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9
Unit 10: Global Economy
Objectives
EPF.9: The student will demonstrate knowledge of the global economy by
a) explaining that when parties trade voluntarily, all
benefit.
b) distinguishing between absolute advantage and
comparative advantage.
c) distinguishing between trade deficit and trade
surplus.
d) explaining exchange rates, & the impact of a strong
dollar and weak dollar on economic decisions.
e) describing the costs and benefits of trade barriers.
f) describing the effects of international trade
agreements and the World Trade Organization.
g) explaining growing economic interdependence.
Voluntary Exchange
willingly
- Trading goods and services _________ with other people because both parties expect to ___________ from the trade.
benefit
Voluntary Exchange
win - win
- Voluntary exchanges are cooperative activities. There is no loser. It’s a ____________ situation.
Why does it work?
For example, an employer will hire a student at a wage rate of $8 per hour only if the employer expects to receive labor services from the student that are worth at least that much.
And the student will voluntarily work for $8 per hour only if the student values the $8 more than the best alternative use of his or her time.
Why does it work?
Yay money!
Yay a worker!
Benefits of Trade
- Gains from trade – The increased ___________ resulting from trade
output
broader
- Voluntary exchange among people or organizations in different countries gives people a _______ range of choices (more variety) in buying goods and services and often __________ prices.
Benefits of Trade
lowers
chocolate
- In the US for example, without trade we would have to give up: coffee, ________, many spices, and imported oil.
Absolute Advantage
The ability to produce more units of a good or service than some other producer, using the same quantity of _________.
resources
Absolute Advantage
Absolute Advantage & Comparative Advantage video (6:24)
https://goo.gl/RVwcS5
Comparative Advantage
opportunity
The ability to produce a good or service at a lower ___________ cost than some other producer
Comparative Advantage
second-best
Recall: Opportunity cost - The ___________ alternative (or value of that alternative) that must be given up when scarce resources are used for one purpose instead of another.
Examples
- The goods or services that an individual, region, or nation can produce at lowest opportunity cost depend on many factors (which may vary over time), including: available resources, ___________, difference in relative prices, and political & economic institutions.
technology
Examples
televisions
- Few shoes, textiles, or ___________ are produced in the U.S. today.
- Why do you think the US no longer has the comparative advantage on these items?
Other countries can produce them at lower cost (cheap labor).
Specialization
- A situation in which an individual, business, or country focuses its resources on producing a few goods or services and expects to _______ for other goods and services it wants.
trade
- Specialization (and division of labor) increases _____________.
productivity
Specialization
- Specialization requires trade and therefore increases _______________.
interdependence
greater
- Total world production (output) is ___________ when nations specialize in the production of those products that they can produce most efficiently (what they have a comparative advantage in).
Trade Lingo
Foreign
Imports - _________ goods and services that are purchased from sellers in other nations.
OUT
- Imports send money _____ of the country.
- What do you buy that is imported?
Trade Lingo
Domestic
Exports - ___________ goods and services that are sold to buyers in other nations.
IN
- Exports bring foreign money _______ to the country
What products do you think Virginia exports?
Which countries do we export to?
VA Export data
https://goo.gl/RdbcrF
Deficit v. Surplus
minus (-)
Net exports = value of exports __________ value of imports.
- Net exports can be positive (trade surplus) or negative (trade deficit).
Deficit v. Surplus
imports
- Trade deficit - when one country buys more foreign goods (_________) than it sells to other countries (__________)
exports
sells
- Trade surplus - when one country _____ more goods to other countries (exports) than it _____ (imports)
buys
Transaction Costs
- Costs associated with buying or selling goods and services that are not included in the ___________ prices of those goods and services.
money
Transaction Costs
- These costs could be financial, loss of extra ______ , or inconvenience.
time
Examples of transaction costs
Examples:
- Spending time gathering information on prices and product quality
- Searching for sellers & bargaining costs.
Examples of transaction costs
broker
- Paying a _______ to set up an exchange/trade (i.e. commission of 0.5%).
currency
- Exchanging foreign _________ when trading goods between countries.
- When transaction costs decrease, trade _________.
increases
Exchange Rates
Exchange rates - The price of one nation's ______ in terms of another nation's currency.
currency
- Like other prices, exchange rates are determined by the forces of _______________.
supply and demand
Exchange Rates
- If more people want to buy American goods or if people think the US dollar is the safest currency, the value of the dollar should _______ and vice versa.
rise
- When the exchange rate between two currencies changes, the relative prices of the goods and services traded among countries using those currencies change; as a result, some groups gain and others lose.
Strong currency
more
- When a currency grows stronger, it purchases ____units of another nation’s currency than it has before.
Strong currency
Example:
- When the dollar grows stronger against the euro, it means people holding dollars get more euros per dollar so they can buy more European goods than before for the same dollar price.
What does a strong $ mean?
imports
- Stronger currencies = increased ________ & decreased __________.
exports
A stronger dollar:
Helps
What does a strong $ mean?
- ______ Americans traveling abroad or buying imports because it makes foreign hotels and goods less expensive.
Hurts
- ______Americans selling exports to shoppers in other countries, because it makes the United States goods more expensive.
Weak currency
fewer
When a currency grows weaker, it purchases _____ units of another nation’s currency than it has before.
imports
Weaker currencies =→ decreased _______ & increased _________.
exports
Weak currency
What does a weaker $ mean?
A weaker dollar:
Helps
- ______ Americans producing and selling exports to shoppers in other countries, because the United States goods are then cheaper to foreigners.
What does a weaker $ mean?
Hurts
- ______ Americans who travel abroad or buy imports because it makes foreign hotels and goods more expensive.
Trade Barriers
Restrictions
- ____________ that prevent free trade among nations.
Trade barriers include:
imported
- Tariff - A tax on an _______ good or service.
limit
Trade Barriers
- Quota — the _____ on the quantity of a product that may be imported or exported, established by government laws or regulations.
forbidding
- Embargo — policy _________ trade in a certain good (e.g., ivory) or with a certain country
- Other barriers: Licensing requirements & bureaucratic “red tape”
About Trade Barriers
- Policies supporting trade barriers are often adopted through the ________ process.
political
About Trade Barriers
reduce
- Trade barriers _____ trade →
- which reduces competition for domestic producers
- which reduces choices for consumers.
Why do countries restrict trade? video (8:34)
https://goo.gl/KqWUBL
Pros of Trade Barriers
(Good things about trade barriers)
competition
- They help domestic producers by reducing the_______________ for the good.
Pros
- Can protect key industries (like steel) or infant (new) industries, companies, or workers in those industries.
revenue
- Brings in government ________
Cons of trade barriers
(Bad things about trade barriers)
prices
- They hurt consumers by raising ______ of the good (because of less competition).
- They hurt foreign producers of the good who wish to export to the United States.
Cons
- Barriers to international trade usually impose more ______ than benefits
costs
- Jobs opportunities and profits in importing firms decrease.
Trade Agreements
treaty
A formal ______ or structure that is designed to improve the flow of trade between participating nations.
rules
Trade Agreements
- Trade agreements establish _____about trade that all parties agree to.
- These agreements have have tended to ______ trade barriers.
reduce
NAFTA
North American Free Trade Agreement
Mexico
NAFTA
A treaty signed by Canada, _______ and the United States in the 1990s which established a free-trade zone with the member nations with the intention of eliminating trade barriers, promoting fair competition, and increasing investment opportunities.
WTO
World Trade Organization (WTO)
freer
- A trade agreement among over 100 nations that seeks _______ trade among nations, specifies the level of tariffs among the signatories, and attempts to resolve trade disputes.
WTO
EU
Eurpoean Union
- a regional trade organization formed in 1992 to promote trade among countries in Europe by reducing trade barriers and adopting a common _____________, the euro.
currency
EU
- The EU has eliminated quotas and tariffs among its members and created other common economic policies.
Globalization
trade
- the increased flow of ______, people, investment, technology, culture and ideas among countries.
What is globalization? video (8:10)
https://goo.gl/SkJhcg
Globalization
- Globalization has brought change--both costs and benefits. (It has created some new jobs and destroyed others.)
Good and Bad
GOOD: Globalization creates competition → --> _______ prices good for consumers.
lowers
Good and Bad
BAD: US producers may be forced out of business because they cannot produce at those lower prices
Greater Connectivity
Greater connectivity through the Internet and otherwise allows businesses to hire skilled people in other countries to do work at lower wages. (Good for _______________, Bad for ___________)
U.S. workers
foreign workers
- This lowers costs of production for businesses (Good for _______________)
Greater Connectivity
U.S. companies
- This can lead to lower prices for consumers
(Good for __________).
consumers
- However, this creates more competition for U.S. jobs. (U.S. students entering the workforce will be competing with those foreign workers as well as other U.S. workers.) (Bad for ___________)
U.S. workers
Interdependence
With greater integration of nations, what happens in one affects others.
decisions
Interdependence
Interdependence - A situation in which _________ made by one person affect decisions made by other people, or events in one part of the world or sector of the economy affect other parts of the world or other sectors of the economy.
international
- As a result of growing ____________ interdependence, economic conditions and policies in one nation increasingly affect economic conditions and policies in other nations.
Examples:
imports
- When the U.S. economy slows, fewer ________ are purchased from other countries and their economies slow as well.
- If a country defaults on its debts, other countries will be affected because foreign banks and individuals will have made _________ to that country.
Examples:
loans
less
- When other economies slow, they may buy _______ from the United States, and this can slow the United States economy.
More Examples:
more
- When other economies expand, they may buy ________ from the United States, stimulating the United States economy.
decreasing
- When foreign goods are cheaper or better, United States consumers may buy them, __________ the demand for United States goods and services and the jobs of those who produce them.
More Examples:
- When natural or human resources are cheaper in other countries, United States businesses use foreign resources when they can which negatively affects the United States labor market.
Outsourcing
countries
Outsourcing - occurs when a firm in one country hires people in other _________ to do work.
Outsourcing
Offshoring - occurs when a firm in one country tries to reduce costs by locating _________ facilities in other countries.
production