2. How much is a cup of Starbucks coffee in London? On Apr 25, 2014 1.00 EUR =1.383311 USD  At Starbucks in Canton, GA a Tall Pike w/ room is $1.75. $1.75 x 1.383311= $2.42  In London, England it would cost $2.42….OUCH! SWS 2009

3. INTERNATIONAL TRADE SWS 2009 CHAPTER 18

4. SWS 2009 International Trade: When we trade with other countries. Import: When we buy products from another country. Export: When we sell products to another country.

5. Exports and Imports as a Percentage of U.S. Gross Domestic Product SWS 2009

6. Exports, Imports and the Balance of Trade TRADE DEFICIT TRADE SURPLUS IMPORTS > EXPORTS = IMPORTS < EXPORTS = Balance of Trade is similar to Balance of Payments SWS 2009

7. INTERNATIONAL TRADE: WHY TRADE IN THE FIRST PLACE? SWS 2009

8. WHY WE TRADE Who is the best producer? There are two ways to compare the ability of two countries that produce a good. Absolute advantage: The country that can produce a good with a smaller quantity of inputs (resources). That country is the best at producing…. ○ Ex- rum on the islands, oil Comparative advantage: A country can produce a good at a lower opportunity cost than anyone else. Do not compare absolute advantages…compare opportunity costs. ex- lawn mower vs. car wash business Who is the best producer? There are two ways to compare the ability of two countries that produce a good. Absolute advantage: The country that can produce a good with a smaller quantity of inputs (resources). That country is the best at producing…. ○ Ex- rum on the islands, oil Comparative advantage: A country can produce a good at a lower opportunity cost than anyone else. Do not compare absolute advantages…compare opportunity costs. ex- lawn mower vs. car wash business SWS 2009

9. Comparative and Absolute Advantage Pre-SpecializationCD PlayersPersonal Computers UK2,000500 Japan4,0002,000 Total Output6,0002,500 SWS 2009 Post-SpecializationCD PlayersPersonal Computers UK4,0000 Japan2.4002,800 Total Output6,4002,800 To identify which country should specialize in a particular product we need to analyze the opportunity cost for each country. For example, if the UK shifts more resources into higher output of personal computers, the opportunity cost of each extra PC is four CD players. For Japan the same decision has an opportunity cost of two CD players. Therefore, Japan has a comparative advantage in PCs. If Japan reallocated resources to CD players, the opportunity cost of one extra CD player is 1/2 of a PC. For the UK the opportunity cost is 1/4 of the PC. Thus the UK has the comparative advantage in CD players.

10. BARRIERS TO INTERNATIONAL TRADE SWS 2009

11. TARIFFS:  A tariff is a taxed placed on imports (goods coming into the country).  It must be paid before goods can be taken off a ship. (makes foreign products more expensive)  Good source of income for government. So if the government wants to PROTECT DOMESTIC (US) businesses, what should it do to this tariff? ANSWER : They should increase it because this makes it LESS PROFITABLE buying from oversea producers. Very Dangerous! This action by the government is known as a PROTECTIONIST TRADE POLICY The down-side: Who is hurt by tariffs? US consumers of Foreign products So US producers & consumers will be more likely to get goods from DOMESTIC (USA)_PRODUCERS. SWS 2009 INTERNATIONAL TRADE BARRIERS

12. QUOTA:  A quota- Instead of imposing a tax on imports the government sets a quota (or maximum amount) on imports/exports. So if the government wants to PROTECT DOMESTIC businesses, what should it do to this quota? ANSWER: They should decrease it because this makes a limited amount of imports in the country, which will increase the price of those imports. Very Dangerous! This action by the government is also known as a PROTECTIONIST TRADE POLICY SWS 2009 INTERNATIONAL TRADE BARRIERS

13. EMBARGOS:  An embargo shuts down all imports from a country. EXAMPLE: Iran & North Korea with the U.S EXAMPLE: Iran & North Korea with the U.S SWS 2009 INTERNATIONAL TRADE BARRIERS

14. Other Barriers to Trade: OPEC: Organization of Petroleum Exporting Countries  Cartel Members: Algeria, Angola, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, UAE, and Venezuela INTERNATIONAL TRADE BARRIERS SWS 2009

15. FREE INTERNATIONAL TRADE SWS 2009

16. FREE INTERNATIONAL TRADE In order to eliminate barriers to trade such as tariffs & quotas countries will establish trade organizations and charge less (or no) tariffs and set no quotas. Such as NAFTA North American Free Trade Agreement (Formed in 1993) 1.Mexico 2.Canada 3.USA SWS 2009

17. E.U. (European Union) is a trade organization. SWS 2009 FREE INTERNATIONAL TRADE

18. A.S.E.A.N is a trade organization. Association of Southeast Asian Nations SWS 2009 FREE INTERNATIONAL TRADE

19. INTERNATIONAL TRADE 1.What is the advantage of free trade? It can increase the flow of goods from countries, giving consumers more LOWER PRICE choices. 2.What is a disadvantage of no tariffs? No tariffs might result in hurting US producers. If consumers can now get cheaper goods from another country, then they will not buy US goods. 3.Who is hurt by tariffs? US consumers who like foreign products b/c they will be more expensive due to tariffs In-class Questions SWS 2009

20. EXCHANGING CURRENCY ( …Starbucks) SWS 2009

21. EXCHANGING CURRENCY EXCHANGE RATES:  The exchange rate between two currencies shows how much one currency is worth in terms of the other.  Currency can appreciate or depreciate in value.  Example: The exchange for the Japanese Yen to the U.S. Dollar is ¥120 = $1. How does this relationship affect trade?  Example: The exchange for the Japanese Yen to the U.S. Dollar is ¥120 = $1. This means the dollar is worth more than the Yen. How does this relationship affect trade? Over the course of one year, the Japanese Yen depreciates compared to the Euro. Who would benefit the most from this occurrence? A European consumer of European goods B Japanese consumers of European goods C European consumers of Japanese goods D Japanese consumers of Japanese goods EXAMPLE QUESTION: SWS 2009

22. CALCULATING EXCHANGE RATES Let’s say you traveled to Japan and took $500 in U.S. currency. When you exchanged the $500 in Japan, you would receive about… $500 x 118.96 = 59,480 ¥ Let’s say you traveled to US and took £550 pounds. When you exchanged the £550 pounds in US, you would receive about… £550 x 2.0292 = $1116.06 SWS 2009

23. Price of a D.S. in Japan is about 6,000 yen. What would be the price if you could buy it in US dollars? 6,000¥ x.0084 = $50.00 But the average price in the US is $130.00. Why the discrepancy? SWS 2009 CALCULATING EXCHANGE RATES

24. EXCHANGE RATES & THE STRONG DOLLAR PROBLEM 1) What is a “strong dollar”:  The value of the dollar is appreciating. ..or the value of the dollar rises compared to other currencies.  …or more foreign currency is necessary to purchase U.S. dollars. 2) Who is aided by a strong US dollar ?  U.S. CONSUMERS because the prices of foreign goods and services are lower since the US Dollar goes further in terms of foreign currency. 3) Who is hurt by a strong US dollar ?  U.S. PRODUCERS because they can’t compete with lower-priced foreign products.  U.S. EXPORTERS because they can’t compete with lower-priced imports. What we find is that a WEAK dollar can be a good thing for businesses. SWS 2009 EXCHANGING CURRENCY

25. EXCHANGE RATES: QUESTION: What country (America or Mexico) would benefit from a appreciated (strong) U.S. dollar? ANSWER:If the U.S. dollar is appreciated, this means that American goods and services are more expensive to Mexico. At the same time, making Mexican goods cheaper to U.S. consumers. ANSWER: If the U.S. dollar is appreciated, this means that American goods and services are more expensive to Mexico. At the same time, making Mexican goods cheaper to U.S. consumers.  So this decreases spending on U.S. goods and decreases American GDP.  More US spending will go to the cheaper Mexican products because your money goes further in Mexico. MEXICO COULD BENEFIT! SWS 2009 EXCHANGING CURRENCY

26. STUDY FOR THE TEST SWS 2009