The International Economy This is the study of how economies in different countries and regions of the world interact and affect one another.

International Trade Why Trade? Trade allows countries to concentrate on what it does best and trade for what it cannot or does not produce. This allows for specialization in certain goods, which leads to more efficient production of those goods. Ex: Brazil-sugar and U.S.-auto industry These are examples of countries concentrating on what they do best. As both countries concentrate on their strengths they both increase their overall well-being.

International Trade Market Advantages Market advantages occur when one country has an abundance of resources and/or can produce certain products more efficiently and in greater quantity than a competing nation. The 2 types of advantage are absolute advantage and comparative advantage.

International Trade Market Advantages Absolute Advantage. A country has an absolute advantage when they can produce a product using less resources than another country. When a country has an absolute advantage it means that the country can produce more of a good than another country. Brazil has an absolute advantage over the U.S. in sugar production. The U.S. has an absolute advantage over Brazil in auto production.

International Trade Market Advantages Comparative Advantage A country has a comparative advantage when they can produce something at a lower opportunity cost than another country. When two countries are producing 2 of the same goods, one country will always have a comparative advantage in the production of one of the goods. In this case each should specialize in what they do best and trade for the other good.

International Trade Market Advantages Imagine countries producing cars and sugar. The U.S. produces more cars and sugar than Costa Rica. So the U.S. has an absolute advantage in both. They can, however, benefit from trade because each has a comparative advantage. Though Costa Rica cannot produce as much sugar, it does not cost as much to produce the amount that they grow. Though the U.S. can produce more sugar, they should focus on producing cars because it costs so much to produce sugar. Because of comparative advantage the U.S. should produce cars and Costa Rica should produce sugar and they should trade with each other.

Practice Pg. 75 Practice 4.1 Diagnostic Test Questions 32,48,55

Trade Restrictions and Barriers Free Trade This is trade without government restrictions. Opponents arguments against free trade. It hurts the poor while helping the rich. It encourages companies to move overseas. It is bad for poor countries who cannot compete in the global economy. It forces less economically developed countries to abandon their own traditions and cultures in favor of becoming more westernized. It can cause shortages in the country that is doing the exporting.

Trade Restrictions and Barriers Free Trade cont. Supporters of free trade argue: It creates jobs for the unemployed. It promotes political freedom. It provides poorer countries with a chance to grow economically. Consumers benefit because prices are lower.

Trade Restrictions and Barriers Government Regulated Trade Governments sometimes regulate trade in an effort to help their own nation’s businesses, increase jobs, help the national economy, or even punish another nation economically.

Trade Restrictions and Barriers Types of Government Regulations Quota-a limitation on the number of units or the amount of a particular product that can be imported into a country. These limit competition by restricting the number of foreign products on the market. Though the foreign good may be cheaper, the domestic consumers can only buy so much of it before they have to buy a comparable domestic good.

Trade Restrictions and Barriers Types of Government Regulations Cont. Tariffs-special taxes placed on products imported from other countries. This will increase the price of the good and therefore decrease the quantity demanded. This might help a domestic producer stay in business, even though without the tariff the imported good would have been cheaper for consumers. Both quotas and tariffs are put in place in order to make it easier for domestic producers to compete against foreign companies

Trade Restrictions and Barriers Types of Government Regulations Cont. Embargo-occur when a nation, or several nations, impose economic sanctions against a nation by refusing to trade with them. Standards-these are specific guidelines on goods coming into the country, (health and safety) and are designed to protect consumers. Subsidies-payment from the government to a business to help them survive against foreign producers rather than placing regulations on trade.

Trade Restrictions and Barriers Reasons for Trade Barriers Protectionism-putting policies in place that are designed to protect domestic industries from too much foreign competition. While protectionism might allow some domestic firms to keep producing, allowing free trade is almost always the most efficient way to run an economy. Health and safety-in the U.S. we protect the health and safety of our citizens by putting standards on consumed goods.

Trade Restrictions and Barriers Reasons for Trade Barriers cont. National Security-if we were to import our military supplies then we would be dependent on another nation during war time, therefore we produce our own military supplies. Retaliation-we may put regulations on countries who have put regulations on us in retaliation.

Trade Restrictions and Barriers Benefits of Trade Barriers They help domestic businesses compete. They protect domestic jobs. They maintain safety standards in the marketplace. They help poorer nations while they are trying to develop economically and compete with wealthier nations.

Trade Restrictions and Barriers Costs of Trade Barriers They limit the number of goods in the marketplace. They increase price levels.

International Trade Organizations and Agreements World Trade Organization (WTO)-establishes rules for international trade and helps resolve disputes between member nations. European Union (EU)-facilitate trade and commerce between 25 European nations in an effort to create a unified regional economy rather than national economies. Association of Southeast Asian Nations (ASEAN)-aims to accelerate economic growth, social progress, and cultural development among its members.

International Trade Organizations and Agreements cont. United Nations (UN)-seek solutions to military and economic issues. North American Free Trade Agreement (NAFTA)-lowered trade barriers between the U.S., Mexico and Canada. International trade can reduce the incidence of wars between nations. When two countries economies are linked they are less likely to go to war with each other.

Balance of Trade and Balance of Payments Balance of Trade-the rate at which one nation trades with other nations. A favorable balance of trade is when a country exports more than it imports. An unfavorable balance of trade is when a country imports more than they export.

Balance of Trade and Balance of Payments Balance of Payments-is the value of all money coming into the country thanks to exports, minus all of the money going out of the country as it pays for imports. Two areas of Balance of Payments: Current Accounts-this is trade in goods and services. Capital Accounts-this includes foreign investments. For years we have run a current account deficit but a capital account surplus that balances out the deficit.

Practice Pg. 83 Prac. 4.2 Diagnostic Test # 16,32,36,49,59,77

Purchasing Power and Exchange Rates Purchasing power refers to the actual amount of goods and services that can be bought with a given unit of money. Purchasing power parity is when the same product sells for the same amount of currency in different countries. The exchange rate is how much the primary form of currency in one nation is worth in comparison to the primary form of currency in another nation.

Purchasing Power and Exchange Rates Determining Exchange Rates There are Three Types of Exchange Rates #1 Fixed Exchange Rates This rate establishes a price for a foreign currency that is tied to a stable currency of a developed country. The stable currency is called a hard currency. #2 Floating Exchange Rates This type of rate is determined by supply and demand. If demand for the U.S. dollar increases or decreases it will affect the exchange rate.

Purchasing Power and Exchange Rates Determining Exchange Rates There are Three Types of Exchange Rates #3 Managed Floating Exchange Rates This exchange rate floats within an agreed upon band (via supply and demand) and if the value gets too high or low the central bank intervenes and manages the rate.

Purchasing Power and Exchange Rates Currency Appreciation Appreciation-when the value of a currency goes up it is said to have appreciated. This benefits consumers because they can buy more of a foreign good. This is bad for producers because a person holding the appreciated currency is going to buy from foreign countries. An appreciated currency leads to trade deficits. The government may take steps to devalue their currency to erase these deficits.

Purchasing Power and Exchange Rates Currency Depreciation Depreciation-when the value of a currency goes down it is said to have depreciated. This benefits producers because people from other countries can now buy more of their goods. This hurts consumers because they are unable to buy as many goods from other countries.

Purchasing Power and Exchange Rates Factors Affecting Exchange Rates #1 Interest Rates on Investments If the U.S. has higher rates relative to other countries, the demand for U.S. dollars will increase. Foreign investors will want to invest in U.S. securities in order to collect the high interest. This increase in demand could cause the dollar to appreciate.

Purchasing Power and Exchange Rates Factors Affecting Exchange Rates #2 Productivity As the productivity of a country goes up so does the demand for its currency because people need their money to buy their goods. #3 Economic Stability The more stable an economy is, the more foreign investors will want their currency. The reverse of all these factors can likewise cause depreciation.

International Trade Issues Tariffs, Quotas, and other trade agreements are issues that countries must address. For individuals the exchange rate is one of the most important international trade issues. The exchange rate measures the price of one nation’s currency in terms of another nation’s currency.

Exchange Rate Example Consider there are two grocery stores; Americo Store and Groceria Mexicana Americo Store is in Brownsville, TX and Groceria Mexicana is across the border in Metamores Mexico. Suppose the exchange rate between the American Dollar and the Mexican Peso is 1:10, meaning the U.S. Dollar translates to 10 Mexican Pesos.

Exchange Rate Example cont. Remember that exchange rates move up and down to reflect the worth of one country’s currency in comparison to another's. If there is high demand for U.S. products our currency appreciates because people need our money to buy our products. At the same time the Peso has depreciated relative to the Dollar. This means the new exchange rate could be 1:15 meaning the U.S. Dollar translates to 15 Pesos.

Exchange Rate Example cont. Which grocery store benefits from the new exchange rate? Groceria Mexicana The appreciated Dollar makes U.S. goods more expensive relative to the Mexican counterparts. Some Americans may cross the border to buy groceries because the exchange rate makes it lucrative.

Exchange Rate Example cont. Anyone converting Pesos to dollars needs 15 per dollar. When a person is converting Dollars to Pesos, his purchasing power has increased due to the new exchange rate. When a person is converting Pesos to Dollars however, the stronger Dollar lowers their purchasing power. Overall, business at Groceria Mexicana would increase, while Americo store’s business will decrease as some customers cross the border to take advantage of their strengthened currency.

Practice Pg. 89 Prac. 4.3 Diagnostic Test # 17,28,44,52,56,78