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Chapter 17:1, International Trade Absolute and Comparative Advantage:
Chapter 17:1, International Trade Absolute and Comparative Advantage:
• Mat_13:45 Again, the
kingdom of heaven is like
unto a merchant man,
seeking goodly pearls:
Objectives: o WHAT: Explain the impact of the unequal
distribution of resources.
o WHAT: Explain and apply the concepts of specialization and comparative advantage to explain why countries trade.
o WHAT: Explain the effects of trade on employment.
o WHAT: Explain the balance of trade and the causes and effects of the U.S. Trade deficit.
o WHY: 12.4(2) Describe the current economy and labor market, including the types of goods and services produced, the types of skills workers need, the effects of rapid technological change, and the impact of international competition.
Resources, Distribution and Specialization:
o Natural resources
o Climate
o Geographic Location
o Help determine what goods and
services an economy produces.
ACTIVITY
Get in groups and you will be assigned a
nation from the G20, find out what that
specific nation specializes in, in exports and
manufacturing.
Capital and Labor:
o Physical capital includes the
things that people make
(technology to produce final
goods and services).
o Capital also includes the money
needed to invest in businesses
and use natural resources.
Human Capital:
o Human capital differs from labor.
o Labor refers to the size of a
nation’s workforce.
o Human capital is the knowledge
and skill a worker gains through
education and experience.
o Every job requires human capital.
o Education depends on human
capital.
Technology and Human Capital:
o Improved technology is a key factor in boosting productivity, making the economy more efficient, and lowering costs.
o Innovation in technology often leads to obsolescence, as older products and processes become out of date.
o Workers can also be in this category.
o New technology can also lead to some jobs to be obsolete (e.g., telephone operator, milk man, etc.).
o Obsolescence may lead to unemployment and force workers to seek retraining as they economy shifts to new goods and services.
Specialization and Trade:
o Unequal distribution of resources creates a need for specialization.
o When the nation specialize in certain goods they obtain the goods they do not or cannot produce through importing or exporting.
o An export is a good or service sent to another country for sale.
o An import is a good or service brought in from another country for sale.
Absolute Advantage:
o A person or nation has an absolute advantage when it can produce more of a given product than another person or nation using a given amount of resources.
o A nation with an absolute advantage would produce goods and services based on this advantage.
o For example Saudi Arabia has an absolute advantage in oil and so its goods and services will be based on drilling for oil.
Absolute and Comparative Advantage:
o Should a wealthy country with many resources be self-sufficient or should it specialize in producing a few products and trade for the others?
o How does a poorer nation decide what to produce?
o The answer to these questions lies with the concept of comparative advantage.
Comparative Advantage:
o A country has a comparative advantage in the product that it can produce most efficiently given all the products it could choose to produce.
o Comparative Advantage is the determining factor for a nation to specialize in a particular good.
o (Example: The greater cost having shoe factories in the U.S. because of labor laws causes American companies to make their shoes overseas).
o Each nation can then use the money it earns selling those goods and services to buy those that it cannot produce as efficiently.
o Trade allows countries to obtain goods for which they might have a high opportunity cost.
o In the law of comparative advantage each person should produce the good for which he or she has a lower opportunity cost.
ILLUSTRATION
Where do you see specialization in school?
What subjects do you specialize in and you
are the quickest in understanding?
ACTIVITY
Go in groups and you represent a nation,
what type of products would you focus in
your economy. Agriculture? Technology?
Service based? Explain what type of
specialization you would do and why.
Growing Interdependence:
o The growth of international trade
has led to a greater economic
interdependence among nations.
o Interdependence is the shared
need of countries for the
resources, goods, services, labor,
and knowledge supplied by other
countries.
The United States as Exporter:
o U.S. enjoys a comparative advantage in producing many goods and services.
o The U.S. is the world’s third largest exporter behind Germany and China.
o Goods make up the bulk of international trade
o But the U.S. is also the world’s leading exporter of services.
o Services (Education, Financial, Computer Services, etc.)
The United States as Exporter:
o Exports include agriculture,
o Weapons (technology)
o Telecommunication (technology)
o Chemicals (technology)
U.S. as Importer:
o The U.S. is also the world’s top importer.
o Nearly $1.9 trillion or 15.5 percent of the world’s total.
o Job loss has happened because of technology and specialization, that led to the need for job retraining.
o The United States has a significant decrease in manufacturing jobs and an increase demand of service based jobs that requires knowledge of computers and in many cases a college education.
Assignment
Do you think that the United States is in a
dangerous position because it imports more
manufactured goods rather than creating
goods from factories here at home?
Chapter 17:2 Trade Barriers and Agreements
Objectives: o We will define various types of
trade barriers.
o We will analyze the effects of trade barriers on economic activities.
o We will evaluate the benefits and costs of participation in international trade agreements and the role of multinational corporations in a global economy.
• Pro_23:26 My son, give me
thine heart, and let thine eyes
observe my ways.
• Eze_36:26 A new heart also
will I give you, and a new
spirit will I put within you: and
I will take away the stony
heart out of your flesh, and I
will give you an heart of flesh.
ILLUSTRATION
Pick a student who represents a nation, and
wants to sell a certain product and then is
charged with trying to sell that product
(Tariff)
Trade Barriers:
o Or trade restriction is a means of
preventing a foreign product or
service from freely entering a
nation’s territory.
Trade Barriers:
o Tariff (tax on imported goods).
o Import quota: limit the amount of
goods that can be imported.
VERS: Voluntary Export Restraint:
o Export nation voluntarily set limit
of quantity of a product to be
sold to another nation.
o This is a preventive measure to
reduce risk of the importing
country imposing damaging
trade barriers.
Other Barriers to Trade:
o Licensing fees.
o Health, Safety, or environmental
regulations (e.g., catalytic
converters required in all cars in
order for it to be imported).
Other Barriers to Trade:
o Economic Sanctions: Politically
motivated means to punish or
pressure another nation.
o Embargo: a ban on trade with a
particular country.
Group Activity
Get in groups and you function as a nation. List three reasons why you would have economic sanctions or trade restrictions upon another country and why.
Examples of real life sanctions/trade restrictions: U.N. to North Korea, U.S. embargo to Cuba , China restricting Korean entertainment in protest to South Korea THADD deployment.
Effects of Trade Barriers:
o Increased Prices for Foreign Goods,
helping domestic producers compete
with foreign firms.
o Trade Wars: Where both nations
impose trade barriers causing
economic hardship.
Arguments for Protectionism:
o Saving Jobs
o Protecting infant industries
o Safe guarding national security.
o National Security especially towards a
hostile nation.
Free Trade Agreements:
o Involves the lowering of elimination of protective tariffs and other trade barriers between two or more nations.
o Supporters argue that free trade is the best way to pursue comparative advantage.
o Raise living standards.
o Further cooperative relationships among nations.
Trade Agreements:
o In 1995, the World Trade
Organization (WTO) was founded
with the goal of making global
trade more free.
o Today the WTO also acts as a
referee enforcing the rules agreed
upon the member countries.
The European Union:
o Is an example of a signed agreement of many nations.
o That set to abolish tariffs and trade restrictions among member nations.
o Adopt uniform tariffs for all countries that are not members.
o The most successful example is the European Union (EU).
o It is the largest trading bloc in the world.
o They also have a single monetary system and currency.
o It is called the Euro.
Free Trade Agreements:
o North American Free Trade Agreement (NAFTA) created a free-trade zone linking the U.S., Canada, and Mexico.
o The agreement included the elimination of tariffs after certain amount of years.
o Trucks have access between the three nations.
Free Trade Agreements:
o Other trade agreements include:
o APEC
o ASEAN
o The debate over Free trade.
o Concern that it gives too much economic power to large multinational corporations.
The Role of Multinationals:
o Is a large corporation that sells goods and services throughout the world.
o Often times, a corporation of this kind would build production facilities in a foreign country.
o It benefits both the multinational and the host nation.
o By locating abroad, the corporation avoids some shipping fees and tariffs.
The Role of Multinationals:
o It may also benefit from cheaper labor.
o The host nation benefits by gaining jobs and tax revenue.
o Still host nations worry about the effect of multinationals on their countries.
o In a small country with a fragile economy, multinationals can gain excessive political power.
o In addition, host nations fear that multinationals could drive out domestic industries and exploit local workers.
Discussion Question
Are you in favor of trade restrictions or for
free trade? Explain your reasons why.
Balance of Trade:
o Is the relationship between the
value of its exports and the value
of its imports.
Surpluses and Deficits:
o A nation that exports more goods
and services than it imports has a
positive trade balance or trade
surplus.
o A nation that imports more goods
and services than it exports has a
negative trade balance or trade
deficit.
Surpluses and Deficits:
o Nations seek to maintain a balance
of trade.
o A negative balance of trade can be
corrected either by limiting imports
or by increasing the number or
value of exports.
o Both of these actions also affect
trading.
Balance of Payments:
o Balance of trade measures the flow of goods and services among nations.
o Economists get a more complex picture of international trade by looking at balance of payments.
o Balance of payments is the value of all monetary transactions between all sectors of a country’s economy households, firms, and government and the rest of the world.
The United States Trade Deficit:
o Although the U.S. sells many goods abroad, it generally imports more than it exports.
o As a result, the United States currently runs a trade deficit.
o As a result of America’s trade deficits, people from other countries now own a large piece of the U.S. Economy.
o Many people fear this trend threatens national independence and even national security.
Discussion Question
Do you think that it is healthy that the U.S. is
in a trade deficit and that it imports more
goods than it exports?
Chapter 17:3
CURRENCY EXCHANGE
Objectives:
o We will examine how exchange rates of the world currencies change and analyze the currency exchange rate system.
o We will examine the balance of trade and the causes and effects of the U.S. Trade deficit.
o “I counsel thee to buy of me gold tried in the fire, that thou mayest be rich; and white raiment, that thou mayest be clothed, and that the shame of thy nakedness do not appear; and anoint thine eyes with eyesalve, that thou mayest see.” Revelation 3:18
o “Ho, every one that thirsteth, come ye to the waters, and he that hath no money; come ye, buy, and eat; yea, come, buy wine and milk without money and without price.” Isaiah 55:1
POP QUIZ!!!!!!!!!!
B –Tech A –Service
C –Manufacturing D –None of the Above
Teachers, attorneys, accountants, doctors,
nurses, dentists, athletes, and entertainers are
examples of what type of industry?
B – Importing A – Exporting
C – Marginal Revenue D – Average Cost
The United States shipping F-35 Raptor
fighters to Israel who purchased the planes is
an example of the United States doing what?
B – Importing A – Exporting
C – Marginal Revenue D – Average Cost
When Honda CRVs and Accords are shipped
from Japan to the United States, the United
States is:
B – Cry Yo A – Gyro
C – Euro D – Mark
The currency of the European Union is the:
ONLINE ACTIVITY
Go online to see the currency exchange rate
between the U.S. dollar and the following
currencies. You can google “Currency
exchange rate” with the following currency.
China (Yuan), South Korea (Won), Mexico
(Peso), The Euro, British (pound), and the
Japanese (Yen).
Currency:
o The value of a nation’s currency in relation to a foreign currency is called the exchange rate.
o Understanding how exchange rates work enables you to convert prices in one currency to prices in another currency.
Calculating Prices:
o A Simple formula converting foreign currency to U.S. dollars.
o Divide the price by the value of the currency per one dollar according to the exchange rate.
o For example, if a hotel room in Mexico cost 500 pesos per night: The formula would be:
o 500 pesos/(10.93 Pesos/ to 1 dollar) = $45.75.
APPRECIATION
o Is an increase in the value of a currency.
o Americans could buy items in a foreign country cheaper.
o Foreigners would have to pay more to buy products domestically.
o American goods and services become more expensive
o Imported goods become cheaper.
DEPRECIATION:
o A decrease in the value of a currency.
o A nation’s currency depreciates its products become cheaper to other nations.
o A depreciation or weak dollar means that foreign consumers will be able to better afford products made in the U.S.
o A weak dollar probably results in the increased exports.
o At the same time, foreign goods (imports) will become more expensive for consumers in the U.S., so they will buy fewer imports.
The Foreign Exchange Market:
o Consists of about 2,000 banks and other financial institutions that facilitates the buying and selling of foreign currencies.
o These banks are located in various financial centers around the world, including such cities as London, Tokyo, NY.
o They are all connected through computers and rapid financial transactions.
Exchange Rate Systems:
o Fixed Exchange Rate System
o Flexible Exchange Rate System
Fixed Exchange-Rate System:
o A system in which governments try to keep the values of their currencies constant against one another.
o The exchange rate relies on supply and demand.
o To preserve its rate, a government may buy or sell foreign currency in order to affect a currency’s supply and demand.
o It will follow this course of action until the exchange rate is back within the specified limits.
Exchange Rate Systems:
o Although fixed exchange rate
system makes trade easier.
o They depend on countries
maintaining similar economic
policies, as well as similar inflation
and interest rates.
o By the 1960s trade was growing
and changing rapidly.
Flexible Exchange Rate System:
o Is determined by supply and demand rather than according to any present range or fixed rate.
o Today the world uses a mixture of fixed and flexible exchange rates.
o Most major currencies include the U.S. dollar and the Japanese yen use the flexible exchange-rate system.
