Specialization and Trade Barriers

Specialization“Do what you do best; trade for the rest!”• Attempting to produce everything

you want to consume yourself limits both your production and consumption possibilities.

• To specialize, you must figure out what you “do best.” Economists define “best” as that which you produce at the lowest opportunity cost.

• “Trading for the rest” by “selling”

the goods or services you can produce at low opportunity costs and then “buying” things you would produce at a high opportunity cost requires division of labor.

What are the potential problems of over-specialization such as one-crop economies and lack of diversification?

How can this impact a region’s economy?

Currency Exchange• Before people from different countries can

buy or sell anything to each other, they have to be able to change their money from their country's currency to the seller's national currency.

– This is called "foreign exchange."

• Each currency, whether it's the US dollar or the Haitian gourde, has a value in terms of other currencies. This is the "exchange rate."

• Without a reliable supply of foreign exchange in each country, and without relatively stable exchange rates, world trade would drop drastically.

• You wouldn't be wearing tennis shoes made in Asia, or eating an apple grown in New Zealand.

The Iraqi DinarThe Iraqi Dinar

The Saudi Riyal

The Saudi Riyal

Israeli LiraIsraeli Lira Iranian (Persian) RialIranian (Persian) Rial

Exchange rates

• Exchange rates provide a procedure for determining the value of one country’s currency in terms of another country’s currency.

• Without a system for exchanging currencies, it would be very difficult to conduct international trade.

Barriers to Trade

• A tariff is a tax placed on goods that one nation imports from another.

• Many nations use tariffs to protect their industries from foreign competition.

• Tariffs provide protection by acting to raise the price of imported goods.

• Thus, tariffs encourage domestic firms to increase their production, and consumers are forced to pay higher prices for the protected goods.

Import quotas

• Import quotas offer another means of protectionism.

• These quotas set a limit on the amount of certain goods that can be imported into a country and tend to be more effective than protective tariffs, which do not always stop consumers who are willing to pay a higher price for an imported good.

• OPEC Monitors oil supply and demand to set the price of oil. How? By QUOTAS!!

Embargo• An embargo is an order

designed to stop the movement of goods.

• An embargo, issued by the government of one country, may restrict or suspend trade between that country and another nation.

• A government may impose an embargo to hamper the military efforts of another government.

• Sometimes a government imposes an embargo to express its disapproval of actions taken by another government. The embargo is intended to pressure the offending government to change its actions.

Why did the US place an embargo on Iraq after the Persian Gulf War?

Why did the US place an embargo on Iraq after the Persian Gulf War?

Word Association

• Embargo = stop or halt

• Quota = limit

• Tariff = Tax

How could a high tariff on imported grain help the people in the country charging the tariff?

1)The grain process would be lower if tariffs were in place2)Local grain would always be of a higher quality than grain from other countries3)Local grain would be more plentiful because it was grown closer to the markets4)Local farmers would be able to sell their grain since it would be cheaper than imported grain

How could a high tariff on imported grain help the people in the country charging the tariff?

1)The grain process would be lower if tariffs were in place2)Local grain would always be of a higher quality than grain from other countries3)Local grain would be more plentiful because it was grown closer to the markets

4)Local farmers would be able to sell their grain since it would be cheaper than imported grain