1. Unit 4: International Economics
SSEIN 1
Unit 4: International Economics

2. SSEIN1 The student will explain why individuals, businesses, and governments trade goods and services.
a. Define and distinguish between absolute advantage and comparative advantage.
b. Explain that most trade takes place because of comparative advantage in the production of a good or service.
c. Explain the difference between balance of trade and balance of payments.

3. Absolute & Comparative Advantages
We trade because different people have different specialties
Someone pays you for one specialty, and you take that money and trade it for someone else’s specialty
This is true for individual, but it can be expanded to much larger areas as well

4. Absolute & Comparative Advantages
Within our own country, we see regional specialization…
New York: Banking/Financial
Detroit: Car industry
Midwest: Farming (wheat/grain)
South: Agriculture (fruit)

5. Absolute & Comparative Advantages
Our country also exports our specialties to other countries, and import their specialties

6. Absolute & Comparative Advantages
America’s Top Exports:
Semiconductors (a part used in most electronics) - $50 bil
Airplanes - $49 bil
Automotive parts and accessories - $44 bil
New & Used cars – $44 bil
America’s Top Imports:
Oil - $237 bil
New & Used cars - $134 bil
Other Automotive parts and accessories - $73 bil
Medical/Pharmaceutical/Dental Prep - $72 bil

7. Absolute & Comparative Advantages
America’s Total Exports = $1.16 tril
America’s Total Imports = $1.95 tril

8. Absolute & Comparative Advantages
International trade is completed for the same reason individuals trade…
they believe what they have a greater need for what they get than what they give
Without trade, we wouldn’t have…
Hondas
Bananas
Coffee
Oil (we’d have some, but nearly enough)

9. Absolute & Comparative Advantages
One reason a country may trade is that it is cheaper to import the good than to manufacture it within

10. Absolute & Comparative Advantages
If a country can manufacture a product more efficiently than other countries, it has an “absolute advantage”

11. Absolute & Comparative Advantages
Example from p. 469 in text book
Take 2 countries… both are identical, except for their climate and soil; both countries have 2 crops, coffee & cashews
If they both focus on coffee:
“A” will produce 40 mil lbs.
“B” will produce 6 mil lbs.
Which has the absolute advantage?
If they both focus on cashews:
“A” will produce 8 mil lbs.

12. Absolute & Comparative Advantages
For a while, economists only looked at the absolute advantage of countries, so trade between “A” and “B” wouldn’t make sense… “A” would have no benefit to trade with “B”

13. Absolute & Comparative Advantages
“A” does have a reason to trade with “B” though because there is a “comparative advantage”
A comparative advantage means that a country can produce a good at a lower opportunity cost.

14. Absolute & Comparative Advantages
If “A” can produce either 40 mil. lbs of coffee, OR 8 mil lbs. of cashews, then their opportunity cost for 1 lb of cashews is 5 lbs of coffee.
Production possibilities curve… making more “x” means you have to give up “y”… remember? In the case of cashews, 40/8 = 5
The opportunity cost for “B” is 1 lb…
6/6 = 1

15. Absolute & Comparative Advantages
So, “A” may have the absolute advantage in producing cashews, but “B” has to give up less, so they have the comparative advantage
If you flip the equation, you’ll find the opportunity cost for the opposite
So for country “A”, producing 1 lb of coffee costs 1/5 lb of cashews (8/40)… “B” opportunity cost remains 1 (still 6/6)…
so which has the “comparative advantage” in coffee production?

16. Absolute & Comparative Advantages
The idea of comparative advantage assumes that everyone will be better off doing what they do best, so the final result will be increased output worldwide