Trading Goods and Services SSEIN1a, b, c

What is specialization? Doing one job or producing one product/service Why? Increases the total amount of things a society can produce and leads to an efficient use of resources.

What is voluntary exchange? Buying goods and services from others that we cannot produce ourselves

How do we decide what to produce? Depends on its resources. Example: land, water, metals, and climate. Also, educated workers and capital goods (computer/machine)

What is trade? Nations sell products to other nations. Exports: goods and services sold to other nations Imports: goods and services bought from other nations Goal: increase the amount and variety of goods available to all nations.

Absolute Advantage Absolute 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.

Comparative Advantage Comparative Advantage: a nations ability to make something at a lower opportunity cost than another nation can. Give up Make 100= 1.25 U.S. to make 1 sugar= Opportunity Cost 80 1 Fertilizer= Opportunity Cost 80=.8 100 Nicaragua to make 1 sugar= Opportunity Cost 50= .7 70 1 Fertilizer= Opportunity Cost 70= 1.4 50 You make what benefits you.

Practice Problem Which nation has an absolute advantage? U.S. TV Computer U.S. 100 20 Japan 80 15 Total 180 35 Which 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?

Balance of Trade balance of trade: the relationship between a nation’s imports and exports trade surplus: a nation exporting more than it imports Example: The US exports $5 million and imports $3 Million trade deficit: the result of a country importing more than it exports Example: Mexico exports $4 million and imports $7 million credit: any transaction that brings money into a country debit: any transaction that takes money out of a nation balance of payments: the difference between the total amount of money coming into a nation and the total amount