Why Do Nations Trade? Absolute advantage – a person or nation has an absolute advantage when it can produce more of a given product using a given amount of resources. (THEY CAN PRODUCE MORE OF SAME PRODUCTS!) Comparative advantage – the ability to produce a product most efficiently given all other products that could be produced

Law of Comparative Advantage – The idea that a nation is better off when it produces goods or services for which it has a comparative advantage –Nations produce goods for which they have a Comparative advantage & trade for other goods. Consider the Production Possibility Curve – a graph that shows alternative ways to use an economys resources. (see board). Even if a country can produce several products, if the opportunity cost (the sacrifice) it pays to produce one product is lower than other countries it will a comparative advantage. Therefore it will produce the one product and trade for the other. The product that it produces more efficiently will be the preferred product.

Why Do Nations Trade? Nations produce goods for which they have a Comparative advantage & trade for other goods. –They export goods for which they have the comparative advantage. Efficiency, specialization, human capital, & technology, and available resources all play a part in comparative advantage. –They import other goods & services.

How Do Trade Barriers & Trade Agreements Affect Trade?

How Do Trade Barriers Affect Trade? Trade Barrier – any restriction that prevents a foreign good or service from entering a nations territory Types of Trade Barriers – KNOW, KNOW!!! –Import Quotas – a limit on the amount of goods that can be imported. –Voluntary Export Restraints – a self imposed limitation on the number of products that one country ships to another. A country voluntarily reduces the number of its exports to a country to reduce the chances that the country will set up a trade barrier

How Do Trade Barriers Affect Trade? Types of Trade Barriers – KNOW, KNOW!!! –Import Quotas – a limit on the amount of goods that can be imported. –Voluntary Export Restraints – a self imposed limitation on the number of products that one country ships to another. –Tariffs – a tax on an imported good Customs duty –a tax on items purchased abroad –Other barriers – High licensing fees to sell. Health & safety regulations

How Do Trade Barriers Affect Trade? The Effect of Trade Barriers – –Increased prices for foreign goods. –Trade wars – a cycle of increasing trade restrictions. Arguments for trade barriers – why do countries impose trade barriers? –Protectionism – the use of trade barriers to protect a nations industries from foreign competition. Protect jobs Protects infant industries Safeguards national security

How Do Trade Agreements Affect Trade? An International Trade Agreement – The cooperation of at least two countries to reduce trade barriers and tariffs in order to trade with each other. KNOW!!!! –World Trade Organization (WTO)– a world wide organization whose goal is freer global trade and lower tariffs. –(EU) European Union – a regional trade organization made up of European nations –NAFTA (North American Free Trade Agreement) – an agreement to eliminate trade barriers between U.S, Mexico, & Canada. KNOW!!!!

Assume that you are planning a trip to a foreign country. Aside from the plane fare you have two thousand dollars to spend. You really want to go to the country where you can buy the most souvenirs and gifts. How will you decide which country to visit by determining which country will give you the most for your American dollars? BELL RINGER

Measuring Trade? EXCHANGE RATES – The value of a foreign nations currency in terms of the home nations currency. –The exchange rate enables you to convert prices in one currency to prices in another currency. For example if you were going to Mexico and the exchange rate was 10 pesos = $1.00 and a hotel room cost 500 pesos you would pay $50.00 American dollars for the hotel room. In the same example if the exchange rate was 5 pesos =$1.00 and a hotel room cost 500 pesos you would pay $ for the same room.

–In the first example the American dollar would be stronger against the peso and would buy twice as much as in the second example. Therefore travel to Mexico from America would be a good thing. –In the second example the American dollar would be weaker against the peso. It would take twice as much money to buy the same thing. Therefore travel to Mexico from America would not be a good thing.

Lets consider the same example but this time you live in Mexico. You are traveling to America and the exchange rate was $1.00 = 10 pesos and a hotel room cost $50 you would pay 500 pesos for the hotel room. If the exchange rate was $1.00 = 5 pesos and a hotel room cost $50.00 you would pay 250 pesos for the same room. In this case it is cheaper to travel from Mexico to America because the pesos will buy more of U.S. dollars.

American Dollar using values from Wednesday, November 30, 2011 click on values to see graphs 1 USD in USD Argentine Peso Australian Dollar Brazilian Real British Pound Bulgarian Lev Canadian Dollar Chilean Peso Chinese Yuan Colombian Peso Croatian Kuna Danish Krone Euro Hong Kong Dollar Hungarian Forint Iceland Krona Indian Rupee Indonesian Rupiah Israeli New Shekel Japanese Yen Latvian Lat Lithuanian Litas Malaysian Ringgit Mexican Peso New Zealand Dollar Norwegian Kroner Pakistan Rupee Philippine Peso Romanian Leu Russian Ruble Singapore Dollar South African Rand South Korean Won Sri Lanka Rupee Swedish Krona Swiss Franc Taiwan Dollar Thai Baht Trinidad/Tobago Dollar Turkish Lira Venezuelan Bolivar

Measuring Trade? EXCHANGE RATES – are measured in terms of strong or weak currencies. –An increase in the value of a currency is called appreciation. A currency has a higher value when it buys more of another nations currency. For example if the $1.00 buys 100 yen and the dollar appreciates it will buy 120 yen. It buys more yen for the same value. –The dollar is stronger against the yen. If the dollar depreciates it will buy 75 yen. It buys less yen for the same value. –The dollar is weaker against the yen

Balance of Trade – the relationship between a nations imports and exports. –When a nation export more than it imports it has a trade surplus. If a countrys exports exceed imports the value of its currency remains high. –When a nation imports more than it exports the imbalance results in a trade deficit. If a countrys imports exceed exports the value of its currency falls. The higher the deficit the weaker the currency.

Assume that you are planning a trip to a foreign country. Aside from the plane fare you have two thousand dollars to spend. You really want to go to the country where you can buy the most souvenirs and gifts. How will you decide which country to visit by determining which country will give you the most for your American dollars? BELL RINGER