Unit 4A: International Economics

1. Unit 4A: International Economics

2. Standards…. • SSEIN1 The student will explain why individuals, businesses, and governments trade goods and services.

3. Nations specialize in producing their most productive goods. • Nations sell exports to other countries and buy the imports that they do not produce themselves. • When different countries exchange goods with one another it is called international trade.

4. Question #1 • What country exports the most goods in the world? • A: China • What country is 2nd? • A: The US.

5. Question #2 Can you name the country most of Georgia’s exports go to? (2015 data)

7. US Biggest Exports • US Top Exports from 2014 (in billions $) • Machines, engines, pumps: $219 (13.5%) • Electronic equipment: $171 (10.6%) • Oil: $157 (9.7%) • Vehicles: $135 (8.4%) • Aircraft, spacecraft: $124 (7.7%) • Medical, technical equipment: $84 (5.2%) • Gems, precious metals, coins: $65 (4.0%) • Plastics: $63 (3.9%) • Pharmaceuticals: $43 (2.7%) • Organic chemicals: $42 (2.6%)

8. Question #3 • Can you name the 3 biggest trading partners of the US? (2015) • 3) Mexico 14.1% • 2) China 15.4% • 1) Canada 15.6%

10. Standards…. • a. Define and distinguish between absolute advantage and comparative advantage.

11. Market advantages occur when one country has an abundance of resources and can produce products more efficiently and in greater quantity than another country.

12. Absolute advantage means that a country can produce a product using less resources than another country. • Example: If it costs .25 cents a pound to produce sugar in the US and it costs Nicaragua .27 cents to produce the same amount, the US has an absolute advantage.

13. Absolute advantage is greater output per unit of input (remember productivity).

14. Use your notes page to find the answer…. • Ecuador’s people produce 100 bushels of corn for every 4 hours they spend in the field. Brazil’s people produce 84 bushels of corn for every three hours they spend. Which one has the absolute advantage? Why? Show the math.

15. Brazil WINS • Ecuador Hours= 4 Bushels=100 100/4 = 25 per hour • Brazil Hours=3 Bushels=84 84/3= 28 per hour Brazil has the absolute advantage

16. Comparative advantage is when a country can produce a good at a lower opportunity cost than another country.

17. Ex. Even if the US had an absolute advantage over Nicaragua in making sugar, it may make more money using its resources to make cars. • If Nicaragua’s best option was to make sugar it would have a comparative advantage over the US and the US would import sugar from Nicaragua.

19. The table shows the total pounds of each product that the two nations could produce using the same amount of workers and resources. • Who holds an absolute advantage in Soybeans? In Corn? • A = Soybeans and corn (RUSSIA)

20. To figure comparative advantage you must find which producer has the lowest opportunity cost. • You do this in a different manner for output (# of products) and input (hours,etc.) • Tip: Think OUTPUT = OVER and input = under • Tip: Always keep the country’s or persons products together when dividing, don’t mix.

21. The Output Problem • First put Russia’s corn over the soybeans, this gives you Russia’s opportunity cost for producing soybeans (they give up 2.5 corn every time they produce a soybean). • Then, do the same for Uzbekistan, 170/70 Uzbekistan gives up only 2.42 corn to produce a soybean.

22. Therefore, Uzbekistan has a lower number (2.42 v. 2.5) and a lower opportunity cost to produce soybeans. They should produce soybeans and trade with Russia for corn. • Put the soybeans over the corn to find the opportunity cost for producing corn. 80/200 Lower Opportunity cost = Russia .4 • 70/170 Opportunity Cost Uzbekistan .41 • Russia should produce corn and trade for soybeans.

23. The Input Problem • Same method just place the input under instead of over when dividing. • The table shows the hours needed to make the 2 products. • What is Sally’s opportunity cost for peanut butter? Jelly (6) goes under 10. = 1.67

24. Timmy’s opportunity cost for peanut butter is 12/8 (1.5). Timmy has the lower opportunity cost (1.5) v. (1.67). Therefore, Timmy has the comparative advantage for peanut butter.

25. Try these 2 problems: • 1) It takes Mexico 4 hours to produce tortillas and 6 hours to produce tacos. It takes Brazil 3 hours to produce tortillas and 5 hours to produce tacos. Who should produce what?

26. INPUT PROBLEM: Tortillas • Mexico 4/6 (.67) Brazil 3/5 (.6) • Brazil should produce tortillas.

27. 2) The United States can produce 50 candy bars and 20 sodas. Canada can produce 40 candy bars and 12 sodas. Who should produce what?

28. OUTPUT PROBLEM: Candy Bars • US 20/50 (.4) Canada (.3) • Canada produces candy bars, US the sodas.

30. Discussion Question • Think of a product that is produced in our state. What factors contributed to our state’s comparative advantage?

31. b. Explain that most trade takes place because of comparative advantage in the production of a good or service.

32. Econolink Comparative Advantage • http://technology.councilforeconed.org/comparative-advantage/

33. Comparative Advantage:Lebron James is better @ basketball and cutting grass than Coach Brooker. Who should cut grass?

34. When 2 countries specialize in trade (using their comparative advantage), the total amount of production goes up. • Countries then trade with each other for the resources that they did not produce and need. • If opportunity costs of producing is the same in 2 countries, the countries will not likely be trading partners for that good.

36. There are some industries in which neither nation has a comparative advantage, but they trade with each other for benefits such as variety. • Ex. Japan and US and automobiles.

37. c. Explain the difference between balance of trade and balance of payments.

38. The balance of trade is the difference between a nation’s value of exports minus the value of imports. • If a country exports more than it imports, it has a trade surplus. • If a country imports more than it exports, it has a trade deficit.

40. If a country exports more than it imports with a certain country it has a favorable balance of trade.

41. Question, Does the US have a favorable or unfavorable balance of trade with China?

42. Question • Angola has 200 million in imports and 150 million in exports. What is its balance of trade? • A= 50 million trade deficit

43. Balance of payments is the difference between the total amount of money coming into a country and the total amount leaving. • The balance of payments includes all of the economic transactions of a nation with other nations. • Any transaction bringing money in is credit, sending money out is debit.

44. Examples of transactions in balance of payments include: • Trade balance • Tourism • Military spending • Interest payments on loans • Corporate dividends • Buying and selling of: land, businesses, currency • Transfer payments

45. Examples: A Mexican immigrant gets paid in the US and sends money home to Mexico. • A Chinese investor gets paid a stock dividend from Microsoft.

46. If the balance of payments is negative, the nation and its people will be in debt.

47. The balance of payments is divided into 2 categories: • 1) Current accounts- trade of goods and services • 2) Capital accounts- foreign investments

48. In recent years, the US has run a current account deficit, but has sold more property, stocks and bonds (capital accounts) to foreign investors to get the money to pay for current spending.

49. SSEIN2 The student will explain why countries sometimes erect trade barriers and sometimes advocate free trade.

50. To improve balance of payments and to protect businesses in certain domestic industries, nations sometimes impose trade barriers to limit imports. • A government policy to limit imports is called protectionism.