2. Ch. 17 - International Trade Sect. 1 - Comparative and Absolute Advantage Unequal Resource Distribution - A nation’s resources (land, labor, capital) determine what it can produce - makes specialization and trade necessary Specialization and Trade - Given a nations resources it will specialize in producing certain goods and trading for the other goods - Even if a nation has the resources to produce many goods it still makes economic sense to specialize and trade

3. Absolute Advantage - When a nation can produce more of a good than another nation with its given resources Comparative Advantage - When a nation can produce a good at a lower opportunity cost compared to other nations - A nation should produce whatever has the lower opportunity cost

4. 3 Tom has an absolute advantage in both coconuts and fish So why would he trade?

5. 4 Tom has a comparative advantage (lower opp. cost) in producing fish Hank has a comparative advantage (lower opp. cost) in producing coconuts

6. 5 Tom produces only fish (lower opp. cost) Hank produces only coconuts (lower opp. cost) They trade for what the other produces

7. Tom and Hank each increase their consumption of both goods by specializing and trading with each other

8. Comparative Advantage Example - Lebron James has an absolute advantage over Frank both in playing basketball and stocking shelves at Home Depot - Why should Lebron play basketball and let Frank stock shelves? - Lebron’s opp. cost (what he gives up) to stock shelves is much higher than Frank’s

9. 8 1. Calculate the opportunity costs for each country 2. Determine the comparative advantage for each country

10. BangladeshUnited States Shirts (S) 750 S - 250 M 1 S = 1/3 M 1000 S - 1000 M 1 S = 1 M Malaria Medicine (M) 250 M - 750 S 1 M = 3 S 1000 M - 1000 S 1 M = 1 S

11. 10 1. Calculate the opportunity costs for each country 2. Determine the comparative advantage for each country U.S. Consumption with Trade Bangladesh Consumption with Trade

12. Bangladesh produces clothing that the U.S. trades for - What the U.S. would have to give up to produce more clothing creates a higher opp. cost for the U.S - Bangladesh has a lower opp. cost to produce clothing Khan Academy - Gains from Trade

13. OC of 1 unit of Fish in U.S. _________. OC of 1 unit of Fish in England _________. OC of 1 unit of Chips in U.S. _________. OC of 1 unit of Chips in England _________. U.S. has comparative advantage in _________. England has comparative advantage in ________. U.S.England 1/2 Chips 4 Fish 2 Fish Fish Chips 1/4 Chips

14. 0 800 400 200500 Corn Computers Country A Country B

15. Trade

16. Absolute Advantage - When a nation can produce more of a good than another nation with its given resources Comparative Advantage - When a nation can produce a good at a lower opportunity cost compared to other nations - A nation should produce whatever has the lower opportunity cost

17. Trade Partners Top U.S. Trade Partners: Canada China Mexico Japan Germany United Kingdom

18. U.S. Exports Top U.S. Exports: Transportation Equipment Chemicals Electronics / Electrical Equipment Medical Equipment Machinery Food

19. Absolute Advantage - When a nation can produce more of a good than another nation with its given resources Comparative Advantage - When a nation can produce a good at a lower opportunity cost compared to other nations - A nation should produce whatever has the lower opportunity cost Interdependence - Trade creates interdependence between nations - we need goods from others - they need goods from us

20. Trade and Unemployment - As a nation specializes and trades it can cause job loss (structural unemployment) On the other hand - As worldwide demand increases it can create demand for more workers Sect. 2 - Trade Barriers and Agreements Trade Barriers - Preventing a foreign product or service from freely entering a nation

21. Tariffs - Tax on imported goods - used to protect U.S. industries Quotas - A set limit on the amount of a good that can be imported from another nation Sanctions - Actions a nation takes to punish or pressure another nation Ex: - Iraq after Gulf War - Soviet invasion of Afghanistan in 1979 Embargo - A ban on trade with a particular nation

23. Trade Barriers

24. Trade Agreements - Many nations have trade agreements to increase economic growth and maximize comparative advantage World Trade Organization - Founded in 1995 with the goal of making global trade more free - WTO enforces trade rules between member nations European Union - Began in 1957 - 27 nations of Europe abolished tariffs and trade restrictions among member nations - established the Euro as the standard currency in 2002

25. NAFTA - 1994 - North American Free Trade Agreement, created free trade between the United States, Canada, and Mexico Opponents argue it leads to loss of jobs to Mexico and Canada

27. Free Trade

28. NAFTA - 1994 - North American Free Trade Agreement, created free trade between the United States, Canada, and Mexico Opponents argue it leads to loss of jobs to Mexico and Canada Sect. 3 - Measuring Trade Foreign Exchange - Trade with foreign nations can be complicated because of different currencies with changing values Exchange Rate - The value of a nation’s currency in relation to a foreign currency - used to convert to U.S. currency price in foreign currency value of currency per dollar = cost in dollars

29. 500 pesos 12.5 pesos/dollar = $40.00 100 British Pounds.49 BP/dollar = $204.00 100 euros.70 euros/dollar = $142.00

31. Fixed Exchange Rate - When trade partners keep their currency exchange rate the same - makes trade simpler Flexible Exchange Rate - As world economy grew, most nations have gone to flexible exchange rate - The exchange rate will constantly change and be recalculated Balance of Trade - Relationship between value of imports and exports - Importing more than exporting creates a Trade Deficit - if the value of the dollar rises - decrease in exports - if the value of the dollar falls - increase in exports

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33. Trade Balance

34. Personal Financial Handbook Credit - Borrowing money to make a purchase - The cost of borrowing is interest on the amount borrowed - Your Credit Rating is based on your credit history Secured / Unsecured Credit - Secured credit requires collateral - if borrower defaults the lender keeps the collateral Ex. - Automobile, house Unsecured credit does not require collateral Ex. - Credit cards

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37. Truth in Lending Act - Must tell buyer in writing the finance charges, annual percentage rate, penalties for late payments Bankruptcy - If you cannot pay your debts your assets are placed under control of court Can arrange for a payment plan - or sell assets to cover debt Taxes, child support, student loans cannot be eliminated

38. Insurance - People purchase insurance so the injured party can recover money from the insurance company, not the person responsible Liability Insurance - Payments (premiums) made to the insurance company - they agree to pay the damages caused by the insured person Ex: auto, malpractice, manufacturers, homeowners

39. 38 Auto Insurance - Liability - Covers damage to someone else (auto, medical, property) Medical Coverage - Pays medical expenses for you and your passengers Collision - Pays for damages to your own car if you are at fault Comprehensive - Covers damages due to vandalism, theft, fire, towing Deductable - Amount you have to pay first before insurance will pay

41. 40 Auto Insurance - Liability - Covers damage to someone else (auto, medical, property) Medical Coverage - Pays medical expenses for you and your passengers Collision - Pays for damages to your own car if you are at fault Comprehensive - Covers damages due to vandalism, theft, fire, towing Deductable - Amount you have to pay first before insurance will pay

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