International Trade Absolute Advantage: when a country can easily produce more of a particular product than another country Comparative Advantage: when a country has a lower opportunity cost when giving up production of a product in order to produce another product

Barriers to Trade: Tariffs A tax on imported goods. There are two types of tariffs: Protective: a tariff high enough to protect domestic industries that are not efficient. Revenue: a tariff high enough to generate revenue for the government without discouraging imports.

Tariffs A tax added to imported goods Example: A tax of 15% makes jewelry from Mexico more expensive than jewelry made in the U.S.

Quota Limits the amount of a good allowed to be imported into the country. Example: Korea may export only 15,000 automobiles a year to the U.S.

Embargo The government completely prohibits the import of a good/service.

Standards Standards are usually intended to ensure safety of imported goods and make sure that goods comply with local laws. Example: lead-based paint—allowed in some other countries, but not in the U.S.

Subsidies Government makes payments (a subsidy) to a local supplier in order to reduce the production costs of the supplier. Example: The sugar industry asks the government to provide financial assistance to make it possible to sell its products overseas at a lower price that will compete well in other countries.

Balance of trade The value of exports minus imports. A trade deficit occurs when imports are greater than exports. A trade surplus occurs when exports are greater than imports.

Balance of Payments The difference between the value of exports and the value of imports plus any other monetary transactions between nations. (earnings on investments, royalties from copyrights, fees for services, etc.) The balance of payments is usually a larger number than the balance of trade.

Is a trade deficit a problem? When we have a trade deficit, the value of imports is higher than the value of exports, so we’re supplying a lot of dollars around the world. When the supply of dollars increases and the demand for dollars remains the same, the dollar depreciates (goes down).

Trading Blocs and Trade Agreements NAFTA: trade agreement between U.S., Canada, and Mexico to encourage free trade (few, if any, barriers) among these countries before trading with other countries, if possible. EU: European Union—trade agreement between 28 European nations with the addition of a common currency—the Euro. ASEAN: Association of Southeast Asian Nations WTO: World Trade Organization—tries to facilitate free trade and help with trade disagreements

Trade Agreements: Good or Bad? NAFTA ↓

Jobs Lost and Gained due to NAFTA

Foreign Exchange Value of currency Appreciate = strengthen Depreciate = weaken

For example… If the exchange rate between the dollar and the peso goes from 10 pesos/dollar to 15 pesos/dollar, the dollar is appreciating and the peso is depreciating. If the exchange rate between the dollar and the peso goes from 10 pesos/dollar to 5 pesos/dollar, the dollar is depreciating and the peso is appreciating.