1. International Trade

2. Check tags of clothing, bags, etc. Try to find something made in the US

3. Why Nations Trade
Unequal distribution of resources prevents countries from producing everything citizens want and need
Land, labor, and capital
Ex. Fertile soil  agriculture
Ex. Oil and natural gas  Sale of these
Specialization  produce only certain goods and services
Determined by land, labor, capital
Better for countries to specialize in some products and trade for others

4. Absolute Advantage
Absolute Advantage  ability to produce more of a given product using a given amount of resources
Country A has absolute advantage of both food and clothing.
Would Country A be better off as self-sufficient or trading?

5. Comparative Advantage
Comparative Advantage ability to produce a product most efficiently given all the other products that could be produced
Lowest Opportunity Cost
Law of Comparative Advantage  idea that a nation is better off when it produces goods and services for which it has a comparative advantage
Key to determining what a country should produce is OPPORTUNITY COST
What you give up in order to produce a product
The nation with the lowest opportunity cost has the comparative advantage

6. Country A has a comparative advantage in food
Country A’s OC for each unit of food is ½ a unit of clothing
Country B’s OC for each unit of food is 2 units of clothing
Country A’s OC for each unit of clothing is 2 units of food
Country B’s OC for each unit of clothing is ½ a unit of food
Country A has a comparative advantage in food
County B has a comparative advantage in clothing

7. Country A and B decide to trade 1 unit of food for 1 unit of clothing.
If Country A decided it needs 3 units of clothing, it could take an entire day to make 3 units of clothing, or spend the day making food, trade 3 units of food for 3 units of clothing, and have three left over
If Country B decided it needs 1 unit of food, it could spend an entire day making food, or it can produce 2 units of clothing, trade one unit for food, and have a unit of clothing left over
Both are better off by trading

9. Comparative Advantage and Trade
International trade leads to greater interdependence
Export  good sent to another country ($1.280 trillion)
Import  good brought in from another country ($1.948 trillion)
United States is the world’s largest exporter and importer

10. Comparative Advantage and Trade
International trade leads to greater interdependence
Export  good sent to another country ($1.280 trillion)
Import  good brought in from another country ($1.948 trillion)
China is now the world’s largest exporter and importer

12. Trade Barriers
Trade barrier  means of preventing a foreign product or service from freely entering a nation’s territory
Import Quota  limit on quantity of a good imported
Embargo ban on trade to another country

13. More trade barriers Tariff  tax on imported goods
Standards  impose certain standards or regulations on products
Can lead to trade war  cycle of increasing trade restrictions
Limit supply  increase price

15. Arguments for protectionism
Protectionism  use of trade barriers to protect a nation’s industry from foreign competition
Protect infant industries  new industries need time to become efficient
Industry lacks incentive to become efficient
Difficult to take tariff away
Protect industry essential to national defense
Steel, oil etc.

16. International Cooperation
Recent trend of increasing free trade
Best way to pursue comparative advantage
International free trade agreements  cooperation resulting in reduced trade barriers and tariffs
European Union (EU)  trade organization made up of European Countries
NAFTA  North American Free Trade Agreement - US, Canada, Mexico
ASEAN  Association of Southeast Asian Nations

18. Measuring Trade
Exchange Rate  value of foreign nation’s currency in terms of another nation’s currency
Convert prices in one currency to prices in another currency
Exchange Rates

19. Strong and Weak Currencies
Appreciation  increase in the value of currency
Nation’s products become more expensive for other countries
Less exports
Foreign products cheaper
More imports
Depreciation  decrease in the value of currency
Nation’s products become less expensive for other countries
More exports
Foreign products more expensive
Less imports

20. Strong and Weak Currencies
If the dollar appreciates, is that good?
It depends . . .
When the dollar gets stronger, foreign goods become cheaper in America
So, a stronger dollar is good for foreign businesses and American consumers!!!!

21. Strong and Weak Currencies
If the dollar appreciates, is that good?
However, American goods become more expensive in foreign countries
So, a stronger dollar can actually harm American businesses that export

22. Strong and Weak Currencies
What about if the dollar gets weaker??
Foreign goods will cost more, so you’ll pay more for many of the things you buy
However, American goods will become cheaper in foreign countries, which means companies like Mohawk will actually see their exports go up

23. Example Exchange rate is 10 pesos to 1 dollar
So, a shirt that costs 50 pesos to make in Mexico sales for 5 dollars in the US
If, the dollar gets weaker, now the exchange rate is 10 pesos to 2 dollars
The same shirt will now cost 10 dollars in the US
Therefore, a weaker currency will harm consumers

24. Example Exchange rate is 10 pesos to 1 dollar
A rug that cost Mohawk 100 dollars to make will sell for 1000 pesos in Mexico
If, the dollar appreciates, and the exchange rate is now 20 pesos to 1 dollar
Now the same rug will cost 2000 pesos in Mexico
So, a stronger dollar, while good for us as consumers, will actually harm our business that have sales in foreign countries

25. Balance of Trade
Balance of Trade  relationship between a nation’s imports and exports
Balance of Payments  system of recording all of a country’s money transactions
Trade Surplus  when a nation exports more than it imports
Trade Deficit  when a nation exports less than it imports
US trade deficit  over $450 billion
$45-$50 billion each month