Intro to International Economics SSEIN1: The student will explain why individuals, businesses, and governments trade goods and services. SSEIN2: The student will explain why countries sometimes erect trade barriers and sometimes advocate free trade.

Specialization and Trade: Everyone Benefits Increases the amount and variety of goods available to all nations; increases efficiency

Absolute Advantage The ability of a nation or region to produce more of a certain product than another country of region

Comparative Advantage The ability of one country/region to produce a good at less of an opportunity cost than another country/region

Example Sugar Fertilizer United States 80 100 Nicaragua 70 50 TOTAL 150 Which country has an absolute advantage in producing sugar? Which country has an absolute advantage in producing fertilizer? Which country has a comparative advantage in producing sugar? Which country has a comparative advantage in producing fertilizer?

Balance of Trade balance of trade = exports – imports A positive balance of trade is a trade surplus (If a nation imports $1 million worth of goods/services and exports $4 million worth of goods/services; trade surplus of $3 million A negative balance of trade is a trade deficit (If a nation imports $2 million worth of goods/services and exports $1 million worth of goods/services; trade deficit of -$1 million

Balance of Payments Looks at all transactions between households, firms, and govts. of one nation and those of other nations Balance of payments = credits – debits Ideally, the balance of payments should be 0 or a positive number

Trade Barriers

What are Trade Barriers? Attempts to limit imports into a country “Protectionism” – govt policy

Types of Trade Barriers #1: Tariffs (tax on certain imports) Make goods more expensive to buy Reduces demand for foreign goods => helps nation’s own industries compete Increases govt. revenue => reduces a nation’s budget deficit

#2: Quotas (limit on the # of certain products that can be imported from another country) Example: U.S. forced a limit on the number of cars that could be imported from Japan

#3: Standards Rules about the quality of imports If imports don’t pass a nation’s standards, they will not be accepted Example: U.S. might ban the import of fruit that has been sprayed with certain pesticides

#4: Subsidies Direct financial aid to certain domestic industries Lower a firm’s production costs and allow domestic firms to compete with lower-cost imports

#5: Embargo Total ban on one or more products from a particular nation Often politically motivated => pressures other govts. to change behavior Example: U.S. embargo on Cuban imports (Fidel Castro seized U.S. property and instituted communism)

Arguments FOR Free Trade Improves economic efficiency Offers consumers of all nations a wide variety of goods/services @ the lowest prices

Arguments AGAINST Free Trade Protection of national security Protection of “infant” industries Protection of jobs

International Trading Blocs #1: North American Free Trade Agreement (NAFTA) United States, Canada, and Mexico Gradual elimination of trade barriers between these countries

#2: European Union (EU) 27 European nations Shared currency called the “euro”

#3: Association of Southeast Asian Nations (ASEAN) Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand, Cambodia, Laos, Myanmar, and Vietnam Elimination of most tariffs in this trading region