1. Unit 5: International Economy International trade allows a country to concentrate on what it does best and trade for what it can’t or doesn’t produce. In effect, trade increases the total amount of output produced in the world – meaning there’s more output per person, so overall living standards rise.

2. Vocabulary  -- goods and services bought from other nations  - goods/services that a nation produces and then sells to other nations  -- country’s ability to produce more of a given product than another country  -- country’s ability to produce a given product relatively more efficiently; production at lower opportunity cost Imports Absolute Advantage Exports Comparative Advantage

3. To explain comparative advantage, use the example of the lawyer who hires an assistant to do her word processing even though the lawyer can word process faster than the assistant. Suppose the lawyer earns 10 times more per hour than her assistant, yet she can word process twice as fast. Who should do the word processing? Clearly the assistant because the opportunity cost is higher for the lawyer, who can earn 10 times as much preparing legal briefs. In economic terms, the lawyer has a comparative advantage in practicing law, and the assistant has a comparative advantage in word processing, even though the lawyer has an absolute advantage at doing both. B. Market Advantages: Absolute advantage vs. Comparative advantage A. International Trade 1. across national borders 2. no country produces everything it needs 3. allows countries to specialize in certain goods ChinaRussia Rice80 lbs50 lbs Tea20 lbs75 lbs i. Absolute Advantage who can produce more with less resources Who has the absolute advantage in: Rice: Tea: China Russia

4. I’m Heather an expert patent lawyer. I am also very good at repairing bicycles. Hi! I’m Adam, a bike mechanic. Like my sister, I can also file patents. However, Heather can file patents AND repair bikes faster than I can. ii. Comparative Advantage - occurs when a country focuses on producing the good that has the lowest opportunity cost. From Economics for Dummies: You can most easily understand the logic behind the comparative advantage argument by thinking in terms of people rather than countries.

5. Productivity for Heather and Adam per Day Patent Productivity Bike Repair Productivity Heather612 Adam210 Since Heather has absolute advantage in filing patents and repairing bikes, we can use comparative advantage to determine who should do what. The key insight of comparative advantage is that the true cost is how much production of one good you have to give up to produce a unit of the other good. Until English economist David Ricardo developed comparative advantage, people used to believe that because Heather is better than Adam at repairing bikes, not only should she work hard as a patent attorney filing lots of patents, but she should also fix bikes. He pointed out that Heather should never fix bikes even if she is the most efficient bike repairperson around. Ricardo realized that the world is better off if each person (and country) specializes. So, who should produce bike repairs??

6. Productivity for Heather and Adam per Day Patent Productivity Bike Repair Productivity Heather612 Adam210 Who should produce bike repairs?? 1. What is Heather’s opportunity cost of filing patents if she only repairs bikes? (meaning how many patents does Heather give up filing when she repairs 1 bike?) 2. What is Adam’s opportunity cost of filing patents if he only repairs bikes? 3. Who has the lowest opportunity costs of filing patents? 4. Who should repair bikes? Who should file patents? Until English economist David Ricardo developed comparative advantage, people used to believe that because Heather is better than Adam at repairing bikes, not only should she work hard as a patent attorney filing lots of patents, but she should also fix bikes. He pointed out that Heather should never fix bikes even if she is the most efficient bike repairperson around. Ricardo realized that the world is better off if each person (and country) specializes. 12 repairs = 6 patents Adam Heather 12 repairs = 6 patents 12 1 repair =.5 patents 10 repairs = 2 patents 10 1 repair =.2 patents

7. ChileUS Wheat1 bag1,000 bags Fruit50 boxes100 boxes Who has absolute advantage in: Wheat: Fruit: But who has Comparative Advantage? Wheat: Fruit: Absolute and Comparative Advantage Between Countries To determine who has the comparative advantage in producing fruit, determine which country has the lowest opportunity cost of wheat. ChileWheat/Fruit1/50 =.02 U.S.Wheat/Fruit1,000/100 = 10 Who should produce fruit? To determine who has the comparative advantage in producing wheat, determine which country has the lowest opportunity cost of fruit. ChileFruit/Wheat50/1 = 50 U.S.Fruit/Wheat100/1,000 =.1 Who should produce wheat? U.S. Chile U.S. Chile

8. What country has an absolute advantage of food and clothing? Which country has a comparative advantage in food production? (Hint: Find which country has the lowest OC in clothing) What country has a comparative advantage in clothing output? Comparative and Absolute Advantage Country A: Clothing/Food = 3/6 =.5 Country B: (you find the ratio) Country A C/F = 2/1 = 2 Country A Country B

9. U.S.China Pens7550 Markers6035 What country has the absolute advantage in Pens: _________________ Markers: _______________ Which country has the comparative advantage in Pens: __________ Markers: ___________ LOC Markers China: M/P = 35/50 = ______ US: M/P = 60/75 = ______ LOC Pens China: P/M = 50/35 = ______ US: P/M = 75/60 = ______ Write this down U.S..7.8 1.43 1.25 China U.S.

10. CarrotsPotatoes U.S.5052 U.K.7085 What country has the absolute advantage in Carrots: _________________ Potatoes: _______________ Which country has the comparative advantage in Carrots: _________________ Potatoes: ______________ LOC Potatoes US: P/C = 52/50 = ______ UK: P/C = 85/70 = ______ LOC Carrots US: C/P = 50/52 = ______ UK: C/P = 70/85 = ______

11. MexicoRussia Computers35105 Printers6090 What country has the absolute advantage in Computers: _________________ Printers: _______________ Which country has the comparative advantage in Computers: _______________ Printers: ______________ LOC Printers Mexico: P/C = 60/35 = ______ Russia: P/C = 90/105= ______ LOC Computers Mexico: C/P = 35/60 = ______ Russia: C/P = 105/90 = ______

12. 1. The following table shows how many cars or computers can be produced by Japan and the United States in a month (in millions). Which statement is true concerning absolute advantage? Japan United States Cars 25 60 Computers 100 45 a. Japan has an absolute advantage in the production of cars. b. Japan has an absolute advantage in the production of both goods. c. Japan has an absolute advantage in the production of computers. d. Japan has no absolute advantage in this scenario. REVIEW QUESTIONS

13. 2. If someone has a comparative advantage in the production of a good then a. with a given set of resources, they produce more of the good than the competitors b. they can produce more of that good than anyone else. c. with a given set of resources, they produce the good at a lower opportunity cost. d. they can charge more for the good because they have higher opportunity costs.

14. 3. Russia and China are countries that trade with one another. The table below give the amount of crude oil and steel that each produces in a day. Which of the statements below is accurate? Oil Steel Russia 5,000 300 China 60 170 a.Russia has an absolute advantage in oil and China has an absolute advantage in steel b. China has a comparative advantage in steel, despite Russia's absolute advantage in both products. c. Russian and the Chinese would not benefit from trade d. China has a comparative advantage in oil, despite the fact that Russia can produce so much more of it.

15. A. Government Regulated Trade 1. All countries have some restrictions 2. Reasons: 1) helps domestic businesses 2) creates jobs 3) helps the economy 4) punishes another nation

16. 3. Types of Restrictions a. Quota – limit on number of imports lowers competition domestic (U.S.) companies can raise overall prices ex - limits on Canadian lumber b. Tariffs – special taxes on imports raise prices of foreign goods trade unions (advocates) protect domestic jobs other countries may retaliate U.S. exports more expensive

17. c. Embargoes – refusing to trade ex - Middle East oil to U.S. (1973), U.S. grain to USSR (1979) d. Standards – specific guidelines on goods must meet safety and health guidelines more standards = higher costs protects consumers ex - Chinese toy recall (2007), Toyota recall (2008) e. Subsidies – payment from the government protects domestic firms redistributes income from tax $ helps compete against foreign firms requires higher taxes ex - public universities, vaccinations

18. B. Costs and Benefit of Trade Barriers 1. Benefits -domestic businesses protect domestic jobs standards of safety helps developing nations (free trade would make it fail) 2. Costs - limits foreign goods harder for foreign businesses to sell higher priced foreign goods fewer choices for consumers domestic products rise in price too

19. 1. The purpose of a tariff when used for protectionism is to a. increase the number of foreign goods imported into the country b. make an imported good more expensive than its domestically produced counterpart c. raise revenues to pay subsidies to domestic producers d. stall importation while perishable items rot. REVIEW QUESTIONS

20. 2. The United States does not allow any company to legally import goods from Cuba. This type of trade barrier is known as a/an a. subsidy b. standard c. embargo d. quota REVIEW QUESTIONS:

21. 3. One argument in favor of a tariff would be that it would a.help domestic consumers by allowing them to pay a lower price b. reduces foreign competition for domestic businesses c.help foreign producers by allowing them to ship goods to the U.S. d. force foreign companies to ship goods that meet certain quality standards in the U.S.

22. 4. Why do domestic producers benefit from trade barriers like embargoes or quotas? a. The number of goods imported is lower. b. Domestic producers get money from the government. c. They tax the foreign competition. d. They decrease the desire for other countries goods.

23. Exchange Charts Foreign Currency in US Dollars US Dollar in Foreign Currency British pound2.060.49 Danish krone0.195.17 Euro1.440.69 Japanese yen0.0087114.69 Mexican peso0.8610.71 Lee went to Japan on vacation and took $300 spending money. When he exchanged it for yen, he received _____________ yen. While in Japan, Lee found a CD of a Japanese band for 2500 yen. He knows he can purchase the same CD back home in the US for $20. Should he purchase the CD in Japan or wait until he gets home? $300 x114.69 = 2,500 x.0087 =To find out how much he would get back in US dollars:

24. How much is each of the following worth in US dollars? 1 British Pound = _______1 Mexican Peso = _____________ 1 Danish Krone = ____________1 Euro = _______________ In Europe, $1.00 = 1.44 euros. How much is one US dollar worth in each of these countries? Mexico ___________Japan _____________ Denmark ____________Britain ______________ 10.71 pesos $2.06 Foreign Currency in US Dollars US Dollar in Foreign Currency British pound2.060.49 Danish krone0.195.17 Euro1.440.69 Japanese yen0.0087114.69 Mexican peso0.8610.71

25. Suppose you purchased each item below. Find the price in US dollars. A meal in India for 700 rupees ________________________________ A painting in London for 1,250 Euros ___________________________ A belt in Chile for 1,250 pesos ________________________________ A shirt in Canada for 40 dollars ________________________________ Foreign Currency in US Dollars US Dollar in Foreign Currency India Rupee.0252.46 Chile peso.002483.75 European Union euro1.33.75 Canada dollar1.02.98 Mexican peso0.8610.71 700 x.02 = $14.00

26. VI. Spectrum of Economic Systems A. Capitalism 1. Privately owned factors of production and businesses 2. Supply & Demand determine Price and What, How & For Whom to produce 3. Profits are higher 4. Advantages: efficiency freedom profit motives consumer satisfaction 5. Disadvantages: everyone's needs not met produces only for those who have demand poor left behind

27. B. Socialism 1. Government controls some resources 2. best interest of society 3. advantages: addresses the FOR WHOM, share benefits, people elect officials 4. disadvantages: less efficient, higher cost of production, higher taxes C. Communism 1. property is collectively owned 2. consumption based on need 3. central planning 4. no choice on career 5. gov't decides 6. Disadvantages: lost freedom; little say; no incentives; lack of consumer goods; inefficiency

28. All of the following are advantages of a capitalistic society EXCEPT a. everyone's needs met b. freedom of choice c. profits d. decentralization

29. What type of economic system has shared benefits from the gov't while at the same time has some resources privately owned? a. communism b. capitalism c. socialism