International Trade

And

Exchange Rates

Advantages of International Trade

• Allows a country to specialize• Increases efficiency• More goods and services• Lower prices for consumers• Greater diversity of goods and

services• Higher standard of living

Two Types of Advantage

• Absolute Advantage

• Country A can produce MORE of a good than country B

• Ex. Brazil (sugar) and USA (cars)

• Large countries tend to always have absolute advantage over small ones

• Comparative Advantage

• Country A can produce a good more EFFICIENTLY than country B

• Ex. Costa Rica (sugar) and USA (cars)

• Large countries can still benefit from trade with small ones because of comparative advantage

Comparative Advantage and Opportunity Cost

• Why would a big country trade with a small country if it had an absolute advantage in everything?

• COMPARATIVE ADVANTAGE!!!!• If we try to produce all of our own sugar,

pineapples, and coffee, it would be inefficient and too expensive (BIG opportunity costs)

• Hello, Costa Rica!• Two countries WON’T trade if the opportunity

cost is the same (no comparative advantage)

An EOCT type question

• The table below represents the amount of wheat and sugar that Brazil and the USA can produce in one day (in thousands).

• Who has an absolute advantage in wheat? In sugar?• Who has a comparative advantage in wheat? In sugar?

WHEAT SUGAR

USA 60 45

BRAZIL 50 40

Trade Balances

• Balance of Trade• Value of all goods and services exported

minus value of all imported• Trade surplus or Trade deficit

• Balance of Payments• Includes balance of trade AND a country’s

official reserves in its own and other countries’ currencies

Trade Deficits

• Trade deficits cause the international value of our dollar to fall. That means the dollar is worth less than other currencies. WHY do trade deficits do this?

Barriers to Trade: Protectionism

• Tariff: tax on an imported goods• Quota: limit on imported goods• Embargo: prohibiting an import• Standards: safety rules on imports • Subsidy: Government payments to their own

producers of a product• Costs? (remember, government actions that

impact economics produce floors or ceilings)• Benefits?

Trend More International Trade

• NAFTA: North American Free Trade Agreement (Canada, Mexico, USA)

• EU: European Union (most European Nations)

Exchange Rates• International Trade

Currency exchanges

• Exchange rate: price of one country’s currency compared to another’s

• Rates change as macroeconomic conditions change

• If you travelled to Europe with $100 and exchanged it into Euros, how many Euros would you get?

One USDollar

In US Dollars

Euro .71 1.40

US Dollar Exchange Rate

Dollar to Euro Conversion

IF YOU WANTED TO GO ON A TRIP TO PARIS WHAT WOULD HAVE BEEN THE BEST TIME TO TRAVEL?

Euro to Dollar Conversion

IF YOU ARE A GERMAN, WHAT WOULD HAVE BEEN THE BEST TIMETO GO TO DISNEYWORLD ON VACATION?

Exchange rate questions

• High demand for US exports causes what to happen to international value of dollar?

• If the USA demands increasing amounts of imports what will happen to international value of dollar?

• Which kinds of American businesses are WINNERS when the international value of the dollar falls? (weak dollar)