Unit 5: International EconomyInternational trade allows a country to concentrate on what it does best and trade for what it can’t or doesn’t produce. In effect, trade increases the total amount of output produced in the world – meaning there’s more output per person, so overall living standards rise.

Vocabulary -- goods and services bought from other nations

- goods/services that a nation produces and then sells to other nations

-- country’s ability to produce more of a given product than another country

-- country’s ability to produce a given product relatively more efficiently; production at lower opportunity cost

Imports

Absolute Advantage

Exports

Comparative Advantage

B. Market Advantages: Absolute advantage vs. Comparative advantage

A. International Trade 1. across national borders 2. no country produces everything it needs 3. allows countries to specialize in certain goods

China RussiaRice 80 lbs 50 lbsTea 20 lbs 75 lbs

i. Absolute Advantage who can produce more with less resources

Who has the absolute advantage in:Rice:Tea:

China

Russia

I’m Heather an expert patent

lawyer. I am also very good at

repairing bicycles.

Hi! I’m Adam, a bike mechanic. Like my sister, I

can also file patents.

However, Heather can file

patents AND repair bikes faster

than I can.

ii. Comparative Advantage - occurs when a country focuses on producing the good that has the lowest opportunity cost.

From Economics for Dummies: You can most easily understand the logic behind the comparative advantage argument by thinking in terms of people rather than countries.

Productivity for Heather and Adam per DayPatent

ProductivityBike Repair Productivity

Heather 6 12

Adam 2 10

Since Heather has absolute advantage in filing patents and repairing bikes, we can use comparative advantage to determine who should do what. The key insight of comparative advantage is that the true cost is how much production of one good you have to give up to produce a unit of the other good.

So, who should produce bike repairs??

Productivity for Heather and Adam per DayPatent

ProductivityBike Repair Productivity

Heather 6 12

Adam 2 10

Who should produce bike repairs??

1. What is Heather’s opportunity cost of filing patents if she only repairs bikes? (meaning how many patents does Heather give up filing when she repairs 1 bike?)

2. What is Adam’s opportunity cost of filing patents if he only repairs bikes?

3. Who has the lowest opportunity costs of filing patents? 4. Who should repair bikes? Who should file patents?

12 repairs = 6 patents

Adam

AdamHeather

12 repairs = 6 patents12 12

1 repair = .5 patents

10 repairs = 2 patents 10 repairs = 2 patents10 10

1 repair = .2 patents

Chile USWheat 1 bag 1,000 bagsFruit 50 boxes 100 boxes

Who has absolute advantage in:Wheat:Fruit:

But who has Comparative Advantage?Wheat:Fruit:

Absolute and Comparative Advantage Between Countries

To determine who has the comparative advantage in producing fruit, determine which country has the lowest opportunity cost of wheat.

Chile Wheat/Fruit 1/50 = .02U.S. Wheat/Fruit 1,000/100 = 10

Who should produce fruit?

To determine who has the comparative advantage in producing wheat, determine which country has the lowest opportunity cost of fruit.

Chile Fruit/Wheat 50/1 = 50U.S. Fruit/Wheat 100/1,000 = .1

Who should produce wheat?

U.S.U.S.

U.S. Chile

U.S.Chile

What country has an absolute advantage of food and clothing?

Which country has a comparative advantage in food production?(Hint: Find which country has the lowest OC in clothing)

What country has a comparative advantage in clothing output?

Comparative and Absolute Advantage

Country A: Clothing/Food = 3/6 = .5

Country B: (you find the ratio)

Country A

C/F = 2/1 = 2

Country A

Country B

U.S. China

Pens 75 50

Markers 60 35

What country has the absolute advantage inPens: _________________Markers: _______________

Which country has the comparative advantage in

Pens: __________

Markers: ___________

LOC MarkersChina: M/P = 35/50 = ______

US: M/P = 60/75 = ______

LOC PensChina: P/M = 50/35 = ______

US: P/M = 75/60 = ______

Write this down

U.S.

U.S.

.7.8

1.43

1.25

China

U.S.

Carrots Potatoes

U.S. 50 52

U.K. 70 85

What country has the absolute advantage inCarrots: _________________Potatoes: _______________

Which country has the comparative advantage in

Carrots: _________________

Potatoes: ______________

LOC PotatoesUS: P/C = 52/50 = ______

UK: P/C = 85/70 = ______

LOC CarrotsUS: C/P = 50/52 = ______

UK: C/P = 70/85 = ______

Mexico Russia

Computers 35 105

Printers 60 90

What country has the absolute advantage inComputers: _________________Printers: _______________

Which country has the comparative advantage in

Computers: _______________

Printers: ______________

LOC PrintersMexico: P/C = 60/35 = ______

Russia: P/C = 90/105= ______

LOC ComputersMexico: C/P = 35/60 = ______

Russia: C/P = 105/90 = ______

1. The following table shows how many cars or computers can be produced by Japan and the United States in a month (in millions). Which statement is true concerning absolute advantage?

Japan United States Cars 25 60 Computers 100 45

a. Japan has an absolute advantage in the production of cars.b. Japan has an absolute advantage in the production of both goods.c. Japan has an absolute advantage in the production of computers.d. Japan has no absolute advantage in this scenario.

REVIEW QUESTIONS

2. If someone has a comparative advantage in the productionof a good then

a. with a given set of resources, they produce more of the good than the competitors

b. they can produce more of that good than anyone else.

c. with a given set of resources, they produce the good at alower opportunity cost.

d. they can charge more for the good because they have higheropportunity costs.

3. Russia and China are countries that trade with one another. The table below give the amount of crude oil and steel that each produces in a day. Which of the statements below is accurate?

Oil Steel Russia 5,000 300 China 60 170

a.Russia has an absolute advantage in oil and China has an absolute advantage in steelb. China has a comparative advantage in steel, despite Russia's absolute advantage in both products.c. Russian and the Chinese would not benefit from traded. China has a comparative advantage in oil, despite the fact that Russia can produce so much more of it.

A. Government Regulated Trade

1. All countries have some restrictions

2. Reasons:

1) helps domestic businesses 2) creates jobs 3) helps the economy 4) punishes another nation

3. Types of Restrictions

a. Quota – limit on number of imports lowers competition domestic (U.S.) companies can raise overall prices ex - limits on Canadian lumber

b. Tariffs – special taxes on imports raise prices of foreign goods trade unions (advocates) protect domestic jobs other countries may retaliate U.S. exports more expensive

c. Embargoes – refusing to trade ex - Middle East oil to U.S. (1973), U.S. grain to USSR (1979) d. Standards – specific guidelines on goods must meet safety and

health guidelines

more standards = higher costs protects consumers ex - Chinese toy recall (2007), Toyota recall (2008)

e. Subsidies – payment from the government protects domestic firms redistributes income from tax $ helps compete against foreign firms requires higher taxes ex - public universities, vaccinations

B. Costs and Benefit of Trade Barriers

1. Benefits - domestic businessesprotect domestic jobsstandards of safetyhelps developing nations (free trade would make it fail)

2. Costs - limits foreign goodsharder for foreign businesses to sellhigher priced foreign goodsfewer choices for consumersdomestic products rise in price too

1. The purpose of a tariff when used for protectionism is to

a. increase the number of foreign goods imported into the countryb. make an imported good more expensive than its domestically produced counterpartc. raise revenues to pay subsidies to domestic producersd. stall importation while perishable items rot.

REVIEW QUESTIONS

2. The United States does not allow any company to legally import goods from Cuba. This type of trade barrier is known as a/an

a. subsidyb. standardc. embargod. quota

REVIEW QUESTIONS:

3. One argument in favor of a tariff would be that it would

a.help domestic consumers by allowing them to pay a lower priceb. reduces foreign competition for domestic businessesc.help foreign producers by allowing them to ship goods to the U.S.d. force foreign companies to ship goods that meet certain quality standards in the U.S.

4. Why do domestic producers benefit from trade barriers like embargoes or quotas?

a. The number of goods imported is lower.b. Domestic producers get money from the government.c. They tax the foreign competition.d. They decrease the desire for other countries goods.

Exchange Charts

Foreign Currencyin US Dollars

US Dollar in Foreign Currency

British pound 2.06 0.49

Danish krone 0.19 5.17

Euro 1.44 0.69

Japanese yen 0.0087 114.69

Mexican peso 0.86 10.71

Lee went to Japan on vacation and took $300 spending money. When he exchanged it for yen, he received _____________ yen.

While in Japan, Lee found a CD of a Japanese band for 2500 yen. He knows he can purchase the same CD back home in the US for $20. Should he purchase the CD in Japan or wait until he gets home?

$300 x 114.69 =

2,500 x .0087 = To find out how much he would get back in US dollars:

How much is each of the following worth in US dollars?1 British Pound = _______ 1 Mexican Peso = _____________1 Danish Krone = ____________ 1 Euro = _______________

In Europe, $1.00 = 1.44 euros.

How much is one US dollar worth in each of these countries?Mexico ___________ Japan _____________Denmark ____________ Britain ______________

10.71 pesos

$2.06

Foreign Currencyin US Dollars

US Dollar in Foreign Currency

British pound 2.06 0.49

Danish krone 0.19 5.17

Euro 1.44 0.69

Japanese yen 0.0087 114.69

Mexican peso 0.86 10.71

Suppose you purchased each item below. Find the price in US dollars.

A meal in India for 700 rupees ________________________________

A painting in London for 1,250 Euros ___________________________

A belt in Chile for 1,250 pesos ________________________________

A shirt in Canada for 40 dollars ________________________________

Foreign Currencyin US Dollars

US Dollar in Foreign Currency

India Rupee .02 52.46

Chile peso .002 483.75

European Union euro 1.33 .75

Canada dollar 1.02 .98

Mexican peso 0.86 10.71

700 x .02 = $14.00

VI. Spectrum of Economic SystemsA. Capitalism 1. Privately owned factors of production and businesses 2. Supply & Demand determine Price and What, How & For Whom to produce 3. Profits are higher 4. Advantages: efficiency freedom

profit motives consumer satisfaction

5. Disadvantages: everyone's needs not met produces only for those who have demand poor left behind

B. Socialism1. Government controls some resources2. best interest of society3. advantages: addresses the FOR WHOM, share benefits, people elect officials4. disadvantages: less efficient, higher cost of production, higher taxes

C. Communism1. property is collectively owned2. consumption based on need3. central planning4. no choice on career5. gov't decides6. Disadvantages: lost freedom; little say; no incentives; lack of consumer goods; inefficiency

All of the following are advantages of a capitalistic society EXCEPT

a. everyone's needs metb. freedom of choicec. profitsd. decentralization

What type of economic system has shared benefits from the gov't while at the same time has some resources privately owned?

a. communismb. capitalismc. socialism