Warm up 10

1. How does the movement of people, things and ideas affect you?

2. What do you think globalization means?3. What does GDP measure? 4. What is the difference between Nominal and Real GDP?

Which one is more accurate in determining whether or not there was an actual increase or decrease?

• Please take out your homework on Economic Indicators and the Business Cycle.

Trade:

the voluntary exchange of goods and services for an agreed upon amount.

Adam Smith on Trade

“It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy.

The tailor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not make his own clothes, but employs a tailor.

If a foreign country can supply us with a commodity cheaper

than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.”

• What does specialization do to productivity? Why?

• How does trade let us benefit from the advantages of specialization?

No country can produce everything it demands , therefore we trade.

• Exports are goods that are sold to other countries.• Imports are goods that are bought from foreign countries.

Trade helps alleviate the problem of scarcity.– EX) US imports diamond/ US exports commercial aircrafts– Trade allows countries to specialize in the production of what they do best

and make the most efficient use of their resources, thereby decreasing the price of both goods.

• To determine what a nation/firm should specialize in they must consider their opportunity cost of producing other goods/services.

• Nations/firms want to produce the good/services that they have a COMPARATIVE ADVANTAGE in.

Top ExportersTop Importers

Warm Up

• Please complete the questions from the released NC Final Exam from 2013.

Absolute Advantage &Comparative Advantage

• Absolute Advantage- The ability of a country, individual, company or region to produce a good or service at a lower cost the cost than anyone else can. Most efficient

• Comparative Advantage- ability of a country, firm or individual to produce a good at a lower opportunity cost than another country, firm or individual can.

Consider the following…

• Sally is a lawyer who earns $200 per hour. • Sally needs her house cleaned before her parents come to

visit for the weekend and she would have to take leave work early to get it done.

• Sally could clean her house in 2 hours.• Sally knows a maid that charges $25 per hour, but she

would take 3 hours to clean. • Sally has the ABSOLUTE ADVANTAGE, but the maid has the

COMPARATIVE ADVANTAGE.

Why??

Law of Comparative Advantage : An individual, firm, region or country with the lowest opportunity cost of producing a good should specialize in that good.

– What leads to countries, individuals, or firms to being able to produce goods at a lower cost than other countries?

Multiple Choice

1. If Britain has a comparative advantage over France in the production of cars, then...

A. the opportunity cost of producing cars in Britain is lower than in France.B. the opportunity cost of producing cars in Britain is higher than in France.C. there are no gains from specialization and trade in cars between Britain and France.D. only Britain will gain from specialization and trade in cars between Britain and France.

2. If people specialize in producing those goods for which they possess a comparative advantage, then the economy as a whole can produce a greater quantity of goods.a. Trueb. False

3. The law of comparative advantage says that a person should produce a good if he or she...a. has the greatest desire to consume that goodb. has the lowest opportunity cost of producing that goodc. has an absolute advantage in a related activityd. has a comparative advantage in a related activitye. is equally good at producing this good as someone else is

Exchange Rates

Currency ConverterIn order to trade internationally we must pay for our

imported goods in the currency that the seller will accept (most likely their domestic currency)

• This can impact the overall value of the trade because the value of international currency fluctuates constantly. – Value of currency is dictated by supply and demand

• Increase in demand for a country’s exports increases the value of its currency.

Strong v. Weak Dollar• Generalizations used in the foreign exchange market to describe the

relative value and strength of the U.S. dollar against other currencies.

• Strong Dollar: Dollar is worth more than in other countries– more purchasing power in the global marketplace– Can be harmful to businesses trying to export.

• Weak Dollar: Dollar is worth less than in other countries– Less purchasing power in the global marketplace– Can be harmful to businesses/consumers trying to import.

Balance of Trade

• Balance of Trade: the difference between the amount of a countries total exports and imports – Trade Deficit- value of a country’s imports exceeds the

value of its exports.– Trade Surplus- value of a country’s exports exceeds the

value of its imports

Restrictions (Protectionism)

• Tariff- an excise tax on imported goods. – If the US wanted to protect the US steel industry they could put a 20%

tariff on imported steel. – Goal is to make the price of imported good higher than domestically

produced goods.• Quotas- limits the amount of foreign goods imported.

– In the 1970s Japanese made cars were so popular that they were hurting the US auto industry. Reagan put a quota on the amount of cars imported from Japan.

• Embargo- a partial or complete prohibition of trade with a country.– Cuban Embargo– Additional Embargoes

Trade Agreements• Most policy makers agree the total cost of trade barriers

outweigh the benefits of free trade, and are working to reduce trade barriers.

• European Union (EU) is an example of free trade. – Organization of independent nations– Goods, services and workers move freely throughout the nations– Use common currency, the euro.

• NAFTA (North American Free Trade Agreement)– In 1994 Mexico, the US & Canada signed an agreement to eliminate

all trade barriers between the nations. – NAFTA created the world's largest free trade area, which now links

450 million people producing $20 trillion worth of goods and services.– Drawbacks?

• US workers worried they would lose jobs due to factories being moved to Mexico.

WTO (World Trade Organization)

• international body that oversees trade amongst all nations. – Organize negotiations among countries– Helps developing nations– Settles trade disputes– Encourages the abolishment of trade barriers

Globalization

Globalization is a process of interaction and integration among the people, companies, and governments of different nations, a process driven by international trade and investment and aided by information technology. This process has effects on the environment, on culture, on political systems, on economic development and prosperity, and on human physical well-being in societies around the world.