efficiently use its resources.

5-step process to solve all trade problems: 1) Constructing a trade table which gives you numerical ratios of trade-offs: 2)Determine which country has an absolute and comparative advantage in each good 3)Determine which country will produce which good 4)Find the range of acceptable trade that makes each country better off. (Terms of Trade) 5) Graph the end result of a beneficial trade on the original PPF graph Wheat Coffee Wheat

Wheat Coffee Wheat STEP #1 Set up an Opportunity Cost Table BRAZIL MEXICO 1 Coffee = ____ Wheat 1 Coffee = _____ Wheat 1 Wheat = ____ Coffee Opportunity Cost Table BRAZIL MEXICO (give-up) (gain) 1 2 1/2 1

Equally efficient at Coffee Absolute Advantage Wheat Comparative Advantage Wheat Equally efficient at Coffee Comparative Advantage Coffee Mexico produces Coffee & Brazil produces Wheat STEP #2 Determine who has a: COMPARITIVE ADVANTAGE BRAZIL MEXICO 1 Coffee = __1__ Wheat 1 Coffee = __1/2___ Wheat 1 Wheat = __1__ Coffee 1 Wheat = __2__ Coffee Step #3 Determine who will produce which good Brazil: 1000 Coffee or 1000 Wheat Mexico 1000 Coffee or 500 Wheat

BRAZIL MEXICO 1 Coffee = ____Wheat 1 Coffee = _____ Wheat 1 Wheat = ____ Coffee 1 Wheat = ____Coffee 1/ Mexico must buy wheat at a ratio above ½ wheat per coffee Wheat Trading: must be higher than the opportunity cost Brazil must sell Wheat at a ratio below 1 wheat per coffee Coffee Trading: must be higher than the opportunity cost coffee wheat Step #4 Develop Range for Efficient Trade 300 wheat 400 coffee = wheat 400 coffee = 1.33 Terms of Trade: above ½ & below 1 wheat per coffee or above 1 & below 2 coffee per wheat

BRAZIL MEXICO Wheat Coffee Wheat * (500,500) * (250,500) 400 Coffee 300 Wheat BRAZIL 0 Coffee 1,000 Wheat 1,000 Coffee 0 Wheat MEXICO. (700, 400). (300, 600) after trade Trade Example: STEP #5 Graph a beneficial Trade

 Exports minus Imports

 Tariffs – Tax on imported goods ◦ Can be protective tariffs or revenue tariffs.

 Import Quota – A restriction on the number of units of a particular good that can be brought into the country.

 Embargo – Completely cutting off imports and exports with another country.

 Agreements and Organizations that attempt to break down trade barriers between nations.  NAFTA – North American Free Trade Agreement  EU – European Union

◦ Telecommunications – Long Distance Electronic Communications  Telegraph, Telephone, Fax, Internet, Cell Phones, Satellites, Cable TV  What has TV done to culture?

 World becoming one large interconnected economy.  Largely due to advancements in telecommunications  Financial Markets (1970’s – 1980’s) – Became worldwide traded 24 hours a day. Currency, Government Bonds, Stock Markets.

 Price of one nation’s currency in terms of another nation’s currency. Exchange Rate

 Most exchange rates are Flexible Exchange Rates ◦ The forces of supply and demand are allowed to set the price of various currencies  Depreciation – Fall in the price of a currency through the action of supply and demand. Cont.