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16
THE GLOBAL ECONOMY
WHY DO COUNTRIES TRADE? (WITH
TRADE, EVERYONE IS BETTER OFF)
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Imports are the goods we buy from foreign countries
Exports are the goods foreign countries buy from us
A trade deficit means that we are importing more
than we are exporting
ABSOLUTE ADVANTAGE
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This is when a country can produce more of everything
than another country with fewer opportunity costs; more
efficient in everything
COMPARATIVE ADVANTAGE
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This is when a country can produce one good using less
opportunity cost than another country; more efficiently
THINK…
Why would comparative advantage make it more
efficient to trade even when a country can
produce more of everything than another
country?
 Remember the production possibilities curve?
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You have to give up producing some of one good to
produce more of another (opportunity cost)
What if that other good actually made you more
money? How high would your opportunity cost be?
What if you spent more resources on producing a
good that you could trade for?
THAT IS WHY COUNTRIES TRADE 
TARIFFS
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Protective Tariff (favored by “Protectionists”)
A high tariff on imports to protect industries at home
sometimes called an infant industries tariff
 High tariffs may protect jobs at home
 Retaliatory tariffs can cost us money
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Revenue Tariff
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Quotas
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Tariff high enough to generate revenue for the government
without prohibiting imports
Only allowing so much or none of a particular good to be
imported
Balance of Payments
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The difference between the money paid out for imports
and taken in for exports
FREE TRADE
NAFTA (north American free trade association)
 GATT (general agreement on tariffs and trade)
 WTO (world trade organization)
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Free trade can be beneficial to every country
 Often high protective tariffs backfire because foreign
countries then place tariffs or quotas on our exports
thus hurting business and causing jobs to be lost here
 Overall, though, a trade deficit is typically not
beneficial to the country carrying this deficit
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Deficit
 Less exports and more imports
 Surplus
 More exports and less imports
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FOREIGN EXCHANGE
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This is the value of one country’s currency in
terms of the value of another country’s currency
If the American Dollar depreciates in relation to
another country’s currency, then this country will
want more dollars and will purchase more of our
goods because they can get more American
merchandise for fewer of their own “dollars”
 If our currency appreciates in value in relation to
foreign currency, there will be less demand for it
and our goods
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YOUR TURN
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EXPLAIN ABSOLUTE AND COMPARATIVE
ADVANTAGE.