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International Economics

International Economics. Absolute vs Comparative Advantage. Absolute: a country’s ability to produce more of a given product than another country

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International Economics

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  1. International Economics

  2. Absolute vs Comparative Advantage • Absolute: a country’s ability to produce more of a given product than another country • Comparative: a country’s ability to produce a product more efficiently than another country (lower opportunity cost) [Example: Say you have John who makes $300 an hour and he hires a maid who works for $25 an hour. It takes John 1 hour to clean his house compared to his maid who takes 8 hours to clean his house. John has an absolute advantage over his maid but the maid has a comparative advantage. This is because if John cleans his house by himself, he loses $300. If he hires the maid, he makes a profit of $100.]

  3. Another example… Coconuts Fish A 10 10 B 4 8 The 10 represents the coconuts of A if that’s all they do. If they spend half their time getting coconuts, they’d have 5 coconuts and 5 fish. The same is true of B. If they specialize and trade, they both benefit.

  4. Balance of payments • The difference between the amount paid and the amount received in international trade. • Protectionists vs. Free-traders: trade barriers to protect US industries (like steel) vs. those who oppose trade barriers. • Defense: produce own weapons at higher cost & lower efficiency or import weapons? • Protecting jobs: should we, or should companies compete?

  5. Trade Barriers • Tariffs: tax on imports (hurts international trade—almost stopped in 1930s!) • Most Favored Nation clause: country that gets same tariff reduction as another country (China) • NAFTA: North American Trade Agreement (1993): reduced tariffs between Canada, the US & Mexico • Very controversial—predicted huge job losses • Some jobs lost to Mexico, but not many • DRAMATIC growth in trade between the 3

  6. More barriers to trade… • Embargo: restriction on export or import of a commodity in trade (oil) • Quota: limit on the amount of a good that can be allowed into a country (Japanese cars in the US in 1970s—drove prices of all cars up) • Subsidy: government payments to encourage an economic activity (milk, corn, wheat, soybean farmers) • Standards: ways to keep imported products out of a country: Health inspections on Argentina’s beef, license to import, irradiated beef

  7. Cooperation in trade • European Union [EU]: formed in 1993 • No barriers regulating the flow of capital, workers, or goods & services between member countries • Common passports—can travel anywhere to trade, invest, vacation, work, etc. • 2002: euro introduced—common currency replaced individual currencies

  8. Other economic communities… • ASEAN: Association for Southeast Asian Nations (1967): Indonesia, Malaysia, Singapore, Philippines, Thailand • Works to promote peace, stability, growth & liberal free trade policies • OPEC: Organization of Petroleum Exporting Countries (mostly in Middle East): formed in 1960 to restrict production to raise prices

  9. Exchange rates • Foreign exchange rate: the price of one country’s currency in terms of another country’s currency (flexible/floating) • Demand for foreign products pushes dollar’s value down, make imports more expensive • Dollar’s value reflects health of US economy • Trade deficit: value of imports exceeds value of exports—reduces dollar’s value, rising unemployment • Trade surplus: value of exports exceeds value of imports—raises dollar’s value, falling unemployment

  10. Exchange rate table Code Country Units/USD USD/Unit ARP Argentina (Peso) 2.9450 0.3396 AUD Australia (Dollar) 1.5205 0.6577 BSD Bahamas (Dollar) 1.0000 1.0000 BRL Brazil (Real) 2.9149 0.3431 CAD Canada (Dollar) 1.3659 0.7321 USD: US Dollar Units/USD: dollar exchange rate in other currency ($1.00=2.94 pesos) USD/Units: other currency’s exchange rate to the dollar (1 peso=34 cents)

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