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TRANSCRIPT
International Economics
Unit 5 Pretest
As we learn about International Economics, let’s see
what you already know.
Remember – do the best you can, but don’t stress –
this assessment doesn’t count toward your grade
On your Zipgrade answer sheet, bubble in the best
answer for questions #1 – 10.
Ignore the rest of the answer sheet
SSEIN1 The student will explain why individuals, businesses, and governments trade goods and services.
SSEIN2 The student will explain why countries sometimes erect trade barriers and sometimes advocate free trade.
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.
• Exports
• Imports
• Absolute Advantage
• Comparative Advantage
• Tariff
• Protective
• Revenue
• Quota
• Protectionists
• Free Traders
• Foreign Exchange
• Foreign Exchange Rate
• Fixed Exchange Rate
• International
Monetary Fund
• World Bank
• Trade Bloc
• European Union (EU)
• North Atlantic Free
Trade Agreement
(NAFTA)
• Association of South-
East Asian Nation
(ASEAN)
• Balance of Payments
• Balance of Trade
• Embargo
• Purchasing Power
• Subsidy
• Trade Standards
• Trade
• Trade Barrier
• Trade Surplus
• Trade Deficit
• World Trade
Organization
(WTO)
The student will explain why individuals,
businesses, and governments trade goods
and services.
Define and distinguish between absolute
advantage and comparative advantage
Explain that most trade takes place because of
comparative advantage in the production of a
good or service
Explain the difference between balance of
trade and balance of payments
You previously learned that specialization and
voluntary exchange allow all parties to benefit
in an economy
Well, the same works for regions and nations!
When countries specialize in certain goods, they are
able to make more of that good and then benefit
from trading with others
What a country produces depends on its resources –
its natural resources such as land, water, metals and
climate and its skilled and educated workers
Each nation sells some of its products to other nations and then buys things from other nations that it can’t easily produce This activity is called trade Goods and services that are sold to other nations are called exports
Goods and services that are bought from other nations are called imports
Specialization and trade increase the amount and variety of goods available to all nations!
The benefit that comes from specialization depends on the concepts of comparative advantage and absolute advantage
If a country can make a larger quantity of a good than another country, then it is said to have an absolute advantage in that good
However, absolute advantage does not mean that a country should produce that certain product They may produce it at the expense of producing
other useful goods
In this case, the opportunity cost of not producing the other good may be too much for the country to give up!
This is why comparative advantage is important!
Sometimes we import things that we could make ourselves – why would we do that?
The reason is that sometimes its cheaper in opportunity costs to import a good rather than produce it! That is the concept of comparative advantage in a
nutshell!
If one country can make a product relatively more efficiently (lower opportunity cost) than another country, then it is said to have a comparative advantage in that good
The US can produce more sugar than the small nation of Nicaragua. The US can also produce more fertilizers than Nicaragua. So, the US has an absolute advantage in both areas. However, the opportunity cost of producing sugar is higher in the US than it is in Nicaragua: to grow and refine enough sugar to supply our nation’s demand, we would need to take land, capital, and workers away from producing other things, such as fertilizer, that we produce more efficiently and profitably. Nicaragua, on the other hand, can produce sugar very cheaply, while the opportunity cost of trying to produce their own fertilizer would be too high. The US has a comparative advantage over Nicaragua in producing fertilizer, so we export it to Nicaragua. Nicaragua, conversely, has a comparative advantage over the US in producing sugar, so Nicaragua exports it to the US
Get it?
Remember this formula (write this down!)
We Give Up = Your Opportunity Cost
If We Make
But, how do we know who has a comparative advantage in what? That’s where the statistics come in!
Ex: Statistics from our initial example…
This shows the US’s absolute advantage in both
products – it makes more than Nicaragua
Within the US, production is higher in fertilizer, so we now know that the US has a comparative advantage in that (and vice versa for Nicaragua!)
Sugar Fertilizer
U.S. 80 100
Nicaragua 70 50
Total 150 150
Remember We Give Up = Opportunity Cost (OC)
Our Formula>> If We Make
Making Sugar
US 100/80 = 5/4 = 1-1/4 OC
NC 50/70 = 5/7 OC
So Nicaragua has the lower
Opportunity Cost for making
sugar
Making Fertilizer
US 80/100 – 4/5 OC
NC 70/50 – 7/5 OC
So the U.S. has the lower
Opportunity Cost for
making fertilizer
Sugar Fertilizer
U.S. 0 200
Nicaragua 200 0
Total 200 200
If the two countries decide to specialize in their
comparative advantage, the new production
statistics may look like this:
As you can see, the production levels of both
products increase and everyone benefits
through trade!
Our example is extremely simplified
In reality, nations may trade in similar products
instead of just specializing in entire industries
For example, both the US and Japan make and trade
cars – why doesn’t one of them just specialize?
Well, both countries can make cars relatively
efficiently and the imports give American and
Japanese consumers a wider variety of goods!
A nation’s balance of trade is the difference
between the value of its imports and the value
of its exports in a given year
For example, if a nation imports $1 million worth
of goods and exports $3 million worth, then it is
said to have a positive balance of trade
A positive balance of trade is also known as a trade
surplus
If, on the other hand, they imported $3 million and
exported $1 million, the nation has a negative
balance of trade, or a trade deficit
Trade isn’t the only thing that a nation pays for in a year – it also covers other transactions between households, firms, and the government of one nation to another This could include transfer payments, tourism,
military spending, interest payments on loans, corporate dividends, the buying and selling of land and businesses, bank deposits, or the buying and selling of currency!
Any transaction that brings money into a nation is a credit and any transaction that takes money out is a debit
The difference between the total amount of money coming into a nation and the total amount leaving is called its balance of payments
Just as in a family budget, the amount of money going out should not be greater than the amount of money coming in Otherwise, the nation will incur a debt
So, ideally, a nation’s balance of payments should be zero or a positive number
In recent decades, the US has suffered from a negative balance of payments because of our trade deficit (which includes the cost of imported oil, foreign aid,
and military investment abroad)
Suppose that two of your friends, Karl and Kate
want to make some extra money.
They decide to print designs on T-shirts and
make birdhouses.
Kate can print six T-shirts OR make two birdhouses
per hour.
Karl can print one T-shirt OR make one birdhouse
per hour.
Who has absolute advantage with:
T-Shirts?
Birdhouses?
Who has comparative advantage with:
T-Shirts?
Birdhouses?
Based on the Law of Comparative Advantage,
who should produce:
T-Shirts?
Birdhouses?
How will total productivity improve if Karl and
Kate specialize and trade?
Based on the table, which is
true?
a. The US has an absolute
advantage in corn; Russia
has an absolute advantage
in soybeans
b. The US has an absolute
advantage in soybeans;
Russia has an absolute
advantage in corn
c. The US has an absolute
advantage in both crops
d. Russia has an absolute
advantage in both crops
In the year 2000, nation A sold
exports worth $5 million and
bought imports worth $8
million. Which of the following
statements is definitely true
about nation A in the year 2000?
a. It had a positive balance of
payments
b. It had a negative balance of
payments
c. It had a trade surplus
d. It had a trade deficit
Corn Soybeans
US 75 100
Russia 60 40
We still need to have the following students activate their student account on USA Test Prep.
On your phone, go to: USATestPrepCreateAccount
Logon: wheeler
Password: newton74
When countries interact with other countries,
each country gains a higher standard of living.
A high degree of economic interdependence
exists in the world
No country is able to get everything it needs within
its own borders.
We live in a time in which most countries are
moving toward open economies:
High degrees of free trade with few trade barriers
such as quotas and tariffs.
Absolute Advantage: one country can
produce a product at lower cost or with
higher labor productivity
Comparative Advantage: One country can
produce at a lower opportunity cost than
another country
Comparative Advantage
Uneven distribution of resources
Shoes Wheat
China 400 .25 wheat 100 4 shoes
U.S.A 1000 .5 wheat 500 2 shoes
Opportunity Cost in red
The student will explain why countries sometimes erect trade barriers and sometimes advocate free trade. Define trade barriers as tariffs, quotas,
embargoes, standards, and subsidies
Identify costs and benefits of trade barriers over time
List specific examples of trade barriers
List specific examples of trading blocs such as the EU, NAFTA, and ASEAN
Evaluate arguments for and against free trade
International trade today increases the amount
and variety of goods available to all nations
It also makes nations interdependent!
This requires American businesses to compete with
companies around the world – including those in
nations where workers are paid far less than what
American workers earn
So, to improve balance of payments and to
protect businesses in certain domestic industries,
nations may impose trade barriers to limit
imports from other nations!
When a government enacts a policy that attempts to limit imports, it is practicing protectionism Protectionism aims to “protect” domestic (i.e. home
country) industries by limiting competition with foreign producers
It lessens the variety of goods for consumers, but may keep domestic workers employed!
The opposite of protectionism is free trade, or open trade between nations without barriers to imports
Tariff: a tax imposed on certain imports These make imports more expensive to buy and earn
revenue for the government
Quota: a limit on the number of certain products that can be imported
Standards: rules about the quality of imports If the product doesn’t meet the standards, then it
isn’t imported
Subsidies: direct financial aid to certain domestic industries These lower the production costs for businesses
Trade barriers do protect jobs in some industries
that face foreign competition, but they lead to:
Fewer choices for consumers
Higher prices for all goods (imports or domestic)
Hard times for workers in other industries
For example, other export industries that may now have
fewer sales abroad in response to barriers on imports from
those nations
Other nations imposing their own trade barriers
against the US, hurting American exports
The most severe trade barrier is an embargo, or
a total ban on one or more products from a
particular nation
Embargos are often motivated by political rather
than economic factors because they put pressure on
governments to change their actions
The most famous embargo is the 1970s oil
embargo imposed by OPEC against the US and
other western nations
The US also had an embargo against Cuba that was
recently lifted.
Most economists argue that free trade:
Improves economic efficiency
Offers consumers of all nations a wide variety of
goods
Offers consumers the lowest possible prices
However, those who favor trade barriers argue
that:
It protects national security
It protects “infant industries” in the nation
It protects domestic jobs
Trade Surplus – the value of a nation’s
exports exceeds the value of what they
import
Trade Deficit – the value of a nation’s exports
are less than the value of what they import
Trade blocs are groups of nations that work
together through trade agreements
Trade Agreements are documents that outline the
conditions under which trade will take place
between nations.
General Agreement on Tariffs and Trade (GATT)
NAFTA: The North American Free Trade Agreement.
CAFTA: The Central American Free Trade Agreement.
ASEAN: Association of Southeast Asian Nations
EU: European Union
US is member of World Trade Organization (WTO)
Organization that seeks to reduce protectionism
around the world.
Signed in 1992 and went into affect in 1994
It called for the gradual elimination of trade
barriers (tariffs and others) between the US,
Canada, and Mexico over a 15-year period
By 2004, agencies such as the World Bank
concluded that, overall, NAFTA had a small
positive effect on the economic growth and
productivity of both the US and Mexico
The European Economic Community (EEC) was
established in 1957 to create a “common
market” in Europe
In 1993, this association was strengthened with
the creation of the European Union – 27 nations
with a shared currency, the Euro
Today, the EU is the largest free association of
trading nations in the world
Another successful trade bloc is the Association
of Southeast Asian Nations
It began in 1992 and now includes 10 nations of
Southeast Asia
It has worked towards economic growth and
stability by creating a free trade region in this
part of the world
Currently, there are discussions on a new
trading bloc – the Trans-Pacific Partnership.
Advocates argue
that it benefits us in
the following ways:
Greater variety of
goods available
Lower prices
Encourages
cooperation between
partners
Critics argue that it
hurts us in the
following ways:
Lose domestic jobs to
other countries with
lower costs
It helps the other
countries more than the
U.S.
Potential security risks
What do YOU think? Should we move forward
with the TPP agreement?
What is the most important
purpose of NAFTA?
a. To increase trade barriers
between the US, Canada,
and Mexico
b. To reduce trade barriers
between the US, Canada,
and Mexico
c. To help the Mexican
economy with American
and Canadian subsidies
d. To compete with the
nations of the European
Union
A person who favors a
protectionist trade policy
would MOST likely:
a. Call for an end to quotas
b. Support a reduction in
tariffs
c. Call for supporting
national security and
American jobs
d. Claim that trade
restrictions result in
fewer choices and higher
prices
On a clean sheet
of paper, write
your name, date,
block # and title:
Opener –
Wednesday, 2/24
Trade Barriers
Then write at
least 3-5
sentences about
what you think
this cartoon really
means.
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.
Define exchange rate as the price of one nation’s
currency in terms of another nation’s currency
Locate information on exchange rates
Interpret exchange rate tables
Explain why, when exchange rates change, some
groups benefit and others lose
When international trade occurs, one nation must exchange money, or currency, for another nation’s goods
The problem is: not every nation uses the same currency! So, before a transaction takes place, the purchasing
nation must exchange their currency for the currency of the producing nation!
This exchange is governed by foreign exchange rates – or the value of one nation’s currency in terms of another nation’s currency
Current Dollar Exchange Rates
Relative value of the American dollar in exchange for foreign currencies.
Exchange rates are “floating”, e.g., they change based on the relative Supply and Demand for a currency.
The value of the dollar compared to the value of other currencies is determined by supply and demand.
Demand for U.S. dollars is synonymous with demand for U.S. products.
Foreigners importing U.S. products must pay U.S. companies in dollars and therefore must purchase dollars to purchase American made products.
High demand for American products will drive the value of the dollar up compared to other currencies.
Current exchange rate values are shown in
exchange rate tables like this one:
You convert the currencies by multiplying by
the current exchange rate for the transaction
Value of $1 US
(in foreign curr.)
Value of foreign
currency (in US $)
Canadian $ 0.97 1.03
Euro 0.70 1.42
Japanese Yen 113.94 0.008
Mexican Peso 10.84 0.09
Let’s imagine that you import a Japanese
computer that costs $1,000
The American company must exchange $1,000
for Yen – but, how many?
Figure it out by looking at the table:
Then, set up the multiplication:
$1 US = 113.94 yen
$1000 = (113.94) X 1000 yen
So, $1000 = 113,940 yen
Value of $1 US (in
foreign curr.)
Value of foreign
currency (in US $)
Canadian $ 0.97 1.03
Euro 0.70 1.42
Japanese Yen 113.94 0.008
Mexican Peso 10.84 0.09
Exchange rates change over time
When a currency is strong in terms of another,
that means it is worth more
So, if the US $ is strong, American tourists can buy
more abroad and US businesses can import more
foreign goods for lower cost
When currencies lose their value, they have
depreciated in terms of another currency
If the currency gains value, it has appreciated
When the dollar is strong,
or appreciates:
Imports increase and are
cheaper for consumers to
buy
Travel abroad is cheaper
for American tourists
US exports decline
The US trade deficit
increases
When the dollar is weak, or
depreciates:
US exports increase and
the prices of exports go
up
Travel abroad is more
expensive for American
tourists
The US trade balance
improves
Foreign investment in US
businesses increases
So, there are pros and cons of both conditions!
What is a ‘weak’ dollar? The value of the dollar falls compared to other currencies
More U.S. dollars are needed to purchase foreign currencies
The value of the dollar is depreciating
Who is helped by a weak dollar? U.S. Producers – because they’re competing with higher priced
imported goods & services
Foreign Consumers – because they can buy U.S. goods & services at a
lower price
U.S. Exporters – because American goods & services become less
expensive for foreign consumers
Who is hurt by a weak dollar? U.S. consumers – because the cost of foreign goods & services is more
expensive
U.S. investors in foreign companies because it costs more
Foreign exporters – because their goods & services are more expensive
What is a strong dollar? The value of the dollar rises compared to other currencies
More foreign currency is needed to purchase a U.S. dollar
The value of the dollar is appreciating.
Who is helped by a strong dollar? U.S. consumers because the prices of foreign goods & services are less
expensive
U.S. investors in foreign companies because the prices of foreign
securities are lower
U.S. importers because they can sell foreign goods & services at a
lower price
Who is hurt by a strong dollar? U.S. producers because they are competing against lower priced
foreign goods & services
Foreign consumers because U.S. goods & services are more expensive
U.S. exporters because U.S. goods & services are more expensive
1. If the exchange rate between the US dollar
and Australian dollar changes from 1USD =
1.8 AUD to 1USD = 1.5 AUD then . . . .
2. 1 USD = .90 EUR
French soup = 1.80 euros. I want to buy 5 cups of
French soup. How much would this cost in USD?
Foreign Trade is extremely important –
nations work together to produce and
consume all types of goods and services
And, exchange rates are very important to
people involved in international trade,
tourism, or investment industries
So, changes in exchange rates are posted
daily and experts are hired to predict and
interpret these changes for the future!
Stacy traveled to Mexico and
took out $100 in US currency.
When she exchanged this for
pesos, she received about:
a. 10.3 pesos
b. 103 pesos
c. 1,034 pesos
d. 900 pesos
What might cause the value
of the US dollar to appreciate
in relationship to the Euro?
a. Increased demand for
European products in the
US
b. Increased demand for US
products in Europe
c. Increases in the US money
supply
d. High rates of inflation in
the US
Value of $1
US in pesos
Value of 1 peso
in US dollars
10.34 .09
Across the world, there are _______ different types of
monetary systems or currencies.