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 advantage
 US Opportunity cost of producing sugar= ______
?= blank is 100/80 or 10/8 ; ? is fertilizer
 Nicaragua 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 specialize
 United 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
 Quotas
 A limit on the number of any product entering the country
 Embargos
 an embargo is the prohibition of commerce and trade with a
certain country.
 Standards
 something set up and established by authority as a rule for the
measure of quantity, weight, extent, value, or quality
 Subsidies
 a 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 cars
 In 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 Inability to Protect infant
and consumers of all nations a industries
wide variety of goods
introduction of new goods and Less Safeguard for national
security
better technologies
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 pesos
 How 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 USD
 If 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
table
 The 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 buy
 Travel abroad is cheaper for American tourists
 US exports decline
 The US trade deficit increases
 When the dollar is weak, or depreciates:
 US exports increase
 Travel abroad is more expensive for American tourists
 US imports decline and the price of imports increases
 The US trade balance improves
 Foreign investment in US business increases
Sample Question
 Over 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 goods
B British consumers of Japanese goods
C Japanese consumers of Japanese goods
D Japanese consumers of British goods
Answer to Sample Question
 The 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 economics
1. A tariff placed on foreign steel imports represents
A a barrier to trade
B a balance of payment deficit
C a subsidy to domestic producers
D an increase in domestic production
Answer to 1
1. Answer: A Standard: Issues concerning international
trade
Tariffs are taxes on imports. They often have the effect
of 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 question
2. Those in favor of protectionist trade policies
would MOST likely
A support a reduction in tariffs
B call for fewer import restrictions
C cite the need to preserve domestic industries
D believe that restrictions harm consumers
Answer to 2
2. Answer: C Standard: Issues concerning international
trade
Tariffs 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 Question
3. 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 3
3. Answer: C Standard: Advantages of international trade
To 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 closest
equivalent to having two U.S. dollars?
A 64 Thai baht
B 57 Japanese yen
C 0.7 Euro
D 0.25 British pound
Answer to 4
4. Answer: A Standard: Exchange rates
The 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.