Economics of Foreign Trade

The Envelope Activity Each group will receive an envelope with a list of countries. Your job is to classify your countries as either: Industrialized Countries Developing Countries Less-Developed Countries You must then provide an explanation for your decision.

Envelope “A” Industrialized Countries a country with strong business activity that is usually the result of advanced technology and a highly educated population. Residents in industrialized countries tend to have a high standard of living and the population is centered in large cities and suburbs. These countries have a strong infrastructure, communication, and utility systems.

Envelope “B” Less Developed Countries a country with little economic wealth and an emphasis on agriculture and mining. These countries have an abundance of resources but no technology to make use of them. The average income per person is about $5 000 compared to that of the U.S. which is about $25 000. The poor income results in inadequate housing, starvation, and poor health. There is also a high death rate for infants, shorter life span, and potential for political instability. Many industrialized nations help these countries by improving literacy rates, education, poor health care, investment capital, and the political environment.

Envelope “C” Developing Countries Characterized by improving education systems, increasing technology, and expanding industries, all of which increase national income. On their way from being a less developed country to an industrialized nation.

The Economics of Foreign Trade Countries are interdependent with each other and so are their economies. Consumers have come to expect goods and services from around the world, not just from suppliers in their own country.

Absolute Advantage Absolute advantage: exists when a country can produce a good or service at a lower cost than other countries which usually is a result of a country’s natural resources or raw materials.

Absolute Advantage Think of some examples… South American countries have an absolute advantage in coffee production. Canada in lumber. Saudi Arabia in oil production.

Comparative Advantage However, a country may have an absolute advantage in more than one area. If so, it must decide how to maximize its economic wealth.

Comparative Advantage ( An Example) A country may be able to produce both computers and clothing better than other countries. The world market for computers, however, might be stronger. This means the country would better serve its own interests by producing computers and buying clothing from other countries.

Comparative Advantage In this example, a country specializes in the production of a good or service at which it is relatively more efficient. Comparative Advantage: A situation in which a country, individual, company or region can produce a good at a lower opportunity cost than a competitor.

Opportunity Cost Opportunity Cost: The cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action.

Opportunity Cost (Examples) The University example… Here's another example: if a gardener decides to grow carrots, his or her opportunity cost is the alternative crop that might have been grown instead (potatoes, tomatoes, pumpkins, etc.).

Comparative Advantage (An Example) For example, in country A, the opportunity cost of one banana is one apple. In country B, the opportunity cost of one banana is half an apple. Country B has a comparative advantage over country A in terms of bananas.

Measuring Economic Progress Gross Domestic Product (GDP) measures the total value of all final goods and services that a country produces within its borders for a given year. It includes items produced with foreign resources. Gross National Product (GNP) is an older measure of a country’s output; it measures the total value of all final goods and services produced by the resources of a country regardless of where they are located in the world. In Canada, the GNP was replaced by the GDP in 1986.

Measuring Economic Progress Since all nations have different populations, comparing GDP or GNP is not always meaningful. Instead, businesspeople like to use a per capita comparison which refers to an amount per person.

Measuring Economic Progress An important measure of a country’s international trade activity is its balance of trade - the difference between a country’s exports and imports. If exports are greater than imports, there is a trade surplus; if imports are greater than exports, there is a trade deficit.

When a country continually has an unfavorable balance of trade, it owes money to others. Foreign debt is the amount a country owes to other countries. The largest effect on the economy as a result is that the nation must use future income to pay for current and past spending (with interest). This limits the funds available for improving a country’s infrastructure and for providing services for its citizens in the future.