1. Unit 4 – International Economics

2. Standard
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. What is Trade? The voluntary exchange of goods/services
Also known as commerce

4. Why Trade? Resources are not distributed equally around the globe
Land – agriculture vs. oil
Labor – high literacy rate = skilled workforce
Capital – factories, infrastructure
(Entrepreneurship)

5. Trade
Because countries differ in resources, they differ in the production of g/s
Leads to specialization
Specialization – producing certain g/s rather than what you need
Do what you are good at…trade for what you’re not!

6. Trade Countries then rely on each other for the production of g/s.
This is known as interdependence.

7. Absolute vs. Comparative Advantage
Absolute Advantage – when a nation/person can produce more of a g/s with given resources
Who has the absolute advantage?
Pizza
Salads 9 36 6 12
Nino
Tony

8. Comparative Advantage – the ability to produce most efficiently given all the other products that could be produced
Specialization in what you do best given the resources available

9. (Opportunity Cost of a) (Opportunity Cost of a) Salad
Opportunity cost determines comparative advantage.
Lower opportunity cost is where you have comparative advantage.
Who has the comparative advantage in Pizza? Salads?
(Opportunity Cost of a)
Pizza
(Opportunity Cost of a) Salad
4 salads
¼ pizza
2 salads
½ pizza
Nino
Tony

10. International Trade and Comparative Advantage
Cheese
Wheat
United States 3 12
France 2 4
Which country has the absolute advantage in cheese? Wheat?
Which country has the comparative advantage in cheese? Wheat?
Would these countries benefit from trade?

11. US has absolute advantage in both cheese and wheat
US has absolute advantage in both cheese and wheat. (They produce more than France.)

12. France has the comparative advantage in cheese
France has the comparative advantage in cheese. (They produce cheese more efficiently. They have a lower opportunity cost…don’t have to sacrifice as much wheat as the US.)
(Opportunity Cost of) Cheese
(Opportunity Cost of) Wheat
United States
4 units of wheat
¼ unit of cheese
France
2 units of wheat
½ unit of cheese

13. The United States has a comparative advantage in the production of wheat.( They produce it more efficiently. The opportunity cost of producing wheat is lower…give up less cheese than France.)
(Opportunity Cost of) Cheese
(Opportunity Cost of) Wheat
United States
4 units of wheat
¼ unit of cheese
France
2 units of wheat
½ unit of cheese

14. Barriers to Trade
Most countries have some sort of trade restrictions which prevents foreign goods from moving freely into the country
Most common types: tariffs, quotas
The idea is to “protect” domestic industries

15. Protectionism
The use of trade barriers to protect industries from foreign competition
Ex. US Steel (tariff)

19. Tariff: Tax on imported goods
US Steel
Quota: a limit on the amount that can be imported

20. Embargo Boycotting trade with another country
Typically for political reasons
Ex. Trade embargo with Cuba

23. Other Barriers to Trade
Standards – certain requirements set by governments that must be met in order to import a good (sometimes too strict)

30. Subsidies – payments by a government to a business that helps keep it going (thus preventing trade at fair market prices)
Canada and softwood timber

32. Free Trade Agreements
Trading Blocks – countries who have agreed to limit or restrict trade barriers
NAFTA – North American Free Trade Agreement
Goal is to eliminate all tariffs/trade barriers between Canada, United States, and Mexico by 2009

35. EU – European Union
Group of (Western) European countries that abolished trade restrictions among member countries
Replaced individual currencies with the Euro
Very competitive with the US dollar

36. ASEAN – Association of Southeast Asian Nations
Promotes economic and social growth
10 member countries including Philippines, Thailand, Vietnam
Goal is to complete free trade agreements with Japan, China, India, South Korea, Australia, and New Zealand by 2013

38. Exchange Rates
The value of a foreign nation’s currency in terms of the home nation’s currency
Exchange rates fluctuate on a daily basis

39. Tuesday, October 02, 2007
1 USD
in USD
Australian Dollar
British Pound
2.0417
Canadian Dollar
1.0002
0.9998
Chinese Yuan
7.5093
Euro
1.4163
Hong Kong Dollar
7.7625
Indian Rupee
39.65
Japanese Yen
115.83
Mexican Peso
South African Rand
6.9091
South Korean Won
915.7
Swiss Franc
1.175
Downloaded from

40. Appreciation – an increase in value of a currency “Strong”
Ex. Strong US dollar…
Increase imports
Decrease exports

41. Depreciation – a decrease in the value of a currency “Weakening”
Ex. Weak US dollar…
Decrease imports
Increase exports

42. Calculating Exchange Rates
If converting to US dollars…
Foreign Currency
Foreign Currency per dollar

43. Practice
A new sweater in England costs £50. What is the cost in US dollars?
A dinner in France costs €25. What is the cost in US dollars?
A hotel room in Japan costs ¥20,000. What is the cost in US dollars?

44. Balance of Trade vs. Balance of Payments
Balance of Trade: the relationship between a nation’s imports and exports
Balance of Payments: the financial record of all financial payments between countries
Tracks the flow of money in or out of a country