1. Unit 4: International Economics
The Basics of International Trade

2. Think and Write
Given that the U.S. (like all nations) has limited productive resources, where do you think our country ought to focus in its production decisions (meaning…what are we best suited to produce)? Answer and support your reasoning… (there is no “right or wrong”)

3. Production and Trade Decisions
It makes the most economic sense to produce where we are most efficient
Must consider production possibilities & related opportunity costs
Allows us to specialize

4. Absolute Advantage
Occurs when one nation is able to produce a product “more” efficiently than another or produce a greater ouput.
Two ways to look at it…
Input Method: When a nation is able to produce the same output as another with less inputs
Output Method: When a nation is able to produce more output than another with the same input

5. Absolute Advantage (cont.)
Example based on inputs…
Country A produces 5 computers with 2 workers while Country B produces 5 computers with 4 workers.
Example based on outputs…
Country A is able to produce 10 computers with 6 workers while it takes Country B 6 workers to produce 12 computers.
Large nations will almost always have an absolute advantage. Why?

6. Example of Absolute Advantage
Nations
# of iPods produced per hour
# of Tablet Computers produced per hour
Warriorland 40 20
Mustangland 90 30
Which nation has the Absolute Advantage producing iPods? Tablets?

7. Comparative Advantage
Occurs when one country has the lowest opportunity cost for producing that good.
It’s the ratio of “What is being produced” vs. “What is given up”
Nations specialize if they can produce with lower opportunity costs than another.
It’s why we trade!!!!

8. Example of Comparative Advantage
Nations
# of iPods produced per hour
# of Tablet Computers produced per hour
Warriorland 40 20
Mustangland 50 30
Which nation has the Comparative Advantage producing iPods? Tablets?

9. Managing Our Trade
We do so through by “balancing out” the flow of goods and/or money between the nations we trade with…
Do we export or import more goods from a trading partner?

10. Balance of Trade Exports – Imports (X-M)
Greater exports = TRADE SURPLUS
Greater imports = TRADE DEFICIT
Exports = Imports = BALANCED TRADE
Measures the $ value of exports vs. imports

11. Balance of Payments
Records all international monetary ($) transactions
$ flowing out and $ flowing in
$ flowing in are “credits”
$ flowing out are “debits”
Balance of Payment Deficit: occurs when DEBITS > CREDITS
Balance of payment Surplus: occurs when CREDITS > DEBITS

12. Balance of Payments (cont.)
Balance of Payment is ideally zero…
Calculated by transactions in three types of accounts…
Current Account (Balance of Trade) – lets us know whether we have a trade deficit or trade surplus
Financial Account measures the value of stocks/bonds one country buys from another.
Capital Account measures the value of capital goods (buildings, etc. )one country buys from another.

13. Balance of Payments
Balance of Payments = Current Account ($) + Financial Account ($) + Capital Account ($)

14. Trade Barriers
Laws passed to restrict flow of goods between its country and another
Goal is typically to promote its industries

15. Types of Trade Barriers
Tariffs – tax place on imports
Quotas – limit in quantity of goods from another nation
Embargo – a complete ban due for political reasons
Standards – requirements on quality of goods before it comes in – protects consumers
Subsidies – a transfer payment from the government to exporting companies – goal is to allow its exports compete with other nations on the international market.

16. Trading Blocs
A group of countries that band together and limit trade barriers in order to promote trade between members
Designed to improve efficiency
Designed to raise standard of living and establish new trading partners
Opponents say it gives some partners an unfair advantage due to labor costs and lack of restrictions on environment

17. Examples of Trading Blocs
European Union (EU) – 28 nations
France, Italy, Belgium, UK, Poland, Sweden, etc.
North American Free Trade Agreement (NAFTA) – US, Mexico, Canada
Association of South East Asian Nations (ASEAN) – 10 nations
Philippines, Singapore, Thailand, and Vietnam, etc.

18. Accomplishments of the EU
Common currency
Peace in Europe
Environmental protection
Safer/cheaper transportation

19. Accomplishments of NAFTA
Trade and investment between members has increased (not as much as hoped for)
Industries have specialized more
Foreign investment has increased
Has not…
Solved labor problems - illegal immigration/migration
Solved environmental issues
Set common rules for subsidies

20. Accomplishments of ASEAN
Rate of GDP growth of the region is the fastest in the world
Wages are increasing & poverty decreasing
Over 70% of goods traded between nations have no tariffs!

21. Exchange Rates The price of one nation’s currency vs. another…

22. Calculating Exchange Rates
U.S. Dollar : Japenese Yen $1.00 ¥  If you went to Japan, you’d get ¥ for each dollar! How about the other way around?

23. Calculating an Exchange Rate
Japenese Yen : U.S. Dollar
¥ $ ?
How many $US could a visitor from Japan get for each Yen he brings?
The math is simple…just divide $1/ and you get ¥1 = $.0088 US
If a person from Japan came to America and wanted to buy a Big Mac Meal ($5.99), how many Yen would they need to exchange?
$5.99/.0088 = ¥680.68!!!!!!!

24. When the Dollar Appreciates
It increases in value compared to other currencies – it is a STRONG $m
Imports increase and are cheaper for consumers to buy
U.S. exports decline
The U.S. trade deficit increases

25. When the Dollar Depreciates
Its value decreases compared to other currencies – it is a WEAK $
U.S. exports increase and prices of exports go up
U.S. imports decline and prices of imports increase
U.S. trade deficit decreases
Foreign investment in the U.S. grows