International Economics Unit 5

Interdependence The more people specialize in trade the more dependent they become on other countries or people for their products. Ex: Farmers grow food for people and in return rely on manufacturers to make their machinery. This web of interdependence creates a strong incentive for cooperation among countries.

Both parties gain as a result of voluntary, non-fraudulent exchange. This occurs when buyers and sellers exchange freely and willingly. Both parties benefit from the trade. Ex: U.S. makes John Deere tractors and Japan makes TV’s. We trade freely with them because we need them and they need us.

Distinguish between absolute and comparative advantage Absolute Advantage The ability to produce a good or service at a lower opportunity cost than some other producer. This is the economic basis for specialization and trade. The ability to produce more units of a good or service than some other producer, using the same quantity of resources.

Why does most trade take place because of comparative advantage? Benefits of Trade: - it increases competition between firms - it increases the variety available to consumers - it increases the level of training about matters such as accounting, management, and law in low- income countries - comes up with new technologies and production methods http://www.econedlink.org/interactives/index.php?iid=224

Explain the difference between balance of trade and balance of payments Deals only with a country’s imports and exports Calculated by subtracting imports from exports. The record of all transactions between individuals, firms, and governments of one country with those in all other countries in a given year.

Balance of trade/payments Balance of payments When exports exceed imports, this is called a trade surplus. When imports exceed exports, this is called a trade deficit. http://www.econedlink.org/interactives/index.php?iid=222 Refers to funds received by a country and those paid by a country for all international transactions. Payments include: exports and imports, international flow of services, gifts or transfers, and payments for physical assets (rent or interest). Balance of payments should be equal among countries.

Trade Barriers Tariff: tax on imported good or service Quota: limit on quantity of a product that may be imported or exported. Established by the government. http://www.econedlink.org/interactives/index.php?iid=223 Embargo: impose certain conditions before granting consent. Or ban on trade. Standards: expectations for minimal levels of quantity to be met (safety standards) Subsidies: financial assistance granted by the government to a person or assoc. for the purpose of promoting free enterprise.

Cost and Benefits to Trade Costs Increase competition Increase variety Increase level of training Increase in new technology and production methods Protects infant industries Political allegiances Revenue from tariffs Spreading of disease Out-sourcing of jobs Importing bad products Do not benefit from comparative advantage Prices rise (tariffs or quotas)

Examples of trade barriers Trade restrictions: 1. tariffs 2. import quotas 3. non-tariff barriers Most barriers of trade are designed to prevent imports from entering a country. This protects domestic producers. This policy would be called protectionism. Ex: Japan and rice.

Trading Blocks EU: European Union NAFTA: North American Free Trade Agreement (U.S., Canada, Mexico) ASEAN: Association of Southeast Nations MERCOSUR: Common Market of the South (Latin America) Others: -BRIC: Brazil, Russia, India, China - GATT: General Agreement of Tariffs and Trade - WTO: World Trade Organization - IMF: International Monetary Fund -World Bank

Arguments for and against free trade AGAINST it… It is important to keep jobs in the U.S. We don’t want money leaving the country. National security is at stake. Other nations don’t treat their workers fairly. Other nations are “dumping” and don’t open their market to us.

Arguments for and against free trade FOR it… Allows people to buy quality goods imports at good prices, which results in a higher standard of living for people in the U.S. and for our trading partners. http://www.econedlink.org/interactives/index.php?iid=225

Exchange Rates Exchange rate: the amount of one country’s currency that is equal to one unit of another country’s currency. Floating exchange rate is determined by a country’s supply and demand You can find exchange rates on the internet, from newspapers or banks.

Who benefits when exchange rates change? When currency can purchase more of other currencies, it strengthen or appreciates Ex: U.S. dollar compared to Peso * This would encourage imports! When currency can purchase less of other currencies it weakens or depreciates Ex: Euro compared to the U.S. dollar *This would encourage exports!

Exchange Rates The price of one nation’s currency in terms of another nation’s currency. Exchange rates are determined by supply and demand. The U.S. has a floating exchange rate. Exchange rates can be found in newspapers, banks, and online.

Exchange Rates Appreciates in value: Gets Better, More expensive. Depreciates in value: Gets worse, less expensive. Strong Dollar: benefits American importers. Companies (foreign) would pay more. Weak Dollar: U.S. exports increase. It would be better to export because importing would be too expensive. http://www.econedlink.org/interactives/index.php?iid=226

Examples of how individuals and businesses specialize Specialization is a situation in which people produce a narrower range of goods and services than they consume. It increases productivity and interdependence. People do not make everything for themselves, they will specialize in one thing to earn money to buy other products or goods.