Economics for Leaders International Markets EFL Lesson 10

Economics for Leaders People Trade ! Countries don’t trade –

Economics for Leaders Voluntary Trade Creates Wealth - Local trade Regional trade National trade International trade always

Economics for Leaders Domestic or International purchases: Fundamentally the same decision Do the anticipated benefits outweigh the costs?

Economics for Leaders Opening Markets Is Creating Wealth

Economics for Leaders Specialization & division of labor creates wealth – but the hard question is: Who should produce what? Because of the Law of Comparative Advantage, both parties can gain from lower costs and greater output, through specialization and exchange. What is your lowest opportunity cost alternative?

Economics for Leaders Zeke and Zac Who Should: Drive the truck ? Load the garbage? What if – Zac doesn’t have a drivers license?

Comparative advantage depends on different opportunity costs – even when one trading partner can do both things better Ben Franklin 1 econ lesson 2 history lessons Adam Smith 12 econ lessons 3 history lessons Who should prepare the lessons for each course?

Comparative advantage depends on differing opportunity costs Ben Franklin 1 econ lesson costs 2 history lessons 1 history lesson costs 1/2 econ lesson Adam Smith 1 econ lesson costs 1/4 history lesson 1 history lesson costs 4 econ lessons Ben should teach history Adam should teach economics

Domestic & International Trade BOTH thrive on specialization according to comparative advantage Goods are Produced at least cost when people specialize according to the principle of Comparative Advantage Lesson - Don’t try to do everything; it;s Not efficient Trade between people in different countries creates wealth – even if people in one country are better at doing everything.

Economics for Leaders What stands in the way of trade?

Transaction costs are real! BUT they can be reduced by: Transportation technology Storage technology Communication technology Monetary union Cutting the red tape

Economics for Leaders Maps adapted from Charles O. Paullin, Atlas of Historical Geography, Carnegie Foundation, 1932 Travel Time from New York City: 1800

Economics for Leaders Travel Time from New York City: 1830

Economics for Leaders Travel Time from New York City: 1857

Economics for Leaders Travel Time from New York City: 1930 (by Rail)

Trade policies affect economic growth Policies that restrict international trade inhibit the ability of markets to create wealth. Tariffs, quotas, regulations on content and production processes hurt both buyers and sellers All participating countries benefit from international trade agreements and associations that reduce barriers to trade

Economics for Leaders NAFTA Evidence:

Economics for Leaders

Economics for Leaders WTO (formerly GATT)

Economics for Leaders European Monetary Union

Economics for Leaders What else restricts trade?

Economics for Leaders What is seen and what is not seen What is seen: “Sun is an unfair competition” Protect the candlemakers! It will help agriculture It will encourage shipping Whaling will flourish What is not seen: Light was for free, now it costs Resources are used up Overall, the result is impoverishment

Exchange rates: the “prices” of currencies in international currency markets (Government manipulation of currency markets can adversely affect the flow of trade.)

Changes in international exchange rates affect the relative purchasing power of a nation’s currency Strong Dollar Weak (or falling) dollar Which is better?

Economics for Leaders Trade Balance Imports Exports

Economics for Leaders Pierre Sells (Exports) Bread... Then What?

Economics for Leaders What Can Pierre Do with $$US ? Take his Cheri to his favorite bistro at the Eiffel Tower? Mais NON! Buy U.S goods & services OR U.S. assets ? Oui!

Economics for Leaders Balance of Payments Current Account Goods & Services Capital account Financial flows

The “Big Ideas” from Lesson 10: 1.International trade is similar to domestic trade – people choose to trade and voluntary trade creates wealth. 2.Trade allows people to specialize in their lowest opportunity cost production. 3.Comparative advantage encourages specialization and trade, both domestically and internationally. 4.Specialization, based on comparative advantage, increases productivity and economic growth.

The “Big Ideas” from Lesson 10: 5.Exchange rates reflect the supply and demand for nations’ currencies. Changes in currency values affect the flow of trade. 6.Trade in goods, services, capital, and financial assets always balances.