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Unit 5: International Economy
International 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
 Imports -- goods and services bought from other nations
 Exports - goods/services that a nation produces and then sells to
other nations
 Absolute Advantage -- country’s ability to produce more of a given
product than another country
 Comparative Advantage -- country’s ability to produce a given
product relatively more efficiently; production at lower
opportunity cost
A. International Trade
1. across national borders
2. no country produces everything it needs
3. allows countries to specialize in certain goods
B. Market Advantages: Absolute advantage vs. Comparative advantage
i. Absolute Advantage who can produce more with less resources
Rice
Tea
China Russia
80 lbs 50 lbs
20 lbs 75 lbs
Who has the absolute
advantage in:
Rice: China
Tea: Russia
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.
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.
Productivity for Heather and Adam per Day
Patent
Productivity
Bike 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 Day
Patent
Productivity
Bike 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?)
12 repairs
repairs == 6 patents
12
patents
12
12
1 repair = .5 patents
2. What is Adam’s opportunity cost of filing patents if he only repairs bikes?
10repairs
repairs ==22patents
patents
10
10
10
1 repair = .2 patents
3. Who has the lowest opportunity costs of filing patents? Adam
4. Who should repair bikes? Adam
Who should file patents?
Heather
Absolute and Comparative Advantage Between Countries
Chile
Wheat 1 bag
Fruit
50 boxes
Who has absolute advantage in:
Wheat: U.S.
Fruit: U.S.
US
1,000 bags
100 boxes
But who has Comparative Advantage?
Wheat: U.S.
Fruit:
Chile
To determine who has the comparative
advantage in producing wheat, determine
which country has the lowest opportunity
cost of fruit.
To determine who has the comparative
advantage in producing fruit, determine which
country has the lowest opportunity cost of
wheat.
Chile
U.S.
Chile
U.S.
Fruit/Wheat
Fruit/Wheat
Who should produce wheat?
50/1 = 50
100/1,000 = .1
U.S.
Wheat/Fruit
Wheat/Fruit
Who should produce fruit?
1/50 = .02
1,000/100 = 10
Chile
Comparative and Absolute Advantage
What country has an absolute advantage of food and clothing? Country A
Which country has a comparative advantage in food production? Country A
(Hint: Find which country has the lowest OC in clothing)
Country A: Clothing/Food = 3/6 = .5
Country B: (you find the ratio) C/F = 2/1 = 2
What country has a comparative advantage in clothing output? Country B
U.S.
China
Pens
75
50
Markers
60
35
What country has the absolute advantage in
U.S.
Pens: _________________
U.S.
Markers: _______________
Which country has the comparative advantage in
China
Pens: __________
U.S.
Markers: ___________
Write this down
LOC Markers
China: M/P = 35/50 = ______
.7
.8
US: M/P = 60/75 = ______
LOC Pens
1.43
China: P/M = 50/35 = ______
1.25
US: P/M = 75/60 = ______
Carrots
Potatoes
U.S.
50
52
U.K.
70
85
What country has the absolute advantage in
Carrots: _________________
Potatoes: _______________
Which country has the comparative advantage in
Carrots: _________________ LOC Potatoes
US: P/C = 52/50 = ______
UK: P/C = 85/70 = ______
Potatoes: ______________
LOC Carrots
US: C/P = 50/52 = ______
UK: C/P = 70/85 = ______
Mexico
Russia
Computers
35
105
Printers
60
90
What country has the absolute advantage in
Computers: _________________
Printers: _______________
Which country has the comparative advantage in
Computers: _______________ LOC Printers
Mexico: P/C = 60/35 = ______
Russia: P/C = 90/105= ______
Printers: ______________
LOC Computers
Mexico: C/P = 35/60 = ______
Russia: C/P = 105/90 = ______
REVIEW QUESTIONS
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?
Cars
Computers
Japan
25
100
United States
60
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.
2. If someone has a comparative advantage in the production
of 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 a
lower opportunity cost.
d. they can charge more for the good because they have higher
opportunity 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?
Russia
China
Oil
5,000
60
Steel
300
170
a. Russia has an absolute advantage in oil and China has an
absolute advantage in steel
b. China has a comparative advantage in steel, despite Russia's
absolute advantage in both products.
c. Russian and the Chinese would not benefit from trade
d. 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 businesses
protect domestic jobs
standards of safety
helps developing nations
(free trade would make it fail)
2. Costs -
limits foreign goods
harder for foreign businesses to sell
higher priced foreign goods
fewer choices for consumers
domestic products rise in price too
REVIEW QUESTIONS
1. The purpose of a tariff when used for protectionism is to
a. increase the number of foreign goods imported into
the country
b. make an imported good more expensive than its
domestically produced counterpart
c. raise revenues to pay subsidies to domestic producers
d. 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. subsidy
b. standard
c. embargo
d. quota
3. One argument in favor of a tariff would be that it would
a. help domestic consumers by allowing them to pay a
lower price
b. reduces foreign competition for domestic businesses
c. 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 Currency
in 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.
$300 x 114.69 =
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?
To find out how much he would
get back in US dollars:
2,500 x .0087 =
Foreign Currency
in 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
How much is each of the following worth in US dollars?
$2.06
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 _____________
10.71 pesos
Denmark ____________
Britain ______________
Foreign Currency
in 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
Suppose you purchased each item below. Find the price in US dollars.
700 x .02 = $14.00
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 ________________________________
VI. Spectrum of Economic Systems
A. 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. Socialism
1. Government controls some resources
2. best interest of society
3. advantages: addresses the FOR WHOM, share benefits, people
elect officials
4. disadvantages: less efficient, higher cost of production,
higher taxes
C. Communism
1. property is collectively owned
2. consumption based on need
3. central planning
4. no choice on career
5. gov't decides
6. 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 met
b. freedom of choice
c. profits
d. decentralization
What type of economic system has shared
benefits from the gov't while at the same
time has some resources privately owned?
a. communism
b. capitalism
c. socialism