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16 THE GLOBAL ECONOMY WHY DO COUNTRIES TRADE? (WITH TRADE, EVERYONE IS BETTER OFF) 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 This is when a country can produce more of everything than another country with fewer opportunity costs; more efficient in everything COMPARATIVE ADVANTAGE 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? 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 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 Revenue Tariff Quotas 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 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) 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 Deficit Less exports and more imports Surplus More exports and less imports FOREIGN EXCHANGE 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 YOUR TURN EXPLAIN ABSOLUTE AND COMPARATIVE ADVANTAGE.