Economics Standards
International Economics
What is international Economics?
- Microeconomics - - Macroeconomics - - International the study of how the study of an economics - how producers and entire country’s different countries consumers economy economies are interact in markets interrelated. What is trade? Why do we trade?
● Trade refers to the exchange of goods, services, and/or productive resources among individuals, businesses, and/or governments. ● Trade refers to exchange among people within a country as well as international trade among people from many countries. ● Economic models suggest domestic and international trade improve a country’s economy. ● As with all choices, costs and benefits exist. When should countries trade?
● Some countries, like the United States, are good at producing pretty much anything. So why would a country like the United States trade with other countries? ● Countries benefit from trade when they produce the goods and services for which they have a comparative advantage in. ● What’s comparative advantage? Types of Advantage in Trade Anything I can make you can do I more than can do you can better
There are 2 types of advantage:
•Comparative Advantage Absolute Advantage Absolute Advantage- the concept that if 2 countries or businesses have the same amount of resources, one country can produce more than the other using fewer resources.
Country A has an Absolute Advantage Country A Country X can produce can produce 1 million gallons of ½ million gallons of milk per year milk per year Absolute Advantage The bakery can Absolute Advantage occurs on an individual/firm level as well. produce more cookies so they Who has an absolute advantage in this example? have the absolute Chance It Home Tucker’s Tasty advantage. Bakery Treats Bakery can produce can produce 150 dozen cookies 500 dozen cookies per month per month
Why might that bakery have an advantage? Is Absolute Advantage
Everything?
Does this mean that Chance It Home Bakery should go out of business because they cannot make as many cookies as Tucker’s Tasty Treats? The answer is no. Absolutely advantage is not the best way to determine who should produce.
Can you think of a reason or an example of why Chance It bakery should continue making cookies?
Let’s compare cost Comparative Advantage Comparative Advantage- the concept that one country or business can produce a good or service at a lower opportunity cost than the other.
Country X has and Comparative Advantage
Country A Country X can produce can produce 1 million gallons of ½ million gallons of milk per year at $1.25 milk per year at $1 per gallon per gallon Comparative Advantage
Comparative Advantage also occurs on an individual/firm level. Fill in the blanks to give Chance It Home Bakery a comparative advantage? Given this scenario, Chance It should specialize in baking cookies because they have a lower opportunity cost. Chance It Home Bakery Tucker’s Tasty can produce Treats Bakery 150 dozen cookies can produce per month for $3 per 500 dozen cookies dozen per month for $3.25 per dozen How to Calculate Comparative Advantage
What we Give Up = Your Opportunity Cost If We Make EXAMPLE
Sugar Fertilizer
United States 80 100
Nicaragua 70 50
TOTAL 150 150
•Which country has an absolute advantage in producing sugar? • USA - 80 units is more than 70 • Which country has an absolute advantage in producing fertilizer? • USA - 100 units is more than 50 Remember We Give Up = Opportunity Cost (OC) EXAMPLE Our Formula>> If We Make
Sugar Fertilizer
United States 80 100
Nicaragua 70 50
TOTAL 150 150
•Which country has a comparative advantage in producing sugar? • USA - What we give up (100) / If we make (80) = 1.25 Opportunity Cost • Nicaragua – What we give up (50) / If we make (70) = .71 Opportunity Cost • So Nicaragua has a lower opportunity cost of making sugar! • Therefore, they have a Comparative Advantage with sugar Remember We Give Up = Opportunity Cost (OC) EXAMPLE Our Formula>> If We Make
Sugar Fertilizer
United States 80 100
Nicaragua 70 50
TOTAL 150 150
•Which country has a comparative advantage in producing fertilizer? • USA - What we give up (80) / If we make (100) = 0.80 Opportunity Cost • Nicaragua – What we give up (70) / If we make (50) = 1.40 Opportunity Cost • So USA has a lower opportunity cost of making fertilizer! • Therefore, they have a Comparative Advantage with fertilizer Remember We Give Up = Opportunity Cost (OC) EXAMPLE Our Formula>> If We Make
Sugar Fertilizer
United States 80 100
Nicaragua 70 50
TOTAL 150 150
•What should they produce. • So according to the laws of comparative advantage: • Nicaragua should make sugar • USA should make fertilizer • and then the two countries should trade. Real Life Example
● The US climate is not suited for growing coffee or tea. ● Even though the US could grow either, and could produce more than other countries if they really wanted to, it would take a lot of resources and the cost would be high. ● So even though the US might have an absolute advantage in growing coffee and tea, the US is better off to let South American countries (whose climates are already suited for growing coffee and tea) produce those goods while we produce goods (like computers) that we have a lower opportunity cost in.
Balance of Trade
● A country’s balance of trade refers to the value of its exports minus the value of its imports for measurable during a specific time. ○ Remember, this is the calculation used to determine the value of the Net Exports component of GDP. If the value of a country’s exports If the value of a country’s exports fall exceeds the value of its imports, the short of the value of its imports, the country enjoys a trade surplus. country has a trade deficit.
Click here to watch a video for a detailed look at the Balance of Trade.