 People expect to gain by trading with other people.  They hope to receive a good/service that is more valuable than whatever they trade away.  Have you traded lunches with anyone? Motive?  People refuse to trade when the good/service being offered is of less value than the good or service they are asked to exchange.

 Wealth is created by any swap.  It may seem like an even trade, but each trader gives up something he/she values less in order to receive something he/she 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.

 You can learn about a nation’s economy by what goods it imports and exports.  Nations cannot produce everything they need  EX: Unequal distribution of resources  “Import” depends on our ability to “export”

 Exports 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 2013 = $2.2 trillion  Ex: Automobiles, computers, aircraft, corn, wheat, soybeans, scientific instruments, coal, machinery, plastic materials, etc.

 US is the world’s second leading exporter (China)  16.1 % of all exports  Followed by Germany and Japan  Partners  Canada  EU  Mexico  China  Japan

 Imports 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 2013 = $2.7 trillion  EX: Petroleum, clothing, iron, steel, office machines, footwear, fish, coffee, diamonds, etc.

 Major trade partners of US:  China  Canada  Mexico  Japan  Germany

 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.

 Trade 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.

 Often 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: bananas  Middle East: oil

 Ability to produce something with fewer resources than other nations require, so they can potentially make more than other countries at less cost.  Some nations have an 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

 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.

 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 called a Comparative Advantage

 When a nation has a lower opportunity cost of producing one product than another.  By concentrating production on products they can make by giving up very little, a country can increase their standard of living by trading with others.  To find comparative advantages, do not compare absolute advantages. Compare opportunity costs.

Your Turn  Comparative Advantage in Paper-Folding and Page Turning  Grab a partner!  Remember: The opportunity cost of producing x is found by taking y/x or (OCX = Y/X)

 Economies are defined by scarcity.  Scarcity forces people to make choice  Choices involve costs  Since we all face different costs, by specializing and trading we can create wealth  Markets form to facilitate trade

 We consider the simplest possible economy  There is one actor, Robinson Crusoe  There is one resource - TIME

 Food - he can catch fish in the local lagoon  1 hour = 3 fish  Shelter – palm leaves for a hut  1 hour = 4 palm leaves  8 Hour day 3 Fish/ hr4 Palms/hr 24 Fish/day32 Palms/day

Fish Palms Rob’s PPF

 3 Fish = 4 Palms  4 Palms = 3 Fish Opportunity Cost 1 Fish = 4/3 Palm1 Palm = ¾ Fish

 Not alone  Friday is living similar life  Faces scarcity  Fishes and cuts down palm leaves  Has different talents than Rob

 Food - 1 hour = 3 fish  Shelter – 1 hour = 6 palm leaves  8 hour day 3 Fish/ hr6 Palms/hr 24 Fish /day48 Palms/day

Fish Palms Friday’s PPF

 3 Fish = 6 Palms  6 Palms = 3 Fish Opportunity Cost 1 Fish = 2 Palms1 Palm = 1/2 Fish

Rob1 Fish = 4/3 Palms1 Palm = 3/4 Fish Friday1 Fish = 2 Palms1 Palm = 1/2 Fish

 Robinson 15 fish and 12 palms daily  Friday 6 fish and 36 palms daily  What will the trade be?

 Both will trade 3 fish for 5 palms  Robinson gives up 3 fish (normally gives up 4 palms) now he gets 5 palms  Increase in 1 palm  Friday gets 3 fish (normally gives up 6 palms) only giving up 5  Increase of 1 palm

Punchline ▪ If you care about someone’s welfare, trade with them! ▪ Trade creates wealth ▪ Trade causes specialization, with trade we get more goods from fewer resources ▪ Trade improves welfare even if one party is bigger, smarter or more productive than others

 Outsourcing = work done for a company by another company or by people other than the original company’s employees  Offshoring = outsourcing in another country  Jobs are lost  Jobs can be done cheaper, reduces costs

 Tariffs : Toyota cars  Tax on an import – paid by producer when import comes into a country  Quota: Absolute and Tariff -rate  Legal limit on the amount of good that may be imported into a country/without penalty of higher duty  Subsidy: Farmers  policy reduces costs for producers, often to promote exports

 Customs duty:  Tax on certain items purchased abroad – fill out form when you come into the country  Embargo: Cuban cigars  Complete elimination of trade with a country  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 barriers  Standards (Safety and Environmental)  High government licensing fees and costly product standards (insecticides used by some countries ban that fruit)

 Limits the supply of foreign goods  Increases the prices  Consumers lose out – prices are higher

 National-defense: May not want to rely on China to produce our weapons.  Infant-Industry: Protect new industries in the early stages of development  Not a true market system: lacks incentive to become efficient, hard to take away tariff after it has “grown”

 Anti-dumping: selling of goods in foreign countries at prices below cost and below the price charged in the domestic market  Done to drive out US competitors and get % of the market  Raise prices once their strategy works  Low Foreign-Wages – US producers argue they will be ruined – can’t compete with low prices goods

 General Agreement on Tariffs and Trade (GATT) Established to reduce tariffs and expand world trade  World Trade Organization (WTO): Founded to ensure compliance with GATT, to negotiate new trade agreements, and to resolve trade disputes  European Union (EU): A regional trade organization made up of 27 European Nations – free-trade zone  North American Free Trade Agreement (NAFTA): Eliminate tariffs and other trade barriers between Canada, Mexico, and the US

 Use of trade barriers to protect a nation’s industries from foreign competition  Trade Barriers limit supply from other countries

 Region where a group of countries agrees to reduce or eliminate trade barriers  Jamaica  China  Argentina  Bangladesh  ……and 28 other countries

 Difference between the value of its exports and the value of its imports.  Balance of trade = Value of exports Value of imports  Trade surplus = positive balance of trade  Trade deficit = negative balance of trade

 US has run a trade deficit since the early 1970’s  Imports of foreign oil large part – but we like foreign goods  To reduce it we set quotas and tariffs to urge consumers to buy domestic  We import almost twice as much as we export

 Dollar value goes down – foreign countries buy more of our goods  Dollar value goes up – we buy more of foreign goods 

Fixed Exchange-Rate Systems  A currency system in which governments try to keep the values of their currencies constant against one another is called a fixed exchange-rate system. Chapter 17, Section 3 Flexible Exchange-Rate Systems Flexible exchange-rate systems allow the exchange rate to be determined by supply and demand.

 You are at an International Mall and you are starving!!!  The menu items are in foreign currency.  You have $10.00 American dollars to spend but you don’t know what the exchange rates are.  By trying to stay within your budget order the items you would like for lunch.