1. International Economics
Unit 5

2. Examples of how individuals and businesses specialize
Specialization is a situation in which people produce a narrower range of goods and services than they consume.
It increases productivity and interdependence.
People do not make everything for themselves, they will specialize in one thing to earn money to buy other products or goods.

3. Interdependence
The more people specialize in trade the more dependent they become on other countries or people for their products.
Ex: Farmers grow food for people and in return rely on manufacturers to make their machinery.
This web of interdependence creates a strong incentive for cooperation among countries.

4. Both parties gain as a result of voluntary, non-fraudulent exchange.
This occurs when buyers and sellers exchange freely and willingly.
Both parties benefit from the trade.
Ex: U.S. makes John Deere tractors and Japan makes TV’s. We trade freely with them because we need them and they need us.

5. Distinguish between absolute and comparative advantage
Absolute Advantage
The ability to produce a good or service at a lower opportunity cost than some other producer.
This is the economic basis for specialization and trade.
The ability to produce more units of a good or service than some other producer, using the same quantity of resources.

6. Why does most trade take place because of comparative advantage?
Benefits of Trade:
- it increases competition between firms
- it increases the variety available to consumers
- it increases the level of training about matters such as accounting, management, and law in low- income countries
- comes up with new technologies and production methods

7. Explain the difference between balance of trade and balance of payments
Deals only with a country’s imports and exports
Calculated by subtracting imports from exports.
The record of all transactions between individuals, firms, and governments of one country with those in all other countries in a given year.

8. Balance of trade/payments
Balance of payments
When exports exceed imports, this is called a trade surplus.
When imports exceed exports, this is called a trade deficit.
Refers to funds received by a country and those paid by a country for all international transactions.
Payments include: exports and imports, international flow of services, gifts or transfers, and payments for physical assets (rent or interest). Balance of payments should be equal among countries.

9. Trade Barriers Tariff: tax on imported good or service
Quota: limit on quantity of a product that may be imported or exported. Established by the government.
Embargo: impose certain conditions before granting consent. Or ban on trade.
Standards: expectations for minimal levels of quantity to be met (safety standards)
Subsidies: financial assistance granted by the government to a person or assoc. for the purpose of promoting free enterprise.

10. Cost and Benefits to Trade
Costs
Increase competition
Increase variety
Increase level of training
Increase in new technology and production methods
Protects infant industries
Political allegiances
Revenue from tariffs
Spreading of disease
Out-sourcing of jobs
Importing bad products
Do not benefit from comparative advantage
Prices rise (tariffs or quotas)

11. Examples of trade barriers
Trade restrictions:
1. tariffs
2. import quotas
3. non-tariff barriers
Most barriers of trade are designed to prevent imports from entering a country. This protects domestic producers.
This policy would be called protectionism.
Ex: Japan and rice.

14. Trading Blocks
Look up the following Trading blocks, list ALL countries involved in each block, and Explain the Purpose and benefits of each block.
Last: Provide an example of each trade barrier for each block.
EU: European Union
NAFTA: North American Free Trade Agreement
ASEAN: Association of Southeast Nations
MERCOSUR: Common Market of the South (Latin America)

15. Trading Blocks EU: European Union
NAFTA: North American Free Trade Agreement
(U.S., Canada, Mexico)
ASEAN: Association of Southeast Nations
MERCOSUR: Common Market of the South (Latin America)
Others:
-BRIC: Brazil, Russia, India, China
- GATT: General Agreement of Tariffs and Trade
- WTO: World Trade Organization
- IMF: International Monetary Fund
-World Bank

16. Arguments for and against free trade
AGAINST it…
It is important to keep jobs in the U.S.
We don’t want money leaving the country.
National security is at stake.
Other nations don’t treat their workers fairly.
Other nations are “dumping” and don’t open their market to us.

17. Arguments for and against free trade
FOR it…
Allows people to buy quality goods imports at good prices, which results in a higher standard of living for people in the U.S. and for our trading partners.

18. Exchange Rates
Exchange rate: the amount of one country’s currency that is equal to one unit of another country’s currency.
Floating exchange rate is determined by a country’s supply and demand
You can find exchange rates on the internet, from newspapers or banks.

19. Exchange Rates
The price of one nation’s currency in terms of another nation’s currency.
Exchange rates are determined by supply and demand.
The U.S. has a floating exchange rate.
Exchange rates can be found in newspapers, banks, and online.

20. Who benefits when exchange rates change?
When currency can purchase more of other currencies, it strengthen or appreciates
Ex: U.S. dollar compared to Peso
* This would encourage imports!
When currency can purchase less of other currencies it weakens or depreciates
Ex: Euro compared to the U.S. dollar
*This would encourage exports!

21. Exchange Rates Appreciates in value: Gets Better, More expensive.
Depreciates in value: Gets worse, less expensive.
Strong Dollar: benefits American importers.
Companies (foreign) would pay more.
Weak Dollar: U.S. exports increase.
It would be better to export because importing would be too expensive.