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International Trade. SSEIN1 The student will explain why individuals, businesses and governments trade goods and services. Who can produce more freezers? Germany Who can produce more dishwashers? Germany. a. Define and distinguish between absolute advantage and comparative advantage.
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SSEIN1 The student will explain why individuals, businesses and governments trade goods and services.
Who can produce more freezers? • Germany • Who can produce more dishwashers? • Germany a. Define and distinguish between absolute advantage and comparative advantage. Therefore, Germany has an absolute advantage in the production of both freezers and dishwashers, simply because they can produce more than Italy.
So should Germany and Italy trade? • To answer this, we must look at opportunity cost. Germany Cost of producing 1 freezer = ½ dishwasher Cost of producing 1 dishwasher = 2 freezers Italy Cost of producing 1 freezer = ¼ dishwasher Cost of producing 1 dishwasher = 4 freezers
When Germany decides to produce 1 freezer, it forgoes the opportunity to produce ½ of a dishwasher. • When Italy decides to produce 1 freezer, it forgoes the opportunity to produce ¼ of a dishwasher. • Which nation gives up the least, or has the lowest opportunity cost, when they produce 1 freezer? • Italy Germany Cost of producing 1 freezer = ½ dishwasher Cost of producing 1 dishwasher = 2 freezers Italy Cost of producing 1 freezer = ¼ dishwasher Cost of producing 1 dishwasher = 4 freezers
When Germany decides to produce 1 dishwasher, it forgoes the opportunity to produce 2 freezers. • When Italy decides to produce 1 dishwasher, it forgoes the opportunity to produce 4 freezers. • Which nation gives up the least, or has the lowest opportunity cost, when they produce 1 dishwasher? • Germany Germany Cost of producing 1 freezer = ½ dishwasher Cost of producing 1 dishwasher = 2 freezers Italy Cost of producing 1 freezer = ¼ dishwasher Cost of producing 1 dishwasher = 4 freezers
A country is said to have a comparative advantage in whichever good has the lowest opportunity cost. • If Italy specializes in the production of freezers and Germany specializes in the production of dishwashers, more freezers and dishwashers will be able to be produced. • Then the nations can trade for each others goods. • In the end, both nations will be able to consume more freezers and dishwashers than they could have with no trading. b. Explain that most trade takes place because of comparative advantage in the production of a good or service.
Recall our equation for GDP: GDP = C + I + G + NX c. Explain the difference between balance of trade and balance of payments. • NX stands for net exports and could be written as (X-M), or (exports – imports). • If a nation subtracts the value of its imports from the value of its exports and ends up with a positive number, then that nation has a trade surplus. • If a nation subtracts the value of its imports from the value of its exports and ends up with a negative number, then that nation has a trade deficit.
Table 1 The U.S. Balance of Payments, 2004 The balance-of-payments accounts of a country record the payments and receipts of the residents of the country in their transactions with residents of other countries. The balance of payments includes the current account (trade in merchandise/services), the capital account (trade in capital), and the financial account (flows related to investment in business, real estate, bonds and stocks). Note: a country could have a trade deficit and a balance of payments surplus. Balance of Payments
SSEIN2 The student will explain why countries sometimes erect trade barriers and sometimes advocate free trade.
Tariff: a tax on imported goods • Quota: a limit on the number of a specific good that can come into a country from another country • Embargo: a ceasing of all trade … no imports, no exports • Standards: regulations in one country that keep goods from another nation out (environmental or safety standards) • Subsidies: government payments to business to help them pay for the costs of production … seen as a barrier to trade b/c it gives the subsidized industry an unfair advantage in global markets a. Define trade barriers as tariffs, quotas, embargoes, standards, and subsidies.
Tariffs, quotas, embargoes, and standards have the same effect – supply falls and prices rise. Subsidies lower the cost of production for domestic producers, causing supply to increase and prices to decrease. b. Identify costs and benefits of trade barriers over time. Effect of trade barriers on supply and demand …
For trade barriers: • Infant industries argument: If a nation has developing industries, it must protect them from competition from well-established businesses in other countries that can produce more efficiently. • National security argument: Certain industries, such as steel and energy, are of vital importance to a nation’s national security and thus must be protected. • Dependency argument: A nation should not allow itself to become too dependent on other nation’s for its own well-being. e. Evaluate arguments for and against free trade.
Against trade barriers: • Efficiency argument: Specialization and trade is more efficient. A nation should not support an industry that is inefficient – this is a waste of resources. • When nations specialize and trade, both parties gain. Production and consumption increase, as does standard of living. Erecting barriers to free trade deprives nations of these benefits of trade. e. Evaluate arguments for and against free trade.
European Union (EU): a monetary union (the euro) of most of the nations of Europe designed to make trade easier • North American Free Trade Association (NAFTA): an association between the nations of North America (US, Canada, Mexico) designed to limit trade barriers • Association of Southeast Asian Nations (ASEAN): free trade association of SE Asian nations d. List specific examples of trading blocks such as the EU, NAFTA, ASEAN.
SSEIN3 The student will explain how changes in exchange rates can impact the purchasing power of individuals in the United States and in other countries.
a. Define exchange rate as the price of one nation’s currency in terms of another nation’s currency.b. Locate information on exchange rates.c. Interpret exchange rate tables.d. Explain why, when exchange rates change, some groups benefit and others lose.
