Chapter 17
Chapter 17
Section 1
SSEIN1a Define and distinguish between absolute advantage and
comparative advantage.
SSEIN1b Explain that most trade takes place because of comparative
advantage in the production of a good or service
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This morning maybe you
had coffee or orange juice,
where did it come from?
Many of our goods and
services come from outside our country—cars,
electronics, food, clothing…
Do other countries like us so much that they
send us things we need?
◦ NO! They trade because they get something in return
that they value—trade makes us better off
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2 individuals have sack lunches at a school
picnic
Both have the same lunch:
1 sandwich, 1 cookie, 1 pickle, I bag of chips
Watch how their utility
increases after trade
without the total of quantity
of goods changing…
GAINS FROM TRADE!
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Trade creates losers
◦ If things can be done cheaper somewhere else,
production will move there unless local workers are
more productive or get paid less
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Trade makes us better
off and richer
◦ Trade with others frees
up our time and
resources to do things
at which we are better
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Trade acts generally like jobs and skills do for
individuals or groups
Countries can specialize in what they do best,
more productively or cheaper and trade those
goods or services for whatever else they need
◦ Yet trade is often limited by population, resources,
geography, education, access, etc.
Think about it!
 Productivity makes us better off
 Specialization allows us to
be more productive and
 Trade allows us to specialize
◦ We need not make
everything, just what
we do best to trade for
everything else
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Absolute Advantage – occurs when a nation
produces more a given product than another
nation
◦ South Africa: Diamonds
◦ Middle East: Oil
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Comparative Advantage –
where a country produces
a good most efficiently or
at less opportunity cost
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Exports are goods
shipped out of a
country
◦ For sale to others
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Imports are goods brought into a
country
◦ Purchased from others
One country’s export is another’s import
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The great question is a country’s relationship
between the 2
Chapter 17
Section 2
SSEIN1c Explain the difference between balance of trade and balance of payments.
SSEIN2a Define trade barriers as tariffs, quotas, embargoes, standards, and subsidies.
SSEIN2b Identify costs and benefits of trade barriers over time.
SSEIN2c List specific examples of trade barriers.
SSEIN2d List specific examples of trading blocks such as the EU, NAFTA, and ASEAN.
SSEIN2e Evaluate arguments for and against free trade.
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A country’s relationship between imports and
exports is their balance of trade
Importing more than you export amounts to a
trade deficit
Exporting more is a trade surplus
◦ So far in 2013 the US trade deficit was over $125 b,
with largest amounts
owed to China, Japan,
Mexico, Germany
◦ Yet the trade deficit has
recently fallen
 Oil imports are the
lowest for 17 years!
Trade barriers prevent foreign products from freely
entering a country
 There are 3 basic tools:
1. Quotas: a limit on the
amount of imports
2. Tariffs: a tax on imports
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Embargoes are “full blown”
restrictions prohibiting complete trade with a
country
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Health restrictions or other regulations and laws can reduce
trade as well
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Think of products from China that don’t meet our standards
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Simply put, trade barriers decrease supply
◦ Lower supply, raises prices (imported cars)
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Increased prices increase costs and thus
decrease efficiency
Trade wars: cycles of
increasing barriers
between countries
◦ Typically countries
react back and forth
to one another, raising
trade barriers
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Tariffs are taxes on imports
◦ Consumers in the importing country see higher
prices when a tariff is placed on a good
◦ Domestic producers benefit because less people will
buy imports and more will buy their product
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Quotas are limits on the number of imports
◦ Consumers in importing countries again face higher
prices and even limited supplies
◦ Domestic producers benefit because consumers will
buy more of their product, perhaps at a higher price
Use of trade barriers to protect industries from
foreign competition.
1. Save domestic jobs
2. Shield infant industries
3. Safeguard national
security
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◦ Other concerns include
effects on the
environment (pollution),
defending against dumping, human rights of workers
(sweatshops), quality, etc.
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Most economists believe that the more openly and
frequently that countries engage in trade, the better
off everyone will be
To make trade more efficient, many countries create
free trade areas, or zones, where
trade barriers are reduced between
neighboring countries
◦ Also called trade blocs
◦ Examples include: NAFTA and the EU
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Overseeing global trade is the World
Trade Organization (WTO) a
supranational governing body that
mediates trade disputes
Chapter 17
Section 3
SSEIN3a Define exchange rate as the price of one nation’s currency in terms of another
nation’s currency.
SSEIN3b Locate information on exchange rates.
SSEIN3c Interpret exchange rate tables.
SSEIN3d Explain why, when exchange rates change, some groups benefit and others lose.
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Exchange rates are the value of a foreign
nation’s currency compared to another’s
Enables you to convert prices into another
currency in another currency
www.oanda.com
To calculate:
use ratios—set exchange
rates equal to one another
and put similar currencies
over one another
◦ Solve as X for the amount
you are looking for
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When currencies are 1 for 1 (1=1) they are
equal in value
If a currency has a lower number than
another it has higher value
◦ 1USD = 0.735EUR—or, $1 gets you about 75 cents
in Euros
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When a currency has a higher number it is
less in value
1 USD = 6.26 Botswana Pula
◦ Means it takes 6.26 of their (Botswanan) currency to
equal one of ours
◦ Botswana’s currency has less value than our dollar
http://money.howstuffworks.com/exchange
-rate.htm
a currency
gains value against
another it is said to
be strengthening
 When
◦ Also called appreciating
a currency
losses value against
another it is said to be weakening
 When
◦ Also called depreciating
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Stronger dollar makes US goods more
expensive for other countries
Stronger dollar also makes foreign goods less
expensive for US
The change of money across foreign borders
occurs on the foreign exchange market
When a foreign
Weak dollar
Strong dollar
country’s
currency is
less expensive
we will buy more
of their things
Value Exports
Exports
Value
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Bretton Woods (1944)
Agreement “pegged” most
currencies to $US as it was
strongest of the time
2 main systems for
exchanging and valuing currency have emerged
◦ Fixed rate: governments attempt to keep their
currencies constant against one another
◦ Flexible rate: values determined by supply and
demand
◦ Most countries use a combination of both