Transcript Unit 8 - Mr. Zedan`s Classes

Absolute and Comparative Advantage
16.1
Trade
 Why do nations trade?
Trade
 Why do nations trade?
 Make money
 Better citizen’s lives
 Gain the goods you lack
 Acquire raw materials
Specialization
 A method of production where a business or area focuses on
the production of a limited scope of products or services in
order to gain greater degrees of productive efficiency within
the entire system of businesses or areas.
 What does this mean in your own words?
Production Possibilities Frontier
Guns
Butter
Production Possibilities Frontier
Point A
Guns
Efficient
•Uses all possible resources
•Why would a country want
to operate here and why
not?
Butter
Production Possibilities Frontier
Point A
Guns
But why?
Point B
•Also Efficient
Butter
•Represents specialization
Specialization and Economics
 Trade materials
 Exports: Goods produced domestically and sold abroad
 Imports: Goods produced in foreign countries and sold
domestically
 What are some examples of US exports
and imports?
Major US Exports (Goods,2011)
Major US Exports (Services, 2011)
Major US Imports (2011)
 Crude Oil
 Passenger Cars
 Medical preparations
 Automotive accessories
 Other household goods
What does this all have to do with
trade?
 Trade revolves around two major ideas:
 Absolute Advantage
 Comparative Advantage
Absolute Advantage
 The ability to produce more of something with the same set
of inputs
 Or
 With the same amount of stuff (usually labor) you can make
more.
Production Possibilities Frontier: AA
Guns
Country A
Country B
15
Guns
10
Butter
5
5 Butter
AA
 When you see things numerically, absolute advantage is
always the bigger number
 Mr. Zedan can grade 5 papers in one hour. Ms. Harte can 7
papers in the same time. Who has the absolute advantage?
 Ms. Harte
Comparative Advantage
 The ability to produce a good at a lower opportunity cost
than someone else
 Or
 You give up less to make something
Production Possibilities Frontier: CA
Guns
15
12
Country B has the
Comparative
Advantage in
producing Butter!!!!
Country A
Country B
Guns
Country B gives
up 2 guns to
make 4 butters
10
8
Butter
5
Country A gives up 3 guns to make 4 butters
4
4
5 Butter
Comparative Advantage
 Comparative advantage can also be expressed in numbers as a
simple ratio comparison
 Mr. Zedan can grade 5 papers in one hour, or write 10
lessons. Ms. Harte can grade 7 papers in the same time, or
write 2 lessons. Who has the absolute advantage in each?
Who has the comparative advantage in each?
Problem Answer
 Absolute
 Grading Papers:
Ms. Harte (7 is greater than 5)
 Writing Lessons: Mr. Zedan (10 is greater than 2)
 Comparative
 Grading Papers:
 Writing Lessons:
Ms. Harte
Mr. Zedan
Specialization Again
 If Ms. Harte and Mr. Zedan could specialize (pick only one
thing to do) what would each choose? Why?
 Economic Rule: When it comes to trading, a country will
always trade what it has a comparative advantage in, not an
absolute advantage.
Barriers to International Trade
16.2
China
 Trade Barriers
 http://video.foxbusiness.com/v/4324806/forbes-china-
erecting-trade-barriers/
 China’s economy has evolved but has its government?
 http://www.pbs.org/newshour/bb/international/julydec10/china_12-10.html
Slowing the Rate of Growth
 Selected industries and groups of workers
 Despite joining the WTO, China is still trying to protect
some sectors of the economy while opening up to trade.
Restricting International Trade
 Historically, trade is restricted in two major ways.
 1. Tariffs – a tax placed on imports to increase their price in
the domestic market.
 2. Quota – a limit placed on the quantities of a product that
can be imported.
Tariffs
 2 kinds of tariffs
 1. Protective Tariff – is a tariff that is high enough to protect less-
efficient domestic industries. i.e. – Book example –
 Mechanical Pencils –
 U.S. Made - $1.00
 Foreign Made - $.35
 $.95 Tariff slapped on it = $1.30
 2. Revenue Tariff – A tariff that is high enough to generate revenue
for the government without actually prohibiting imports.
 Mechanical Pencils –
 Foreign Made - .35
 $.40 Tariff = $.75
Tariffs as Revenue
 Traditionally tariffs were used more for revenues than for
protection.
 1860 – 1913 – Tariffs provided about one half of
government’s total revenue.
 After the Federal Income Tax Law in 1913 – Custom
Duties only represent a small portion of revenue.
Bush
 In practice a tariff achieves protection and provides some
revenue
 In 2002 – The Bush Administration imposed a 30%
temporary tariff on foreign steel imports to protect the
domestic steel industry.
 The tariffs preserved some jobs, and raised some revenues in
an election year
 But it also raised the price of domestic steel by 20 to 30 %.
Other Barriers
 Food inspectors – are more rigorous than those given to
domestic foods.
 Health Issues – EU countries refuse to allow genetically
engineered food into their markets
 Granting Licenses to import –
 Government can be slow to issue
 Charging very high fees
Arguments for Protection
 Protectionist vs. Free Traders
 Promoting Infant Industries
 Protecting Jobs
 Keeping Money at home
 Balance of Payments
 Aiding National Defense
Israel – for example have developed large armament industry
to prepare for crisis
Free Trade Movement
 Great Depression – 1930 Congress passes the Smoot-Hawley Act






– one of the most restrictive tariffs in history.
Raised tariffs so high that prices on foreign goods rose by 70%
Other countries retaliated – trade came to a halt
1934 – Most Favored Nation –
1947 – 23 countries signed the General Agreement on Tariffs and
Trade (GATT)
1962 – Congress gave the President the ability to negotiate further
tariff reductions
WTO – replaces GATT – settles trade disputes, organizes trade
negotiations, provides assistance and training to developing nations
NAFTA
 Reducing tariffs between three nations:
 1. Canada
 2. U.S.
 3. Mexico
Back to China
 The Great Chinese Firewall
 http://www.youtube.com/watch?v=IWsXhNJFj78
 How is censorship a form of trade barrier?
Foreign Exchange and Trade Deficits
Chapter 16
Section 3
 How could the decline in the value of the US dollar be a good
thing?
 Our goods are cheaper overseas which means the trade imbalance can
level off or even lessen.
Foreign Exchange
 In order for our “global economy” to work different




currencies have to be bought and sold before any goods can
be exchanged.
If a company in Japan wants to purchase iPads – they must
pay Apple in US dollars – so they “purchase” US dollars with
their Yen.
This is all done on the foreign exchange market.
The price of one country’s currency or the “foreign exchange
rate” is quoted in two ways. In the above example the
exchange would be written as:
0.0091 yen = 1 US dollar or $110.4900 = 1 Yen
 Look at Figure 16.4 and answer the following questions:
 What is the US equivalent for one Australian dollar?
 0.7728
 How much is 1 US dollar worth in Australia?
 1.2940
 If something in Japan cost 100,000 Yen how much would that
be in US dollars?
 $905.05
Fixed Exchange Rate
 The value of your money used to be measured in gold –
literally.
 People would buy things from another country (using their
currency – not exchanging it) and the money was worth a
portion of that countries actual gold reserve.
 That worked out fine until we became a global economy and
countries holding US dollars actually wanted real GOLD in
exchange.
 Nixon took us off the gold standard.
Flexible Exchange Rates
 Supply and demand determine the value of currency.
 As the supply of one countries currency increases the value of it
decreases.
 So if the US exports more than it imports – the value of the
dollar goes up.
 If the US imports more than it exports – the value of the
dollar goes down
Flexible Exchange Rates
 Since we currently IMPORT a lot of products from China –
what SHOULD be happening to the Chinese currency?
 (It should be getting more expensive – making US products cheaper for
the Chinese to buy.)
 China does not participate in the flexible exchange system
and devalues it’s currency creating a real problem.
 If their currency is devalued then US citizens will want to
purchase them because they are cheaper and Chinese citizens
won’t be able to afford US products.
Deficits and Surpluses
 A trade deficit is when country A imports more from
country B than it exports
 A trade surplus is when country A exports more to country
B than it imports
 When the dollar is strong foreign goods become cheaper.
 We buy more exported goods and more US dollars go overseas.
 Over time – there are more US dollars in foreign markets so
the value of the dollar drops and the reverse occurs.
 This is the cyclical nature of flexible exchange rates.
The Cycle
 So if this is cyclical – does it matter if the dollar is strong or
weak?
 It depends on the market you are in.
 During times when the dollar is strong US citizens are likely to
buy more imported goods – which hurts domestic
manufacturers like the auto industry.
 But when the dollar is weak – it hurt businesses that sell goods
from other countries (electronics for example.)