1. Unit 4 – International Economics

2. Standard
SSEIN1 The student will explain why individuals, businesses, and governments trade goods and services.
a. Define and distinguish between absolute advantage and comparative advantage.
b. Explain that most trade takes place because of comparative advantage in the production of a good or service.
c. Explain the difference between balance of trade and balance of payments.

3. What is Trade? The voluntary exchange of goods/services
Also known as commerce

4. Why Trade? Resources are NOT distributed equally around the globe
Land – agriculture vs. oil
Labor – high literacy rate = skilled workforce
Capital – factories, infrastructure
(Entrepreneurship)

5. Trade
Because countries differ in resources, they differ in the production of g/s
Leads to specialization
Specialization – producing certain g/s rather than what you need
Do what you are good at…trade for what you’re not!

6. Trade Countries then rely on each other for the production of g/s.
This is known as interdependence.

7. Why Trade?
Opportunity Cost: Countries will produced items where opportunity cost is LOWEST.
Think in terms of “what they are giving up”

8. Absolute vs. Comparative Advantage
Absolute Advantage – when a nation/person can produce MORE of a g/s with given resources
Who has the absolute advantage?
Pizza
Salads 9 36 6 12
Nino
Tony

9. Opportunity cost determines comparative advantage.
Comparative Advantage – the ability to produce most efficiently given all the other products that could be produced
Opportunity cost determines comparative advantage.
LOWER opportunity cost is where you have comparative advantage.
Specialization in what you do best given the resources available

10. (Opportunity Cost of a) (Opportunity Cost of a) Salad
Opportunity cost determines comparative advantage.
Lower opportunity cost is where you have comparative advantage.
Who has the comparative advantage in Pizza? Salads?
(Opportunity Cost of a)
Pizza
(Opportunity Cost of a) Salad
4 salads
¼ pizza
2 salads
½ pizza
Nino
Tony

11. International Trade and Comparative Advantage
Cheese
Wheat
United States 3 12
France 2 4
Which country has the absolute advantage in cheese? Wheat?
Which country has the comparative advantage in cheese? Wheat?
Would these countries benefit from trade?

12. US has absolute advantage in both cheese and wheat
US has absolute advantage in both cheese and wheat. (They produce more than France.)

13. Protectionism
The use of trade barriers to protect industries from foreign competition
Ex. US Steel (tariff)

17. Type of Barriers Tariff: Tax on imported goods
US Steel
These will be listed as a $ amount
Quota: a limit on the amount that can be imported
This will be a # but NOT money.

18. Types of Trade Barriers
Embargo
Boycotting trade with another country
Typically for political reasons
Ex. Trade embargo with Cuba

21. Barriers to Trade Continued
Standards
certain requirements set by governments that must be met in order to import a good
Ex. Safety standards

28. Subsidies
payments by a government to a business that helps keep it going
prevents trade at fair market prices
Ex. Canada and softwood timber

30. Free Trade Agreements
Trading Blocks – countries who have agreed to limit or restrict trade barriers
NAFTA – North American Free Trade Agreement
Goal is to eliminate all tariffs/trade barriers between Canada, United States, and Mexico by 2009

33. EU – European Union
Group of (Western) European countries that abolished trade restrictions among member countries
Replaced individual currencies with the Euro

34. ASEAN – Association of Southeast Asian Nations
Promotes economic and social growth
10 member countries including Philippines, Thailand, Vietnam
Goal is to complete free trade agreements with Japan, China, India, South Korea, Australia, and New Zealand by 2013

36. Lunch costs $5, how many pesos must you exchange?

37. Lunch costs $5, how many pesos must you exchange?

38. Finding exchange rates

39. What is it? Exchange Rates
The value of a foreign nation’s currency in terms of the home nation’s currency
#Exchange rates fluctuate on a daily basis

40. You are visiting New York City from Mexico and you want to buy lunch
You are visiting New York City from Mexico and you want to buy lunch. You need to trade your __________ for ___________. $1 U.S. Dollar = 13 pesos Lunch costs $5 How many pesos must you exchange?

41. Stronger: When you get more in return for your one. $1 for 13 Pesos
Weaker: When you get less in return for your one. $1 for .60 Euro

42. Who has the stronger currency?
If your currency is strong, when they give you 1 of theirs, they will get more than 1 in return.
If your currency is weak, when they give you 1 of theirs, they will get LESS THAN 1 in return.

43. Who has the stronger currency?
U.S $1 Mexico 13 Pesos
U.S. $1 Euro .80
Canada $ Euro 1.612
Mexican peso Yen .105

44. If your currency is stronger, what should you increase and what should you decrease?
IMPORTS?
EXPORTS?

45. Appreciation – an increase in value of a currency “Strong”
Ex. Strong US dollar…
Increase imports
Decrease exports
$1 = 13 pesos
$1 = 15 pesos

46. Depreciation – a decrease in the value of a currency “Weakening”
Ex. Weak US dollar…
Decrease imports
Increase exports
$1 dollar = 13 pesos
$1 dollar = 10 pesos

47. How to calculate
Next we will practice: Which one is stronger? Calculate exchange rate.

48. Practice- Always read down the chart!
US Dollar $1 =
Mexican Peso $1MP =
EURO €1 =
Chinese Yuan ¥1 =
US Dollar $ $1
$0.077
$1.36
$0.16
Mexican Peso $MP
$13.06MP
$1MP
$17.71MP
$2.10MP
EURO €
0.74€
0.056€ 1€
0.12€
Chinese Yuan ¥
6.23¥
0.48¥
8.45¥ 1¥

49. Ok…that was some good multiplying, but sometimes you have to divide
Example: Given pesos, pesos, then find dollars You plan to stay in a hotel for one week on your Senior Trip to Cancun, Mexico. The total cost is 7,000 pesos. With an exchange rate of 11 pesos per dollar, what is the cost of your hotel in US dollars. $636.36

50. Balance of Trade vs. Balance of Payments
Balance of Trade: the relationship between a nation’s imports and exports
Balance of Payments: the financial record of all financial payments between countries
Tracks the flow of money in or out of a country

51. Trade surplus
Trade deficit
Export more than you import
Import more than you export