1. Why Do Nations Trade? Absolute advantage – a person or nation has an absolute advantage when it can produce more of a given product using a given amount of resources. (THEY CAN PRODUCE MORE OF SAME PRODUCTS!) Comparative advantage – the ability to produce a product most efficiently given all other products that could be produced

2. Law of Comparative Advantage – The idea that a nation is better off when it produces goods or services for which it has a comparative advantage –Nations produce goods for which they have a Comparative advantage & trade for other goods. Consider the Production Possibility Curve – a graph that shows alternative ways to use an economys resources. (see board). Even if a country can produce several products, if the opportunity cost (the sacrifice) it pays to produce one product is lower than other countries it will a comparative advantage. Therefore it will produce the one product and trade for the other. The product that it produces more efficiently will be the preferred product.

3. Why Do Nations Trade? Nations produce goods for which they have a Comparative advantage & trade for other goods. –They export goods for which they have the comparative advantage. Efficiency, specialization, human capital, & technology, and available resources all play a part in comparative advantage. –They import other goods & services.

4. How Do Trade Barriers & Trade Agreements Affect Trade?

5. How Do Trade Barriers Affect Trade? Trade Barrier – any restriction that prevents a foreign good or service from entering a nations territory Types of Trade Barriers – KNOW, KNOW!!! –Import Quotas – a limit on the amount of goods that can be imported. –Voluntary Export Restraints – a self imposed limitation on the number of products that one country ships to another. A country voluntarily reduces the number of its exports to a country to reduce the chances that the country will set up a trade barrier

6. How Do Trade Barriers Affect Trade? Types of Trade Barriers – KNOW, KNOW!!! –Import Quotas – a limit on the amount of goods that can be imported. –Voluntary Export Restraints – a self imposed limitation on the number of products that one country ships to another. –Tariffs – a tax on an imported good Customs duty –a tax on items purchased abroad –Other barriers – High licensing fees to sell. Health & safety regulations

7. How Do Trade Barriers Affect Trade? The Effect of Trade Barriers – –Increased prices for foreign goods. –Trade wars – a cycle of increasing trade restrictions. Arguments for trade barriers – why do countries impose trade barriers? –Protectionism – the use of trade barriers to protect a nations industries from foreign competition. Protect jobs Protects infant industries Safeguards national security

8. How Do Trade Agreements Affect Trade? An International Trade Agreement – The cooperation of at least two countries to reduce trade barriers and tariffs in order to trade with each other. KNOW!!!! –World Trade Organization (WTO)– a world wide organization whose goal is freer global trade and lower tariffs. –(EU) European Union – a regional trade organization made up of European nations –NAFTA (North American Free Trade Agreement) – an agreement to eliminate trade barriers between U.S, Mexico, & Canada. KNOW!!!!

9. Assume that you are planning a trip to a foreign country. Aside from the plane fare you have two thousand dollars to spend. You really want to go to the country where you can buy the most souvenirs and gifts. How will you decide which country to visit by determining which country will give you the most for your American dollars? BELL RINGER

10. Measuring Trade? EXCHANGE RATES – The value of a foreign nations currency in terms of the home nations currency. –The exchange rate enables you to convert prices in one currency to prices in another currency. For example if you were going to Mexico and the exchange rate was 10 pesos = $1.00 and a hotel room cost 500 pesos you would pay $50.00 American dollars for the hotel room. In the same example if the exchange rate was 5 pesos =$1.00 and a hotel room cost 500 pesos you would pay $100.00 for the same room.

11. –In the first example the American dollar would be stronger against the peso and would buy twice as much as in the second example. Therefore travel to Mexico from America would be a good thing. –In the second example the American dollar would be weaker against the peso. It would take twice as much money to buy the same thing. Therefore travel to Mexico from America would not be a good thing.

12. Lets consider the same example but this time you live in Mexico. You are traveling to America and the exchange rate was $1.00 = 10 pesos and a hotel room cost $50 you would pay 500 pesos for the hotel room. If the exchange rate was $1.00 = 5 pesos and a hotel room cost $50.00 you would pay 250 pesos for the same room. In this case it is cheaper to travel from Mexico to America because the pesos will buy more of U.S. dollars.

13. http://www.x-rates.com/d/USD/table.html

14. American Dollar using values from Wednesday, November 30, 2011 click on values to see graphs 1 USD in USD Argentine Peso 4.78059 0.209179 Australian Dollar 0.981145 1.01922 Brazilian Real 1.81406 0.55125 British Pound 0.6378 1.56789 Bulgarian Lev 1.45759 0.686064 Canadian Dollar 1.01938 0.980988 Chilean Peso 515.781 0.00193881 Chinese Yuan 6.37703 0.156813 Colombian Peso 1949.71 0.000512897 Croatian Kuna 5.59137 0.178847 Danish Krone 5.54255 0.180422 Euro 0.745268 1.3418 Hong Kong Dollar 7.78328 0.128481 Hungarian Forint 229.267 0.00436173 Iceland Krona 118.846 0.00841425 Indian Rupee 52.2552 0.0191369 Indonesian Rupiah 9111.02 0.000109757 Israeli New Shekel 3.77828 0.264671 Japanese Yen 77.5078 0.0129019 Latvian Lat 0.520122 1.92263 Lithuanian Litas 2.57326 0.388612 Malaysian Ringgit 3.17499 0.314962 Mexican Peso 13.572 0.0736811 New Zealand Dollar 1.29528 0.772034 Norwegian Kroner 5.77806 0.173068 Pakistan Rupee 88.6696 0.0112778 Philippine Peso 43.6488 0.0229101 Romanian Leu 3.24452 0.308212 Russian Ruble 30.964 0.0322956 Singapore Dollar 1.28641 0.777357 South African Rand 8.1659 0.12246 South Korean Won 1140.48 0.000876824 Sri Lanka Rupee 113.831 0.00878495 Swedish Krona 6.81622 0.146709 Swiss Franc 0.914071 1.09401 Taiwan Dollar 30.3211 0.0329803 Thai Baht 31.0001 0.032258 Trinidad/Tobago Dollar 6.3891 0.156517 Turkish Lira 1.835 0.544959 Venezuelan Bolivar 4.29528 0.232814

15. Measuring Trade? EXCHANGE RATES – are measured in terms of strong or weak currencies. –An increase in the value of a currency is called appreciation. A currency has a higher value when it buys more of another nations currency. For example if the $1.00 buys 100 yen and the dollar appreciates it will buy 120 yen. It buys more yen for the same value. –The dollar is stronger against the yen. If the dollar depreciates it will buy 75 yen. It buys less yen for the same value. –The dollar is weaker against the yen

16. Balance of Trade – the relationship between a nations imports and exports. –When a nation export more than it imports it has a trade surplus. If a countrys exports exceed imports the value of its currency remains high. –When a nation imports more than it exports the imbalance results in a trade deficit. If a countrys imports exceed exports the value of its currency falls. The higher the deficit the weaker the currency.

17. Assume that you are planning a trip to a foreign country. Aside from the plane fare you have two thousand dollars to spend. You really want to go to the country where you can buy the most souvenirs and gifts. How will you decide which country to visit by determining which country will give you the most for your American dollars? BELL RINGER