Download The International Economy

This is the study of how economies in different
countries and regions of the world interact and affect
one another.
International Trade
Why Trade?
 Trade allows countries to concentrate on what it does
best and trade for what it cannot or does not produce.
 This allows for specialization in certain goods, which
leads to more efficient production of those goods.
 Ex: Brazil-sugar and U.S.-auto industry
 These are examples of countries concentrating on what
they do best.
 As both countries concentrate on their strengths they
both increase their overall well-being.
International Trade
Market Advantages
 Market advantages occur when one country has an
abundance of resources and/or can produce certain
products more efficiently and in greater quantity than
a competing nation.
 The 2 types of advantage are absolute advantage and
comparative advantage.
International Trade
Market Advantages
 Absolute Advantage.
 A country has an absolute advantage when they can
produce a product using less resources than another
country.
 When a country has an absolute advantage it means
that the country can produce more of a good than
another country.
 Brazil has an absolute advantage over the U.S. in sugar
production.
 The U.S. has an absolute advantage over Brazil in auto
production.
International Trade
Market Advantages
 Comparative Advantage
 A country has a comparative advantage when they can
produce something at a lower opportunity cost than
another country.
 When two countries are producing 2 of the same
goods, one country will always have a comparative
advantage in the production of one of the goods.
 In this case each should specialize in what they do best
and trade for the other good.
International Trade
Market Advantages
 Imagine countries producing cars and sugar.
 The U.S. produces more cars and sugar than Costa Rica. So
the U.S. has an absolute advantage in both.
 They can, however, benefit from trade because each has a
comparative advantage.
 Though Costa Rica cannot produce as much sugar, it does not
cost as much to produce the amount that they grow.
 Though the U.S. can produce more sugar, they should focus
on producing cars because it costs so much to produce sugar.
 Because of comparative advantage the U.S. should produce
cars and Costa Rica should produce sugar and they should
trade with each other.
Practice
 Pg. 75 Practice 4.1
 Diagnostic Test Questions 32,48,55
Trade Restrictions and Barriers
Free Trade
 This is trade without government restrictions.
 Opponents arguments against free trade.
 It hurts the poor while helping the rich.
 It encourages companies to move overseas.
 It is bad for poor countries who cannot compete in the
global economy.
 It forces less economically developed countries to
abandon their own traditions and cultures in favor of
becoming more westernized.
 It can cause shortages in the country that is doing the
exporting.
Trade Restrictions and Barriers
Free Trade cont.
 Supporters of free trade argue:
 It creates jobs for the unemployed.
 It promotes political freedom.
 It provides poorer countries with a chance to grow
economically.
 Consumers benefit because prices are lower.
Trade Restrictions and Barriers
Government Regulated Trade
 Governments sometimes regulate trade in an effort to
help their own nation’s businesses, increase jobs, help
the national economy, or even punish another nation
economically.
Trade Restrictions and Barriers
Types of Government Regulations
 Quota-a limitation on the number of units or the
amount of a particular product that can be imported
into a country.
 These limit competition by restricting the number of
foreign products on the market.
 Though the foreign good may be cheaper, the domestic
consumers can only buy so much of it before they have
to buy a comparable domestic good.
Trade Restrictions and Barriers
Types of Government Regulations Cont.
 Tariffs-special taxes placed on products imported from
other countries.
 This will increase the price of the good and therefore
decrease the quantity demanded.
 This might help a domestic producer stay in business,
even though without the tariff the imported good would
have been cheaper for consumers.
 Both quotas and tariffs are put in place in order to
make it easier for domestic producers to compete
against foreign companies
Trade Restrictions and Barriers
Types of Government Regulations Cont.
 Embargo-occur when a nation, or several nations,
impose economic sanctions against a nation by
refusing to trade with them.
 Standards-these are specific guidelines on goods
coming into the country, (health and safety) and are
designed to protect consumers.
 Subsidies-payment from the government to a business
to help them survive against foreign producers rather
than placing regulations on trade.
Trade Restrictions and Barriers
Reasons for Trade Barriers
 Protectionism-putting policies in place that are
designed to protect domestic industries from too
much foreign competition.
 While protectionism might allow some domestic firms
to keep producing, allowing free trade is almost always
the most efficient way to run an economy.
 Health and safety-in the U.S. we protect the health and
safety of our citizens by putting standards on
consumed goods.
Trade Restrictions and Barriers
Reasons for Trade Barriers cont.
 National Security-if we were to import our military
supplies then we would be dependent on another
nation during war time, therefore we produce our own
military supplies.
 Retaliation-we may put regulations on countries who
have put regulations on us in retaliation.
Trade Restrictions and Barriers
Benefits of Trade Barriers
 Benefits of Trade Barriers
 They help domestic businesses compete.
 They protect domestic jobs.
 They maintain safety standards in the marketplace.
 They help poorer nations while they are trying to
develop economically and compete with wealthier
nations.
Trade Restrictions and Barriers
Costs of Trade Barriers
 Costs of Trade Barriers
 They limit the number of goods in the marketplace.
 They increase price levels.
International Trade
Organizations and Agreements
• World Trade Organization (WTO)-establishes rules for
international trade and helps resolve disputes between
member nations.
• European Union (EU)-facilitate trade and commerce
between 25 European nations in an effort to create a
unified regional economy rather than national
economies.
• Association of Southeast Asian Nations (ASEAN)-aims
to accelerate economic growth, social progress, and
cultural development among its members.
International Trade
Organizations and Agreements cont.
• United Nations (UN)-seek solutions to military and
economic issues.
• North American Free Trade Agreement (NAFTA)lowered trade barriers between the U.S., Mexico and
Canada.
• International trade can reduce the incidence of wars
between nations.

When two countries economies are linked they are less likely
to go to war with each other.
Balance of Trade and Balance of Payments
 Balance of Trade-the rate at which one nation trades
with other nations.
 A favorable balance of trade is when a country exports
more than it imports.
 An unfavorable balance of trade is when a country
imports more than they export.
Balance of Trade and Balance of Payments
 Balance of Payments-is the value of all money coming
into the country thanks to exports, minus all of the
money going out of the country as it pays for imports.
 Two areas of Balance of Payments:
 Current Accounts-this is trade in goods and services.
 Capital Accounts-this includes foreign investments.
 For years we have run a current account deficit but a
capital account surplus that balances out the deficit.
Practice
 Pg. 83 Prac. 4.2
 Diagnostic Test # 16,32,36,49,59,77
Purchasing Power and Exchange Rates
 Purchasing power refers to the actual amount of goods
and services that can be bought with a given unit of
money.
 Purchasing power parity is when the same product sells
for the same amount of currency in different countries.
 The exchange rate is how much the primary form of
currency in one nation is worth in comparison to the
primary form of currency in another nation.
Purchasing Power and Exchange Rates
Determining Exchange Rates
 There are Three Types of Exchange Rates
 #1 Fixed Exchange Rates
 This rate establishes a price for a foreign currency that is
tied to a stable currency of a developed country.
 The stable currency is called a hard currency.
 #2 Floating Exchange Rates
 This type of rate is determined by supply and demand.
 If demand for the U.S. dollar increases or decreases it
will affect the exchange rate.
Purchasing Power and Exchange Rates
Determining Exchange Rates
 There are Three Types of Exchange Rates
 #3 Managed Floating Exchange Rates
 This exchange rate floats within an agreed upon band
(via supply and demand) and if the value gets too high
or low the central bank intervenes and manages the rate.
Purchasing Power and Exchange Rates
Currency Appreciation
 Appreciation-when the value of a currency goes up it is
said to have appreciated.
 This benefits consumers because they can buy more of a
foreign good.
 This is bad for producers because a person holding the
appreciated currency is going to buy from foreign
countries.
 An appreciated currency leads to trade deficits.

The government may take steps to devalue their currency to
erase these deficits.
Purchasing Power and Exchange Rates
Currency Depreciation
 Depreciation-when the value of a currency goes down
it is said to have depreciated.
 This benefits producers because people from other
countries can now buy more of their goods.
 This hurts consumers because they are unable to buy as
many goods from other countries.
Purchasing Power and Exchange Rates
Factors Affecting Exchange Rates
 #1 Interest Rates on Investments
 If the U.S. has higher rates relative to other countries,
the demand for U.S. dollars will increase.
 Foreign investors will want to invest in U.S. securities in
order to collect the high interest.
 This increase in demand could cause the dollar to
appreciate.
Purchasing Power and Exchange Rates
Factors Affecting Exchange Rates
 #2 Productivity
 As the productivity of a country goes up so does the
demand for its currency because people need their
money to buy their goods.
 #3 Economic Stability
 The more stable an economy is, the more foreign
investors will want their currency.
 The reverse of all these factors can likewise cause
depreciation.
International Trade Issues
 Tariffs, Quotas, and other trade agreements are issues
that countries must address.
 For individuals the exchange rate is one of the most
important international trade issues.
 The exchange rate measures the price of one nation’s
currency in terms of another nation’s currency.
Exchange Rate Example
 Consider there are two grocery stores; Americo Store
and Groceria Mexicana
 Americo Store is in Brownsville, TX and Groceria
Mexicana is across the border in Metamores Mexico.
 Suppose the exchange rate between the American
Dollar and the Mexican Peso is 1:10, meaning the U.S.
Dollar translates to 10 Mexican Pesos.
Exchange Rate Example cont.
 Remember that exchange rates move up and down to
reflect the worth of one country’s currency in
comparison to another's.
 If there is high demand for U.S. products our currency
appreciates because people need our money to buy our
products.
 At the same time the Peso has depreciated relative to
the Dollar.
 This means the new exchange rate could be 1:15 meaning
the U.S. Dollar translates to 15 Pesos.
Exchange Rate Example cont.
 Which grocery store benefits from the new exchange
rate?
 Groceria Mexicana
 The appreciated Dollar makes U.S. goods more
expensive relative to the Mexican counterparts.
 Some Americans may cross the border to buy groceries
because the exchange rate makes it lucrative.
Exchange Rate Example cont.
 Anyone converting Pesos to dollars needs 15 per dollar.
 When a person is converting Dollars to Pesos, his
purchasing power has increased due to the new
exchange rate.
 When a person is converting Pesos to Dollars however,
the stronger Dollar lowers their purchasing power.
 Overall, business at Groceria Mexicana would
increase, while Americo store’s business will decrease
as some customers cross the border to take advantage
of their strengthened currency.
Practice
 Pg. 89 Prac. 4.3
 Diagnostic Test # 17,28,44,52,56,78