2Wealth and Trade Wealth is created by any swap. It may seem like an even trade, but each trader gives up something he values less in order to receive something he values more.When Neolithic spear makers did business with Neolithic basket weavers, the spear makers were able to carry things around in a manner more convenient than skewering them on spear points, and the basket weavers were able to kill mastodons by a method more efficient than swatting them with baskets.
3Trade is the voluntary exchange of goods and services. The decision to trade is made because two or more parties involved in the exchanges expect to gain.When one or both of the trading partners believe they can no longer gain from trading, the exchanges will stop.
4Wealth DO NOT LOOK IN THE BAG!!!! Can you create wealth? Let’s try it!!!!Boys grab a bag that has ‘B’Girls grab a bag that has ‘A’DO NOT LOOK IN THE BAG!!!!
5Imports & ExportsYou can learn about a nation’s economy by what goods it imports and exports.Can’t produce everything you needUnequal distribution of resources“Import” depends on our ability to “export”
6ExportsExports are goods and services that a nation sells to others or goods and services sent out of the country.A nation’s exports tell you about the goods that a country produces efficiently.US exports in 2006 = $1.4 trillionAutomobiles, computers, aircraft, corn, wheat, soybeans, scientific instruments, coal, machinery, and plastic materials
7ImportsImports are goods and services that a nation buys from other nations or goods and services brought into the country.A nation’s imports tell you which goods it does not produce efficiently.US imports in 2006 = $2.2 trillionPetroleum, clothing, iron, steel, office machines, footwear, fish, coffee, and diamonds
8International Trade International trade is important to all countries. Most trade is in goods, but trade in services is growing.Services include banking and insurance.The international marketplace is generally more complex than the domestic market of a nation, but essential characteristics are identical.
9Rules to Trade ByTrade agreements, the rights and regulations that govern trade, are made by nations (actually it is people that trade).Voluntary exchange will not occur unless both parties anticipate that they will benefit from the exchange.Absolute and comparative advantage help explain the reasons that people trade.
10SpecializationOften nations specialize, which means they focus on making the goods they produce best.Nations then trade their goods for others that are more expensive or even impossible for them to produce.Honduras - bananasMiddle East – oil
11Absolute AdvantageDEFINITION - Ability to produce something with fewer resources than other nations requireSome nations have absolute advantage in the production of particular goods and services due to natural resources, climate, etc.They make enough for themselves and enough to export
12Okay – Now remember back to the first unit????? Production Possibilities Frontier????When comparing the absolute advantage that a nation has over another nation for a particular product, economists use a production possibilities frontier.Remember the maximum that can be produced when all resources are fully used.
13What?????Two countries can benefit from trade even if one has a smaller output than the other.In some instances, a smaller country can produce an item more efficiently, even if it cannot produce as large a volume as a larger country.This is a comparative advantage
14Comparative Advantage DEFINITION – When a nation has a lower opportunity cost of producing one product than another.By concentrating their production on those products they can increase their standard of living
15The Gains From TradeWhen people specialize in their comparative advantage, and trade in markets for other goods, wealth increases.Use existing resources more efficientlyNo extra resources usedUsing low cost producerSpecialization and trade REDUCES scarcity!
16Your Turn Comparative Advantage in Paper-Folding and Page Turning Grab your partner
17Outsourcing/Offshoring Outsourcing = work done for a company by another company or by people other than the original company’s employeesOffshoring = outsourcing in another countryJobs are lostJobs can be done cheaper, reduces costs
18Trade Restrictions Tariffs – Toyota cars 100% Quota Tax on an import – paid by producer when import comes into a countryQuotaLegal limit on the amount of good thatmay be imported into a countrySubsidy – policy reduces costs for producers, often to promote exports
19Trade Restrictions Customs duty Tax on certain items purchased abroad – fill out form when you come into the countryEmbargo – complete elimination of trade with a countryU.S. trade embargo with Cuba
20Trade Restrictions VER (Voluntary Export Restraint) a self-imposed limitation on the number of products shipped to a particular country – done so importing country won’t set up trade barriersStandards (Safety and Environmental)High government licensing fees and costly product standards (insecticides used by some countries ban that fruit)
21ProtectionismUse of trade barriers to protect a nation’s industries from foreign competitionTrade Barriers limit supply from other countries
22International Organizations GATT – General Agreement on Tariffs and Trade was established to reduce tariffs and expand world tradeWTO – World Trade Organization was founded to ensure compliance with GATT, to negotiate new trade agreements, and to resolve trade disputes
23International Organizations EU – a regional trade organization made up of 25 European Nations – free-trade zoneNAFTA – North American Free Trade Agreement – agreement that will eliminate all tariffs and other trade barriers between Canada, Mexico, and the US
24Free Trade ZonesRegion where a group of countries agrees to reduce or eliminate trade barriersJamaicaChinaArgentinaBangladesh……and 28 other countries
25Balance of TradeDifference between the value of its exports and the value of its imports.Balance of trade = Value of exportsValue of importsTrade surplus = positive balance of tradeTrade deficit = negative balance of trade
26US Trade Deficit US has run a trade deficit since the early 1970’s Imports of foreign oil large part – but we like foreign goodsTo reduce it we set quotas and tariffs to urge consumer to buy domesticWe import almost twice as much as we export
27The value of a foreign nation’s currency in relation to your own currency is called the exchange rate.An increase in the value of a currency is called appreciation.A decrease in the value of a currency is called depreciation.Multinational firms convert currencies on the foreign exchange market, a network of about 2,000 banks and other financial institutions.