2What is specialization? Doing one job or producing one product/serviceWhy?Increases the total amount of things a society can produce and leads to an efficient use of resources.
3What is voluntary exchange? Buying goods and services from others that we cannot produce ourselves
4How do we decide what to produce? Depends on its resources.Example: land, water, metals, and climate.Also, educated workers and capital goods (computer/machine)
5What is trade? Nations sell products to other nations. Exports: goods and services sold to other nationsImports: goods and services bought from other nationsGoal: increase the amount and variety of goods available to all nations.
6Absolute AdvantageAbsolute advantage: One nation can produce more output with the same resources as the other.The U.S. can produce more sugar and fertilizer than Nicaragua.
7Comparative Advantage Comparative Advantage: a nations ability to make something at a lower opportunity cost than another nation can.Give upMake100= 1.25U.S. to make 1 sugar= Opportunity Cost 801 Fertilizer= Opportunity Cost 80=.8100Nicaragua to make 1 sugar= Opportunity Cost 50= .7701 Fertilizer= Opportunity Cost 70= 1.450You make what benefits you.
8Practice Problem Which nation has an absolute advantage? U.S. TVComputerU.S.10020Japan8015Total18035Which nation has an absolute advantage?U.S.Which nation has a comparative advantage in making computers?Which nation has a comparative advantage in making TVs?
9Balance of Tradebalance of trade: the relationship between a nation’s imports and exportstrade surplus: a nation exporting more than it importsExample: The US exports $5 million and imports $3 Milliontrade deficit: the result of a country importing more than it exportsExample: Mexico exports $4 million and imports $7 millioncredit: any transaction that brings money into a countrydebit: any transaction that takes money out of a nationbalance of payments: the difference between the total amount of money coming into a nation and the total amount