Trading Goods and Services

SSEIN1a, b, c

What is specialization?

• Doing one job or producing one product/service

• Why? • Increases the total

amount of things a society can produce and leads to an efficient use of resources.

What is voluntary exchange?

• Buying goods and services from others that we cannot produce ourselves

How do we decide what to produce?

• Depends on its resources.

• Example: land, water, metals, and climate.

• Also, educated workers and capital goods (computer/machine)

What is trade?

• Nations sell products to other nations.• Exports: goods and services sold to other nations• Imports: goods and services bought from other nations• Goal: increase the amount and variety of goods

available to all nations.

Absolute Advantage• Absolute advantage:

One nation can produce more output with the same resources as the other.

• The U.S. can produce more sugar and fertilizer than Nicaragua.

Comparative Advantage

• Comparative Advantage: a nations ability to make something at a lower opportunity cost than another nation can.

• Give up• Make• 100= 1.25• U.S. to make 1 sugar= Opportunity Cost 80• 1 Fertilizer= Opportunity Cost 80=.8• 100• Nicaragua to make 1 sugar= Opportunity Cost 50= .7• 70• 1 Fertilizer= Opportunity Cost 70= 1.4• 50• You make what benefits you.

Practice Problem

TV Computer

U.S. 100 20

Japan 80 15

Total 180 35

• Which nation has an absolute advantage?• U.S.• Which nation has a comparative advantage in

making computers?• Which nation has a comparative advantage in

making TVs?

Balance of Trade

• balance of trade: the relationship between a nation’s imports and exports

• trade surplus: a nation exporting more than it imports Example: The US exports $5 million and imports $3 Million• trade deficit: the result of a country importing more

than it exportsExample: Mexico exports $4 million and imports $7 million• credit: any transaction that brings money into a country• debit: any transaction that takes money out of a nation• balance of payments: the difference between the total

amount of money coming into a nation and the total amount