ssein1 the student will explain why individuals, businesses, and governments trade goods and...
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SSEIN1 The student will explain why individuals, businesses, and governments trade goods and services.a. Define and distinguish between absolute
advantage and comparative advantage. b. Explain that most trade takes place
because of comparative advantage in the production of a good or service.
c. Explain the difference between balance of trade and balance of payments.
a. Define and distinguish between absolute advantage and comparative advantage.absolute advantage
The ability to produce more of a given product using a given amount of resources (not best guide for deciding who should do what; comparative advantage is better.)
comparative advantage The ability to produce a product most
efficiently given all the other products that could be produced- law of comparative state that the worker, firm, region, or country with the lowest opportunity cost of producing an output should specialize in that output
Which country has the absolute advantage in producing each good?
Sugar Fertilizer
United States 80 100
Nicaragua 70 50
Total 150 150
Which country has the comparative advantage in producing each good?
Sugar Fertilizer
United States 80 100
Nicaragua 70 50
Total 150 150
Figuring out comparative advantageUS Opportunity cost of producing sugar= ______
?= blank is 100/80 or 10/8 ; ? is fertilizerNicaragua Opportunity cost of producing
sugar= ______? = blank is 50/70 or 5/7 ; ? is fertilizer
US Opportunity cost of producing fertilizer = ______? = blank is 80/100 or 8/10 ; ? is sugar
Nicaragua Opportunity cost of producing fertilizer = ______? = blank is 70/50 or 7/5 ; ? is sugar
Lowest opportunity cost should specializeUnited States has lowest opportunity cost in
producing fertilizer so they should specialize in producing that and export it so they can use the money to buy sugar
Nicaragua has lowest opportunity cost in producing sugar so they should specialize in producing that and export it so they can use the money to buy fertilizer.
b. Explain that most trade takes place because of comparative advantage in the production of a good or service.
Each nation can use the money it earns selling the goods it produces efficiently to buy other goods it cannot produce efficiently. (more efficient and productive due to specialization)
c. Explain the difference between balance of trade and balance of payments.
Balance of trade is the relationship between a nation’s imports and its exports
More exports than imports= trade surplus
More imports than exports= trade deficit
c. Explain the difference between balance of trade
and balance of payments-continued.Balance of payments= the difference between the total
amount of money coming into a nation and the total amount leaving
Credits= Any transaction that brings money into a nation
Debits= Any transaction that takes money out of a nation
SSEIN2 The student will explain why countries sometimes erect trade barriers and sometimes advocate free trade.
a. Define trade barriers as tariffs, quotas, embargoes, standards, and subsidies.
b. Identify costs and benefits of trade barriers over time.
c. List specific examples of trade barriers. d. List specific examples of trading blocks
such as the EU, NAFTA, and ASEAN. e. Evaluate arguments for and against free
trade.
a. Define trade barriers as tariffs, quotas, embargoes, standards, and subsidies.
Tariffs (ex. custom duty)A Tax on imported goods
QuotasA limit on the number of any product entering the
countryEmbargos
an embargo is the prohibition of commerce and trade with a certain country.
Standardssomething set up and established by authority as a
rule for the measure of quantity, weight, extent, value, or quality
Subsidiesa gov’t payment that supports a business or market
b. Identify costs and benefits of trade barriers over time.Costs >increased prices on foreign
goods, trade wars, slows introduction of new goods and better technologies
Benefits > job protection, protect infant industries, safeguard national security
c. List specific examples of trade barriers.US government collects tariffs on imported steel and carsIn the 1980s, the United States forced a limit on the number of
cars that could be imported from Japan, in order to help American companies compete.
US has maintained an embargo on imports from Cuba since 1961, after the Cuban leader, Fidel Castro, seized US property and embraced communism.
The US might ban the import of fruit that has been sprayed with certain pesticides to protect the health of American consumers.
The US government pays farmers to not cultivate some of their land to keep crop output low and crop prices high
d. List specific examples of trading blocks such as the EU, NAFTA, and ASEAN.
EU = European Union is a regional trade org made up of 27 European nations that share a currency called the euro
NAFTA= North American Free Trade Agreement eliminates all tariffs and other trade barriers between Canada, Mexico, and the US
ASEAN= The Association of Southeast Asian Nations or ASEAN. Now includes 10 nations: Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand, Cambodia, Laos, Myanmar, and Vietnam. The ASEAN has eliminated most tariffs in this trading region.
e. Evaluate arguments for and against free trade.
Free trade Pros Free trade cons
Lowers price of all goods Less Job protection
Improves economic efficiency and consumers of all nations a wide variety of goods
Inability to Protect infant industries
introduction of new goods and better technologies
Less Safeguard for national security
SSEIN3 The student will explain how changes in exchange rates can have an impact on the purchasing power of
individuals in the United States and in other countries.
a. Define exchange rate as the price of one nation’s currency in terms of another nation’s currency.
b. Locate information on exchange rates. c. Interpret exchange rate tables. d. Explain why, when exchange rates change,
some groups benefit and others lose.
a. Define exchange rate.
the price of one nation’s currency in terms of another nation’s currency.
b. Locate information on exchange rates.Consider the case of two grocery stores:
Americo-store and Groceria Mexicana.
Americo-store is in Brownsville, Texas, while Groceria Mexicana is right across the border in Matamoros, Mexico. Suppose a bank on the U.S. side of the border—perhaps the Apple Saving and Loan bank—published the following exchange rate table.
Ex. Exchange rate table: U.S. Dollar, end of Year 1
One U.S. dollar in U.S. dollars
British pound 0.49 2.06
Danish krone 5.17 0.19
Euro 0.69 1.44
Japanese yen 114.69 0.0087
Mexican peso 10.71 0.093
Swiss franc 1.17 0.86
Thai baht 31.7 0.03
c. Interpret exchange rate tables.This shows that the exchange rate between the
U.S. dollar and the Mexican peso is 1:10.71, meaning one U.S. dollar translates to 10.71 Mexican pesos.
The second column, “in U.S. dollars,” shows how much would be needed to purchase one Mexican peso. This rate is 1:0.093, meaning 9 American cents— or 9 and 3/10 American cents, to be precise—translates to one Mexican peso.
How to interpret exchange rates?How many pesos, will you need to buy a cap in a
US store that costs $24?1 US dollar = 10.71 pesos; so 24 x 10.71= 257.04
pesosHow many Japanese yen, will you need to buy a cap
in a US store that costs $24?1 US dollar = 114.69 Japanese yen; so 24 x 114.69=
2,752.56 Japanese yen How many Euro, will you need to buy a cap in a
US store that costs $24?1 US dollar = 0.69 Euro; so 24 x 0.69= 16.56 Euro
How to interpret exchange rates? Continued:So if a US citizen wanted to purchase a cap
worth 100 pesos, how many US dollars would he/she need?1 peso= 0.093 USD; so 100 x 0.093 USD=
$9.30 USDIf a US citizen wanted to purchase a cap
worth 15 Euros, how many US dollars would he/she need?1 Euro= 1.44 USD; 15 x 1.44 USD= $21.60
USD
d. Explain why, when exchange rates change, some groups benefit and others lose.
Exchange rates move up and down to reflect the value of one country’s currency in comparison to another. If there is a great demand for U.S. products, people need more U.S. dollars to purchase these goods. This drives the demand for U.S. dollars up, causing the dollar to appreciate, or strengthen.
At the same time, the peso (or other foreign currency) has depreciated, or weakened, relative to the dollar. Suppose the following exchange rate is published one year after the previous one (see next page):
Ex. Exchange rate table: U.S. Dollar, end of Year 2
One U.S. dollar in U.S. dollars
British pound 0.52 1.92
Danish krone 4.83 0.21
Euro 0.67 1.49
Japanese yen 121.3 0.0082
Mexican peso 15.02 0.067
Swiss franc 1.06 0.94
Thai baht 36.8 0.027
Interpreting new exchange rates tableThe new exchange rate is 1:15.02, meaning
the value of an American dollar now translates to 15.02 Mexican pesos. This leads to the big question:
Which grocery store benefits from the new exchange rate?
If you answered Groceria Mexicana, you would be correct. The appreciated dollar makes U.S. goods more expensive relative to their Mexican counterparts. The dollar can purchase more, but it also raises the price of U.S. goods. Some U.S. customers might take advantage of the stronger dollar and cross the border to shop at Groceria Mexicana, since their dollars are now worth 15.02 pesos instead of 10.71. Similarly, anyone converting pesos to dollars needs to pay 15.02 pesos for one dollar (rather than 10.71). In this case, when a person is converting dollars to pesos, his or her purchasing power has increased due to the new exchange rate. When a person is converting pesos to dollars, however, the stronger dollar lowers his or her purchasing power. Overall, business at Groceria Mexicana would increase while the Americo-store’s business would decline as some customers cross the border to take advantage of their strengthened currency.
Effects of Currency Appreciation and Depreciation:When the dollar is strong, or appreciates:
Imports increase and are cheaper for consumers to buyTravel abroad is cheaper for American touristsUS exports declineThe US trade deficit increases
When the dollar is weak, or depreciates:US exports increaseTravel abroad is more expensive for American touristsUS imports decline and the price of imports increasesThe US trade balance improvesForeign investment in US business increases
Sample QuestionOver the course of one year, the Japanese
yen depreciates relative to the British pound. Who would benefit MOST from this occurrence?
A British consumers of British goodsB British consumers of Japanese goodsC Japanese consumers of Japanese goodsD Japanese consumers of British goods
Answer to Sample QuestionThe yen has depreciated, meaning that one
British pound now purchases more yen than it did previously. This would help British consumers of Japanese goods, since they now have additional purchasing power in Japanese markets due to the stronger pound. The answer is choice B.
More sample questions for international economics1. A tariff placed on foreign steel imports
representsA a barrier to tradeB a balance of payment deficitC a subsidy to domestic producersD an increase in domestic production
Answer to 11. Answer: A Standard: Issues concerning
international tradeTariffs are taxes on imports. They often have
the effectof helping domestic industries, so they might
boost domestic production. First and foremost, though, they are a barrier to trade, since the added tax makes trading with that country less profitable. The answer is choice A.
Sample question2. Those in favor of protectionist trade
policies would MOST likelyA support a reduction in tariffsB call for fewer import restrictionsC cite the need to preserve domestic industriesD believe that restrictions harm consumers
Answer to 22. Answer: C Standard: Issues concerning
international tradeTariffs can help protect domestic industries by
discouraging trade with other nations. Domestic workers who could be unemployed by lower-costing imports are now able to retain employment, and “infant” industries are protected. Therefore, choice C is the answer. However, the domestic consumers will face higher prices because of the tariff, and the tariff would also patch over the fact that their domestic business is unable to compete in a world market.
Sample Question3. In the country of Balmoria, it takes 9 hours of labor
to harvest a bushel of wheat and 6 hours of labor to build a wooden bookcase. In the nearby country of Dashmund, it takes 8 hours of labor to harvest a bushel of wheat and 7 hours to build a wooden bookcase. In terms of labor on these identical goods, which statement describes the situation accurately?
A Dashmund has an absolute advantage in both wheat and bookcases.
B Balmoria has an absolute advantage in both wheat and bookcases.
C Dashmund has a comparative advantage in wheat harvesting.
D Balmoria has a comparative advantage in wheat harvesting.
Answer to 33. Answer: C Standard: Advantages of international tradeTo answer this question, take each good and compare the
labor required to produce it in both countries. For a bushel of wheat, Dashmund requires 8 hours of labor to Balmoria’s 9, so Dashmund has the absolute advantage there. This means choice B is incorrect. For bookcases, Dashmund requires 7 hours of labor to Balmoria’s 6, so Balmoria has the absolute advantage when it comes to bookcases. This eliminates choice A as an answer, leaving only choices C and D. Since Dashmund’s 8 hours of labor for wheat harvesting is lower than Balmoria’s 9 hours, Dashmund has the comparative advantage. Choice C is the answer.
4. Use this exchange rate table to answer the question.
One U.S. dollar in U.S. dollars
British pound 0.49 2.06
Danish krone 5.17 0.19
Euro 0.69 1.44
Japanese yen 114.69 0.0087
Mexican peso 10.71 0.093
Swiss franc 1.17 0.86
Thai baht 31.7 0.03
Which monetary amount is the closestequivalent to having two U.S. dollars?A 64 Thai bahtB 57 Japanese yenC 0.7 EuroD 0.25 British pound
Answer to 44. Answer: A Standard: Exchange ratesThe first column shows how much one U.S.
dollar is worth in the various currencies.Looking down the column, you can see one U.S. dollar is worth about 32 Thai baht, meaning two dollars would be twice as much, or 64 baht.