International Economics

Absolute vs Comparative Advantage

• Absolute: a country’s ability to produce more of a given product than another country

• Comparative: a country’s ability to produce a product more efficiently than another country (lower opportunity cost) [Example: Say you have John who makes $300 an hour and he hires a maid who works for $25 an hour. It takes John 1 hour to clean his house compared to his maid who takes 8 hours to clean his house. John has an absolute advantage over his maid but the maid has a comparative advantage. This is because if John cleans his house by himself, he loses $300. If he hires the maid, he makes a profit of $100.]

Another example…

Coconuts FishA 10 10

B 4 8

The 10 represents the coconuts of A if that’s all they do. If they spend half their time getting coconuts, they’d have 5 coconuts and 5 fish. The same is true of B. If they specialize and trade, they both benefit.

Balance of payments• The difference between the amount paid and

the amount received in international trade.• Protectionists vs. Free-traders: trade barriers

to protect US industries (like steel) vs. those who oppose trade barriers.

• Defense: produce own weapons at higher cost & lower efficiency or import weapons?

• Protecting jobs: should we, or should companies compete?

Trade Barriers• Tariffs: tax on imports (hurts international trade—

almost stopped in 1930s!) • Most Favored Nation clause: country that gets

same tariff reduction as another country (China)• NAFTA: North American Trade Agreement (1993):

reduced tariffs between Canada, the US & Mexico• Very controversial—predicted huge job losses• Some jobs lost to Mexico, but not many• DRAMATIC growth in trade between the 3

More barriers to trade…• Embargo: restriction on export or import of a

commodity in trade (oil)• Quota: limit on the amount of a good that can be

allowed into a country (Japanese cars in the US in 1970s—drove prices of all cars up)

• Subsidy: government payments to encourage an economic activity (milk, corn, wheat, soybean farmers)

• Standards: ways to keep imported products out of a country: Health inspections on Argentina’s beef, license to import, irradiated beef

Cooperation in trade

• European Union [EU]: formed in 1993

• No barriers regulating the flow of capital, workers, or goods & services between member countries

• Common passports—can travel anywhere to trade, invest, vacation, work, etc.

• 2002: euro introduced—common currency replaced individual currencies

Other economic communities…

• ASEAN: Association for Southeast Asian Nations (1967): Indonesia, Malaysia, Singapore, Philippines, Thailand

• Works to promote peace, stability, growth & liberal free trade policies

• OPEC: Organization of Petroleum Exporting Countries (mostly in Middle East): formed in 1960 to restrict production to raise prices

Exchange rates• Foreign exchange rate: the price of one country’s

currency in terms of another country’s currency (flexible/floating)

• Demand for foreign products pushes dollar’s value down, make imports more expensive

• Dollar’s value reflects health of US economy• Trade deficit: value of imports exceeds value of

exports—reduces dollar’s value, rising unemployment

• Trade surplus: value of exports exceeds value of imports—raises dollar’s value, falling unemployment

Exchange rate tableCode Country Units/USD USD/UnitARP Argentina (Peso) 2.9450 0.3396AUD Australia (Dollar) 1.5205 0.6577 BSD Bahamas (Dollar) 1.0000 1.0000BRL Brazil (Real) 2.9149 0.3431CAD Canada (Dollar) 1.3659 0.7321

USD: US Dollar

Units/USD: dollar exchange rate in other currency ($1.00=2.94 pesos)

USD/Units: other currency’s exchange rate to the dollar (1 peso=34 cents)