INTERNATIONALECONOMICS

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.

a. Define and distinguish between absolute advantage and comparative advantage.

Comparative Advantage – ability to produce a good or service at a lower opportunity cost than some other producer. This is the basis for specialization and trade.

Absolute Advantage – ability to produce more units of a good or service than some other producer, using the same quantity of resources.

b. Explain that most trade takes place because of comparative advantage in the production of a good or service.

- idea that everyone benefits from trade Nations focus on producing the good at which

productivity advantage is the greatest, or at which its productivity disadvantage is the smallest.

International trade offers economic benefits for other reasons: Increases competition between firms Increases variety for consumers Often increases level of training in accounting,

management and law in low-income countries Disseminates new technology and production

methods

c. Explain the difference between balance of trade and balance of payments.

Balance of Trade Exports minus imports If exports exceed imports,

nation has a trade surplus. If imports exceed exports,

nation has a trade deficit. No reason to expect them to

be even, but deficits for many years should concern countries because they can’t keep consuming high levels of imports forever.

Lower exchange rates should cause imports to fall and exports to rise in the future.

Balance of Payments Record of all

transactions between individuals, firms and governments of one country with those in all other countries in a given year, expressed in monetary terms.

Refers to funds received by a country and those paid by a country for all international transactions.

SSEIN2 The student will explain why countries sometimes erect trade barriers and sometimes advocate free trade.

a. Define trade barriers as tariffs, quotas, embargoes, standards, and subsidies.

b. Identify costs and benefits of trade barriers over time.

c. List specific examples of trade barriers.

d. List specific examples of trading blocks such as the EU, NAFTA, and ASEAN.

e. Evaluate arguments for and against free trade.

a. Define trade barriers as tariffs, quotas, embargoes, standards, and subsidies.

Tariff: tax on imported good/service Quota: limit on quantity of a product that may be

exported or imported. Embargo: imposing certain conditions before

granting consent. (Portuguese and Spanish word – means meeting an order issued by authority to prevent ships leaving port for a fixed period of time.

Standards: expectations for minimal levels of quality to be met.

Subsidies: financial assistance granted by a government to promote an enterprise considered beneficial to the public welfare.

b. Identify costs and benefits of trade barriers over time.

Costs/Benefits to Trade Barriers

Pros Protects workers who would

be hurt by foreign competition.

Protects new industries Keeps vital industries going

that we would need in event of war.

Cons If the foreign country can do

it more efficiently, we benefit from lower prices they can offer.

Less incentive for new industry to be efficient and competitive while protected.

Once a business has tariff protection it’s hard to take it away.

Some industries claim to be essential and get help when they may not be.

Higher prices for imports Job loss in export industries

that face retaliatory trade barriers.

c. List specific examples of trade barriers.

Barriers to trade are government rules that block or inhibit international trade between countries.

Common trade barriers: Tariffs, quotas, administrative

regulations and procedures.

d. List specific examples of trading blocks such as the EU, NAFTA, and ASEAN.

European Union

European Union – 1993 Formed to get rid of trade restrictions and tariffs among

members, adopt uniform tariffs for nonmembers. Originally the Common Market (1957) Has a Parliament and council with reps from each nation. Has own flag, anthem, celebrates Europe Day May 9 Replaced individual currencies with a single currency –

the euro. (except for UK) Austria, Belgium, Cyprus, Czech Republic, Denmark,

Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, Netherlands, UK)

European Union

- far more than a free-trade association such as ASEAN, NAFTA, or Mercosur

- has many of the attributes associated with independent nations: its own flag, anthem, founding date, and currency, as well as common foreign and security policy in its dealings with other nations.

NAFTA

NAFTA (North American Free Trade Agreement) 1994 Eliminate all tariffs and trade barriers between

Canada, Mexico, and US by 2009. Largest free trade zone in the world. Opponents worry about loss of American jobs

b/c of lower wages and fewer restrictions in Mexico.

Supporters claim it will create jobs in US because of increased exports to Mexico and Canada.▪ Statistics so far show increased trade, but not

increased jobs.

NAFTA

North American Free Trade Agreement

Trade blocs

ASEAN – Association of Southeast Asian Nations 1967 Promote growth of the region (economically,

socially, culturally) Promote regional peace and stability (abide by

UN charter) Assist each other in training, research and

education. Collaborate in industry, agriculture and

expansion of trade.

ASEAN

Association of Southeast Asian Nations

e. Evaluate arguments for and against free trade.

Pros and Cons of free trade

Pros Best way to pursue

comparative advantage

Raises general standard of living

International peace Competition leads to

efficient production, less waste of resources

Lower prices for consumers

Cons Need to protect

American businesses and jobs

Need to protect new industries that are just getting started

Protect national security – keep vital businesses going

Unemployment in countries with inefficient, costly production.

SSEIN3 The student will explain how changes in exchange rates can have an impact on 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.

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. USD EUR GBP JPY CHF CAD AUD NZD HKD SGD

USD 1 0.7314 0.626 83.46 0.9948 1.0185 1.0144 1.2851 7.7543 1.2964

EUR 1.3672 1 0.85583

114.095

1.36005

1.3925 1.387 1.7569 10.6012

1.7723

GBP 1.59736

1.1684 1 133.315

1.5891 1.6271 1.6207 2.0528 12.3875

2.0708

JPY 0.012 0.008765

0.0075 1 0.011919

0.012205

0.0122 0.0154 0.0929 0.0155

CHF 1.0053 0.7352 0.6293 83.905 1 1.0239 1.02 1.2918 7.795 1.3032

CAD 0.9818 0.7185 0.6147 81.935 0.9766 1 0.9959 1.2617 7.6127 1.2728

AUD 0.98565

0.7209 0.617 82.255 0.9805 1.0039 1 1.2666 7.6427 1.2777

NZD 0.7782 0.5691 0.4871 64.94 0.7741 0.7926 0.7896 1 6.034 1.0089

HKD 0.129 0.0943 0.0807 10.7632

12.8295

0.1313 0.1308 0.1657 1 0.1672

SGD 0.7713 0.5641 0.4829 64.39 0.7674 0.7864 0.7822 0.9912 5.9816 1

Exchange Rates Table

c. Interpret exchange rate tables. USD EUR GBP JPY CHF CAD AUD NZD HKD SGD

USD 1 0.7314 0.626 83.46 0.9948 1.0185 1.0144 1.2851 7.7543 1.2964

EUR 1.3672 1 0.85583 114.095 1.36005 1.3925 1.387 1.7569 10.6012 1.7723

GBP 1.59736 1.1684 1 133.315 1.5891 1.6271 1.6207 2.0528 12.3875 2.0708

JPY 0.0120.008765 0.0075 1

0.011919

0.012205 0.0122 0.0154 0.0929 0.0155

CHF 1.0053 0.7352 0.6293 83.905 1 1.0239 1.02 1.2918 7.795 1.3032

CAD 0.9818 0.7185 0.6147 81.935 0.9766 1 0.9959 1.2617 7.6127 1.2728

AUD 0.98565 0.7209 0.617 82.255 0.9805 1.0039 1 1.2666 7.6427 1.2777

NZD 0.7782 0.5691 0.4871 64.94 0.7741 0.7926 0.7896 1 6.034 1.0089

HKD 0.129 0.0943 0.0807 10.7632 12.8295 0.1313 0.1308 0.1657 1 0.1672

SGD 0.7713 0.5641 0.4829 64.39 0.7674 0.7864 0.7822 0.9912 5.9816 1

Exchange Rates Table

d. Explain why, when exchange rates change, some groups benefit and others lose.

How do changes in exchange rates affect international trade?

Increase in value of a currency (appreciation) means the currency has become stronger. Products become more expensive in other

countries. If goods are more expensive, other countries

will probably import fewer products from that country.

Foreign products will be less expensive for consumers in the country with the strong currency, so consumers will buy more foreign products.

What if the value of the currency decreases?

That’s depreciation. The nation’s products become less

expensive in other countries. If goods are less expensive, other

countries will probably import more from that country.

Foreign goods will cost more in the country with the weak currency, they will buy less foreign products.

What about U.S.??

Strong dollar – exports decline – imports rise.

Weak dollar – exports rise – imports decline

Winners and Losers?

If the dollar is strong and exports are expensive - American businesses are the losers because no one wants to buy their products overseas.

If the dollar is strong against the Euro or the British pound, then the American tourist is the winner because they can travel more cheaply. The foreign tourist would be the loser because their trip to America would be more expensive.

If the dollar is weak and exports are less expensive then American businesses are the winner because American products are cheaper for consumers in foreign countries.

If the dollar is weak against the Euro or the British pound, etc. then American tourists lose because their vacation will be more expensive. The foreign tourist coming to America would win because their trip to America would be cheaper.