International Trade And Exchange Rates International Economics International Trade And Exchange Rates

Advantages of International Trade Allows a country to specialize Increases efficiency More goods and services Lower prices for consumers Greater diversity of goods and services Higher standard of living

Two Types of Advantage Absolute Advantage Country A can produce MORE of a good than country B Ex. Brazil (sugar) and USA (cars) Large countries tend to always have absolute advantage over small ones Comparative Advantage Country A can produce a good more EFFICIENTLY than country B Ex. Costa Rica (sugar) and USA (cars) Large countries can still benefit from trade with small ones because of comparative advantage

Comparative Advantage and Opportunity Cost Why would a big country trade with a small country if it had an absolute advantage in everything? COMPARATIVE ADVANTAGE!!!! If we try to produce all of our own sugar, pineapples, and coffee, it would be inefficient and too expensive (BIG opportunity costs) Hello, Costa Rica! Two countries WON’T trade if the opportunity cost is the same (no comparative advantage)

An EOCT type question The table below represents the amount of wheat and sugar that Brazil and the USA can produce in one day (in thousands). Who has an absolute advantage in wheat? In sugar? Who has a comparative advantage in wheat? In sugar? WHEAT SUGAR USA 60 45 BRAZIL 50 40

Trade Balances Balance of Trade Value of all goods and services exported minus value of all imported Trade surplus or Trade deficit Balance of Payments Includes balance of trade AND a country’s official reserves in its own and other countries’ currencies

Trade Deficits Trade deficits cause the international value of our dollar to fall. That means the dollar is worth less than other currencies. WHY do trade deficits do this?

Barriers to Trade: Protectionism Tariff: tax on an imported goods Quota: limit on imported goods Embargo: prohibiting an import Standards: safety rules on imports Subsidy: Government payments to their own producers of a product Costs? (remember, government actions that impact economics produce floors or ceilings) Benefits?

Trend More International Trade NAFTA: North American Free Trade Agreement (Canada, Mexico, USA) EU: European Union (most European Nations)

Exchange Rates One US Dollar In US Dollars Euro .71 1.40 International Trade Currency exchanges Exchange rate: price of one country’s currency compared to another’s Rates change as macroeconomic conditions change If you travelled to Europe with $100 and exchanged it into Euros, how many Euros would you get? US Dollar Exchange Rate One US Dollar In US Dollars Euro .71 1.40

Dollar to Euro Conversion IF YOU WANTED TO GO ON A TRIP TO PARIS WHAT WOULD HAVE BEEN THE BEST TIME TO TRAVEL?

Euro to Dollar Conversion IF YOU ARE A GERMAN, WHAT WOULD HAVE BEEN THE BEST TIME TO GO TO DISNEYWORLD ON VACATION?

Exchange rate questions High demand for US exports causes what to happen to international value of dollar? If the USA demands increasing amounts of imports what will happen to international value of dollar? Which kinds of American businesses are WINNERS when the international value of the dollar falls? (weak dollar)