1. Unit 4: International Economics The Basics of International Trade

2. Think and Write Given that the U.S. (like all nations) has limited productive resources, where do you think our country ought to focus in its production decisions (meaning…what are we best suited to produce)? Answer and support your reasoning… (there is no “right or wrong”)

3. Production and Trade Decisions It makes the most economic sense to produce where we are most efficient ◦ Must consider production possibilities & related opportunity costs ◦ Allows us to specialize

4. Absolute Advantage Occurs when one nation is able to produce a product “more” efficiently than another or produce a greater ouput. Two ways to look at it… ◦ Input Method: When a nation is able to produce the same output as another with less inputs ◦ Output Method: When a nation is able to produce more output than another with the same input

5. Absolute Advantage (cont.) Example based on inputs… ◦ Country A produces 5 computers with 2 workers while Country B produces 5 computers with 4 workers. Example based on outputs… ◦ Country A is able to produce 10 computers with 6 workers while it takes Country B 6 workers to produce 12 computers. Large nations will almost always have an absolute advantage. Why?

6. Example of Absolute Advantage Nations# of iPods produced per hour # of Tablet Computers produced per hour Warriorland4020 Mustangland9030 Which nation has the Absolute Advantage producing iPods? Tablets?

7. Comparative Advantage Occurs when one country has the lowest opportunity cost for producing that good. ◦ It’s the ratio of “What is being produced” vs. “What is given up” ◦ Nations specialize if they can produce with lower opportunity costs than another. ◦ It’s why we trade!!!!

8. Example of Comparative Advantage Nations# of iPods produced per hour # of Tablet Computers produced per hour Warriorland4020 Mustangland5030 Which nation has the Comparative Advantage producing iPods? Tablets?

9. Managing Our Trade We do so through by “balancing out” the flow of goods and/or money between the nations we trade with… Do we export or import more goods from a trading partner?

10. Balance of Trade Exports – Imports (X-M) ◦ Greater exports = TRADE SURPLUS ◦ Greater imports = TRADE DEFICIT ◦ Exports = Imports = BALANCED TRADE Measures the $ value of exports vs. imports

11. Balance of Payments Records all international monetary ($) transactions ◦ $ flowing out and $ flowing in ◦ $ flowing in are “credits” ◦ $ flowing out are “debits” ◦ Balance of Payment Deficit: occurs when DEBITS > CREDITS ◦ Balance of payment Surplus: occurs when CREDITS > DEBITS

12. Balance of Payments (cont.) Balance of Payment is ideally zero… Calculated by transactions in three types of accounts… ◦ Current Account (Balance of Trade) – lets us know whether we have a trade deficit or trade surplus ◦ Financial Account measures the value of stocks/bonds one country buys from another. ◦ Capital Account measures the value of capital goods (buildings, etc. )one country buys from another.

13. Balance of Payments Balance of Payments = Current Account ($) + Financial Account ($) + Capital Account ($)

14. Calculating Exchange Rates U.S. Dollar:Yen $1.00 ¥120.87 Yen:U.S. Dollar ¥1 $?

15. Exchange Rates The price of one nation’s currency vs. another… http://www.x-rates.com/table/?from=USD

16. Trade Barriers Laws passed to restrict flow of goods between its country and another ◦ Goal is typically to promote its industries

17. Types of Trade Barriers Tariffs – tax place on imports Quotas – limit in quantity of goods from another nation Embargo – a complete ban due for political reasons Standards – requirements on quality of goods before it comes in – protects consumers Subsidies – a transfer payment from the government to exporting companies – goal is to allow its exports compete with other nations on the international market.

18. Trading Blocs A group of countries that band together and remove trade barriers in order to promote trade ◦ Designed to improve efficiency ◦ Designed to raise standard of living and establish new trading partners ◦ Opponents say it gives some partners an unfair advantage due to labor costs and lack of restrictions on environment

19. Examples of Trading Blocs European Union (EU) North American Free Trade Agreement (NAFTA) Association of South East Asian Nations (ASEAN)