GLOBAL ECONOMICS
Bell Work: Why do
countries trade with
each other?
Why Countries Trade
• Based on Opportunity Cost
• Best use of resources, more efficient to produce one over
the other
• Both people and nations benefit from trade
Absolute Advantage
• When a country can produce more of a good with the
same resources that another country can
Shoes
Shirts
United States
100
75
Canada
80
100
Total
180
175
Shoes
Shirts
United States
200
0
Canada
0
200
Total
200
200
Comparative Advantage
• When a country has an absolute advantage with 2
products but still benefits from trade. Based on lower
opportunity cost.
Shoes
Shirts
Unites States
100
80
Canada
80
75
Total
180
155
Shoes
Shirts
United States
200 (190)
0 (8)
Canada
0
150
Total
200(190)
150 (158)
By Adjusting the US production of Shoes/Shirts there is an increase in
production of both
Advantages of Trade
1. Allows nations to specialize in producing a limited
number of goods
2. Allows for nations to consume large variety of goods
3. Dramatic change in standard of living
International trade & taxes
• Imports – Products made in another country that are sold
here
• Exports – Products made in the US that are sold outside
of this country
• Tariff – Tax on imported goods
• Import Quota – limits the quantity that can be purchased
from another country
Exchange Rates – the value of one
currency to another
• What would happen if the US Dollar
increases in value more than other
countries?
• Exports to other countries would
decrease, because they could not
afford our products
Trade Deficit/Surplus
• Trade Deficit – importing more goods and services than
the country exports
• Lower labor costs, high demand for products,
• Trade Surplus – Exporting more than importing
Protectionism – not allowing too many imports in, by setting
up tariffs and import quotas. (usually command economies)
-allows countries to produce their own goods
-could lead to higher prices/lower quality