International Economics Why, no matter what anyone might hear, TRADE IS GOOD

Intro Movie Response What are the advantages, disadvantages of Globalization? What is the difference between comparative and absolute advantage? Identify and explain the different barriers to trade. (List some examples as well)

International Trade When countries interact with other countries, each country gains a higher standard of living. A high degree of economic interdependence exists in the world No country is able to get everything it needs within its own borders. We live in a time in which most countries are moving toward open economies: High degrees of free trade with few trade barriers such as quotas and tariffs.

Trade Efficiency Absolute Advantage: one country can produce a product at lower cost or with higher labor productivity Comparative Advantage: One country can produce at a lower opportunity cost than another country

Why Nations Trade Comparative Advantage is the economic basis for specialization and trade. If individuals and countries specialize in producing the goods in which they have the comparative advantage and trade for the goods in which others have the comparative advantage, both parties will be better off. WHY??? SCARCITY! Uneven distribution of resources

Bert and Betsy’s Dilemma Household Chores (Output per hour) Dishwashing (number of loads) Sweeping (number of trash loads) Betsy 2 3 Bert 1

Comparative Advantage Shoes Wheat China 400 100 U.S.A 1000 500 .25 wheat 4 shoes .5 wheat 2 shoes Opportunity Cost in red

Important Trade Agreements Trade Agreements are documents that outline the conditions under which trade will take place between nations. World Trade Organization (WTO) NAFTA: The North American Free Trade Agreement. CAFTA: The Central American Free Trade Agreement. ASEAN: Association of Southeast Asian Nations EU: European Union US is member of World Trade Organization (WTO) Organization that seeks to reduce protectionism around the world.

Trade Barriers Tariffs Quotas Embargos Standards Subsidies Costs vs. Benefits over time . . .

Balance of Payments Current Account: a nation’s balance of trade, or it’s net income Capital Account: the value of a nation’s assets Trade of Goods Trade of Services Income from Investments Investments in Foreign countries Investments by Foreign countries in the U.S.

Balance of Trade Trade Surplus – the value of a nation’s exports exceeds the value of what they import Trade Deficit – the value of a nation’s exports are less than the value of what they import

Warm-up List two trade barriers Explain how each of these acts as a barrier to trade.

Exchange Rates Relative value of the American dollar in exchange for foreign currencies. Most exchange rates are “floating”, e.g., they change based on the relative Supply and Demand for a currency. The value of the dollar compared to the value of other currencies is determined by supply and demand. Demand for U.S. dollars is synonymous with demand for U.S. products. Foreigners importing U.S. products must pay U.S. companies in dollars and therefore must purchase dollars to purchase American made products. High demand for American products will drive the value of the dollar up compared to other currencies. Current Dollar Exchange Rates

Strong Dollar Weak Dollar Exports are more expensive to world Imports are cheaper to Americans Fewer U.S. jobs Less Inflation More Foreign Investment Less expensive foreign travel Exports are cheaper to the world Imports are more expensive to Americans More U.S. jobs Less Foreign investment More expensive foreign travel

Weak Dollar What is a weak dollar? The value of the dollar falls compared to one or more other currencies. More US dollars are necessary to purchase foreign currency. The value of the dollar is depreciating. Foreign exporters – because the price of foreign goods and services are higher

Weak Dollar Who is helped by a weak dollar? US producers – because they are competing with higher-priced imported goods and services Foreign consumers – because they can buy US goods and services at lower prices US exporters – because American goods and services become less expensive for foreign consumers.

Weak Dollar Who is hurt by a weak dollar? US consumers – because the prices of foreign goods and services increase US investors who invest in companies in other nations – because the price of foreign securities increases Foreign exporters – because the price of foreign goods and services are higher

Strong Dollar What is a strong dollar? The value of the dollar rises compared to one or more other currencies. More foreign currency are necessary to purchase US dollars. The value of the dollar is appreciating.

Strong Dollar Who is helped by a strong dollar? US consumers – because the prices of foreign goods and services are lower US investors who invest in companies in other nations – because the price of foreign securities decreases US importers – because they can sell foreign goods and services at lower prices

Strong Dollar Who is hurt by a strong dollar? US producers – because they are competing with lower-priced imports Foreign consumers – because US goods and services are more expensive for them to purchase US exporters – because American goods and services become more expensive for foreign consumers

Assessment If the exchange rate between the US dollar and Australian dollar changes from 1USD = 1.8 AUD to 1USD = 1.5 AUD then which currency has depreciated (lost) value? 1 USD = .90 EUR French soup = 1.80 euros. I want to buy 5 cups of French soup. How much would this cost in USD?