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Why do people trade?

More access to trade means more choices,cheaper prices and a higher standard ofliving.

Video clip: trading up

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2 types of problems:

◦Output problems - look at total items being produced

◦Input problems - look at resources that go into making a product

Input or Output Question?Number caught per day

Deer Antelope

Henry 4 6

John 24 12

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Input or Output Question?

Months to produce one

Car Plane

Canada 8 months 10 months

Japan 15 months 12 months

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1. Absolute advantage

Output problem: person/country can make more of the item than other country

Input problem: person/country can make item using less resources (time, land etc) than other country

Absolute Advantage?Number caught per day

Deer Antelope

Henry 4 6

John 24 12

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Absolute Advantage?

Months to produce one

Car Plane

Canada 8 months 10 months

Japan 15 months 12 months

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◦a country is able to produce a good at a lower opportunity cost than another country

** Comparative advantage Is gained through specialization To figure comparative advantage….Must calculate the PER UNIT

opportunity cost

* This will be different for INPUT and OUTPUT problems Output problem = COST/GAIN

Input Problem = GAIN/COST

The country that can produce the item at a lower opportunity costshould specialize in that item

To figure opportunity cost - Cost/Gain The following chart illustrates the number of CDs and pounds of beef that Japan and Canada can produce in a day

Japan Canada 1 CD = ____ B 1 CD = _____ B 1 B = ______ CD 1 B = ______CD

Japan should produce __________ Canada should produce _________

CD ‘s Beef

Japan 4 2

Canada 4 6

Japan, 1 CD = 1/2 B, 1 B = 2 CD

Canada 1CD = 3/2 B, 1 B = 2/3 CD

Japan should produce CDs

Canada should produce Beef

The following chart illustrates the number of hours it takes the U.S. and France to make one loaf of bred and one bushel of corn

U.S. 1 B = _________ C, 1C = __________ B

France 1 B = ________C, 1 C = __________B

The U.S. should produce ________________France should produce __________________

Bread Corn

U.S. 4 hours 2 hours

France 4 hours 6 hours

In the U.S. 1 B = 2 C, 1C = 1/2 B In France 1 B = 2/3 C 1 C = 3/2 B

The U.S. should produce Corn France should produce Bread

Practice: Who has the Comparative Advantage?

Number caught per day

Deer Antelope

Henry 4 6

John 24 12

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Henry 1 D = _____ A 1A = ______D

John 1D = ______A 1A = ______D

Comparative Advantage?Number caught per day

Deer Antelope

Henry 4 6

John 24 12

17

Henry 1D = 3/2 A 1 A = 2/3 D

John 1 D = ½ A 1A = 2 D

Comparative Advantage?Number caught per day

Deer Antelope

Henry 4 6

John 24 12

18

Henry 1D = 3/2 A 1 A = 2/3 D

John 1 D = ½ A 1A = 2 D

Practice: Who has the Comparative Advantage?

Months to produce one

Car Plane

Canada 8 months 10 months

Japan 15 months 12 moths

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Canada 1C = _____ P 1 P = _____C

Japan 1C = ______P 1P = _____C

Comparative Advantage?

Months to produce one

Car Plane

Canada 8 10

Japan 15 12

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Canada 1 C = 4/5 P 1 P = 5/4 C

Japan 1 C = 5/4 P 1P = 4/5 C

Comparative Advantage?

Months to produce one

Car Plane

Canada 8 10

Japan 15 12

21

Canada 1 C = 4/5 P 1 P = 5/4 C

Japan 1 C = 5/4 P 1P = 4/5 C

1. The following table gives the number of hours it takes in the United States and Scotland, using the same amount of resource, to produce a ton of oats or one bagpipe.

a. Output or input problem??

b. Who has the absolute advantage in oats? Bagpipes?

c. Who has the comparative advantage in Oats? Bagpipes?

Oats Bagpipes

U.S. 2 hours 3 hours

Scotland 5 hours 4 hours

Input problem; looks at TIME making Absolute advantage:

Oats = U.S. (takes less time to make) Bagpipes = U.S. (takes less time to make) Comparative Advantage: U.S. Scotland 1 O = 2/3 BP 1 O = 5/4 BP

1 BP = 3/2 O 1BP = 4/5 O

U.S = OATS Scotland = BAGPIPES

The table below gives the total number of pens and paper that country X and country Y can produce. Country X Country Y A B C D E F A B C D E F

Pens 0 4 8 12 16 20 Pens 0 3 6 9 12 15Paper 40 32 24 16 8 0 paper 60 48 36 24 12 0

PENS 4 PAPER 8 PENS 3 PAPER 12 a. Output or input problem?

b. Who has the absolute advantage in producing pens? paper ?

c. Who has the comparative advantage in producing pens? paper?

Output problem Absolute advantage:

Pens = X Paper = Y

Comparative Advantage: Country X Country Y 1 Pen = 2 paper 1 pen =4

paper 1 paper = 1/2 pen 1 paper = ¼ pen

Free Trade = trade without restrictions

Protectionism = trade with restrictions (ex. Tariffs and quotas)

Supply decreases, causing prices to increase

G’s revenue from tariff?

Q demanded at Pw + t?

Q supplied at Pw + t ?

Topic 3: Foreign Exchange(aka. FOREX)

US sells cars to MexicoMexico buys tractors from CanadaCanada sells syrup to the U.S.Japan buys Fireworks from Mexico

For all these transactions, there are different national currencies - each country must be paid in their own currency

The buyer (importer) must exchange their currency for that of the sellers (exporter).

Looks at relationship between exports and imports

Trade surplus = Exports > imports ◦ Causes AD to increase

Trade Deficit = Imports > exports ◦ Causes AD to decrease

Foreign Exchange Market: FOREX

Examines the price of one currency interms of the other currency.

FOREX simplified

Imagine a shack in the middle of the pacific ocean - on the shelves in the stock room is every country’s currency

“Fred” is the operator of this shack

If a person wants (demands) one currency, they have to pay for it using their currency

People will bring their Pesos to Fred who will go into the stock room and place the pesos on the shelf. The SUPPLY of pesos in the “shack” just increased

Fred then goes and gets the dollars off the shelf to give to the customer. The SUPPLY of dollars in the stock room just decreased

More Canadians are traveling to the United States:

Demand for dollars increases Demand for Canadian dollars decrease

Supply of Dollars decreases Supply of Canadian dollars increases

Things that impact the Supply and demand of a

currency

Example: More Japanese teenagers want American clothing

In order for Japanese teenagers to buy American clothing, they will need to convert Japanese currency to American currency

2. Changes in Relative Price Level

If prices are lower in one country, more people will want to buy products from this country

Example: Prices in the United States rise relative to prices in

Germany.

People in the U.S. will want to buy the cheaper German made products and will need German currency to do so

If interest rates are higher in one country relative to those in another country, countries will want to put their $ into the banks with the higher interest rates

Example: Interest rates in the U.S. rise relative to those in Canada. Canadians will want to save their money in U.S. banks but they will need to convert their currency to dollars to do so

If income goes up in a country, they will buy more foreign products; if income goes down in a country, they will buy less foreign products

Example: Income for Americans has decreased; Americans will buy less products from all foreign countries

Expansionary = causes value of currency to go down

Contractionary = causes the value of currency to go up

Foreign Exchange

Q

Demand

Supply Equilibrium:

$1 = £1

Quantity of ____________

Price of ____

Numbers 1 and 2 on practice WS

Appreciation: currency is more valuable than the other country’s currency

Depreciation: currency is less valuable than the other country’s currency

What happens to the Demand for the dollar? What happens to the demand for the euro? What happens to the supply of the euro? What happens to the supply of the dollar?

Draw a graph that shows the Change in the demand for Dollars.

The U.S. dollar _____________________________

As a result of the changing value of the dollar, Exports from the U.S. will _______ Imports from the U.S. will _________ U.S. will have a trade ____________

The demand for yen will______ The demand for the dollar will ______

The supply of the yen will _______ The supply of the dollar will _______

Show on a graph the change in the supply of dollars.

The dollar will _____________ in comparison to the yen. As a result of the change in value,

U.S. exports will _______ U.S. imports will ____

U.S will have a trade _______.

Numbers 3 and 4 practice WS

Balance of Payments (BOP)

Database that records monetary transactions between countries

The balance of payments is made up of two accounts. 1. current account 2. financial account.

* Balance of trade : relationship between exports and imports only

Current Account

Includes:

1. Merchandise and service Trade

2. Income receipts – income received from stocks and dividends

3. Transfers of money (includes foreign aid)

Surplus = more $ comes into country Than is leaving

Deficit = more $ leaving country than what is coming in

Financial Account Includes: Transactions between foreign countries of physical

and financial assets FINANCIAL ACCOUNT = THINK ASSETS!!!!

Physical Asset: EX: a U.S. company buys a hotel in Russia

Financial Asset : purchase of other country’s stocks, bonds, treasury bills

EX: A German student buys stock in an American company

Credit vs debit – think about who OWNS the assets

Capital account surplus: if a nation's investments abroad are greater than foreign investments at home. $ is flowing into a country (capital inflow)

Capital account deficit: foreign investments at home are greater than investments abroad; $ flowing out of the (capital outflow)

Example: U.S is buying up more assets in Mexico, Brazil,

and Hungry, than Japanese, Germany, and Canada investors are buying up of U. S. assets, then we have a surplus. A deficit is the reverse.

Transaction Current or FINANCIAL account

Debit or credit for U.S.

Harley Davidson USA purchases $25 million in production machinery from a Japanese company

CURRECT DEBIT

Bank of America pays $5 million in interest to French depositors

CURRENT DEBIT

A London record store spends $10,000 on CD’s by an American singing group

CURRENT CREDIT

Senor Ramos from Spain buys a shopping center in Florida

FINANCIAL DEBIT