Economics for Leaders International Markets EFL Lesson 10.

Economics for Leaders

International Markets

EFL Lesson 10


People

Trade !

Countries don’t trade –


Voluntary Trade Creates Wealth -

Local trade

Regional trade

National trade

International trade

always

always

always

always

always


Domestic or International purchases: Fundamentally the same decision

Do the anticipated benefits outweigh the costs?


Opening Markets Is Creating Wealth


Specialization & division of labor creates wealth – but the hard question is: Who should produce what?

Because of the Law of Comparative Advantage, both parties can gain from lower costs and greater output, through specialization and exchange.

What is your lowest opportunity cost

alternative?


Zeke and ZacWho Should:

•Drive the truck ?

•Load the garbage?

What if – Zac doesn’t

have a drivers license?

Comparative advantage depends on different opportunity costs – even when one trading partner can do both things better

Ben Franklin1 econ lesson 2 history lessons

Adam Smith12 econ lessons3 history lessons

Who should prepare the lessons for each course?

Comparative advantage depends on differing opportunity costs

Ben Franklin1 econ lesson costs

2 history lessons1 history lesson

costs 1/2 econ lesson

Adam Smith1 econ lesson

costs 1/4 history lesson

1 history lesson costs 4 econ lessonsBen should

teach history

Adam should teach

economics

Domestic & International Trade BOTH thrive on specialization according to comparative advantage

Goods are Produced at least cost when people specialize according to the principle of Comparative Advantage

Lesson - Don’t try to do everything; it;s Not efficient

Trade between people in different countries creates wealth – even if people in one country are better at doing everything.


What stands in the way of trade?

Transaction costs are real!

BUT they can be reduced by:Transportation technologyStorage technologyCommunication technologyMonetary unionCutting the red tape

Economics for LeadersMaps adapted from Charles O. Paullin, Atlas of Historical Geography, Carnegie Foundation, 1932

Travel Time from

New York City:1800


Travel Time from

New York City: 1830


Travel Time from New York City: 1857


Travel Time from New York City: 1930 (by Rail)

Trade policies affect economic growth

Policies that restrict international trade inhibit the ability of markets to create wealth.Tariffs, quotas, regulations on content and

production processes hurt both buyers and sellers

All participating countries benefit from international trade agreements and associations that reduce barriers to trade


NAFTA

Evidence:


WTO (formerly GATT)


European Monetary Union


What else restricts trade?


What is seen and what is not seen

What is seen:“Sun is an unfair competition”Protect the candlemakers!

It will help agricultureIt will encourage shippingWhaling will flourish

What is not seen:Light was for free, now it

costsResources are used upOverall, the result is

impoverishment

Exchange rates: the “prices” of currencies in international currency markets

(Government manipulation of currency markets can adversely affect the flow of trade.)

Changes in international exchange rates affect the relative purchasing power of a nation’s currency

Strong Dollar

Weak (or falling) dollar

Which is

better?


Trade Balance

ImportsExports


Pierre Sells (Exports) Bread . . . Then What?


What Can Pierre Do with $$US?

Take his Cheri to his favorite bistro at the Eiffel Tower?

Mais NON!

Buy U.S goods & services

OR

U.S. assets ?

Oui! Oui!


Balance of Payments

Current

Account Goods &

Services

Capital account

Financial flows

The “Big Ideas” from Lesson 10:

1. International trade is similar to domestic trade – people choose to trade and voluntary trade creates wealth.

2. Trade allows people to specialize in their lowest opportunity cost production.

3. Comparative advantage encourages specialization and trade, both domestically and internationally.

4. Specialization, based on comparative advantage, increases productivity and economic growth.

The “Big Ideas” from Lesson 10:

5. Exchange rates reflect the supply and demand for nations’ currencies. Changes in currency values affect the flow of trade.

6. Trade in goods, services, capital, and financial assets always balances.

Economics for Leaders International Markets EFL Lesson 10.

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Transcript of Economics for Leaders International Markets EFL Lesson 10.