Chapter 17

Chapter 17 Section 1

SSEIN1a Define and distinguish between absolute advantage and comparative advantage.SSEIN1b Explain that most trade takes place because of comparative advantage in the production of a good or service

This morning maybe you had coffee or orange juice, where did it come from?

Many of our goods and services come from outside our country—cars, electronics, food, clothing…

Do other countries like us so much that they send us things we need?◦ NO! They trade because they get something in

return that they value—trade makes us better off

2 individuals have sack lunches at a school picnic

Both have the same lunch: 1 sandwich, 1 cookie, 1 pickle, I bag of

chips Watch how their utility

increases after trade without the total of quantity of goods changing…

GAINS FROM TRADE!

Trade creates losers◦ If things can be done cheaper somewhere else,

production will move there unless local workers are more productive or get paid less

Trade makes us better off and richer◦ Trade with others frees

up our time and resources to do things at which we are better

Trade acts generally like jobs and skills do for individuals or groups

Countries can specialize in what they do best, more productively or cheaper and trade those goods or services for whatever else they need◦ Yet trade is often limited by population, resources,

geography, education, access, etc.

Think about it! Productivity makes us better offSpecialization allows us to be more productive

Trade allows us to specialize◦We need not make everything, just what we do best to trade for everything else

Absolute Advantage – occurs when a nation produces more a given product than another nation◦ South Africa: Diamonds◦ Middle East: Oil

Comparative Advantage – where a country produces a good most efficiently or at less opportunity cost

Exports are goods shipped out of a country ◦For sale to others

Imports are goods brought into a country ◦Purchased from others

One country’s export is another’s import The great question is a country’s relationship

between the 2

Chapter 17 Section 2

SSEIN1c Explain the difference between balance of trade and balance of payments.SSEIN2a Define trade barriers as tariffs, quotas, embargoes, standards, and subsidies.SSEIN2b Identify costs and benefits of trade barriers over time.SSEIN2c List specific examples of trade barriers.SSEIN2d List specific examples of trading blocks such as the EU, NAFTA, and ASEAN.SSEIN2e Evaluate arguments for and against free trade.

A country’s relationship between imports and exports is their balance of trade

Importing more than you export amounts to a trade deficit

Exporting more is a trade surplus◦ So far in 2013 the US trade deficit was over $125 b,

with largest amounts owed to China, Japan, Mexico, Germany

◦ Yet the trade deficit has recently fallen Oil imports are the

lowest for 17 years!

Trade barriers prevent foreign products from freely entering a country

There are 3 basic tools:1.Quotas: a limit on the

amount of imports2.Tariffs: a tax on imports Embargoes are “full blown”

restrictions prohibiting complete trade with a country Health restrictions or other regulations and laws can

reduce trade as well Think of products from China that don’t meet our

standards

Simply put, trade barriers decrease supply◦ Lower supply, raises prices (imported cars)

Increased prices increase costs and thus decrease efficiency

Trade wars: cycles of increasing barriers between countries◦ Typically countries

react back and forth to one another, raising trade barriers

Tariffs are taxes on imports◦ Consumers in the importing country see higher

prices when a tariff is placed on a good◦ Domestic producers benefit because less people

will buy imports and more will buy their product

Quotas are limits on the number of imports◦ Consumers in importing countries again face

higher prices and even limited supplies ◦ Domestic producers benefit because consumers

will buy more of their product, perhaps at a higher price

Use of trade barriers to protect industries from foreign competition.

1.Save domestic jobs2.Shield infant industries3.Safeguard national

security◦ Other concerns include

effects on the environment (pollution), defending against dumping, human rights of workers (sweatshops), quality, etc.

Most economists believe that the more openly and frequently that countries engage in trade, the better off everyone will be

To make trade more efficient, many countries create free trade areas, or zones, where trade barriers are reduced between neighboring countries◦ Also called trade blocs ◦ Examples include: NAFTA and the EU

Overseeing global trade is the World Trade Organization (WTO) a supranational governing body that mediates trade disputes

Chapter 17 Section 3

SSEIN3a Define exchange rate as the price of one nation’s currency in terms of another nation’s currency.SSEIN3b Locate information on exchange rates.SSEIN3c Interpret exchange rate tables.SSEIN3d Explain why, when exchange rates change, some groups benefit and others lose.

Exchange rates are the value of a foreign nation’s currency compared to another’s

Enables you to convert prices into another currency in another currency

www.oanda.com To calculate:

use ratios—set exchange rates equal to one another and put similar currencies over one another◦ Solve as X for the amount

you are looking for

When currencies are 1 for 1 (1=1) they are equal in value

If a currency has a lower number than another it has higher value◦ 1USD = 0.735EUR—or, $1 gets you about 75

cents in Euros When a currency has a higher number it is

less in value 1 USD = 6.26 Botswana Pula

◦ Means it takes 6.26 of their (Botswanan) currency to equal one of ours

◦ Botswana’s currency has less value than our dollar http://money.howstuffworks.com/exc

hange-rate.htm

When a currency gains value against another it is said to be strengthening◦Also called appreciating

When a currency losses value against another it is said to be weakening◦Also called depreciating

Stronger dollar makes US goods more expensive for other countries

Stronger dollar also makes foreign goods less expensive for US

The change of money across foreign borders occurs on the foreign exchange market

When a foreign country’s currency is less expensive we will buy more of their things

Strong dollar Weak dollar

ValueExports

Exports Value

Bretton Woods (1944) Agreement “pegged” most currencies to $US as it was strongest of the time

2 main systems for exchanging and valuing currency have emerged◦ Fixed rate: governments attempt to keep their

currencies constant against one another ◦ Flexible rate: values determined by supply and

demand◦ Most countries use a combination of both