Economics for Leaders Voluntary trade… creates wealth Any choice creates an… opportunity cost...

Economics for Leaders

Voluntary trade… creates wealth

Any choice creates an…opportunity cost

Both individuals and firms compare marginal benefit to…marginal cost to maximize in their decisions

Supply & demand determine…prices in a market economy

An increase in productivity lowers…the cost of production and output prices

An EFL Review



Lesson 10:International Markets


International Trade

Is expanding international trade a good thing or a bad thing?

It Depends!

Opportunity Cost


Opening Markets Creates Wealth


Voluntary trade creates wealth through:

Exchange of goods with differing values/opportunity costsSpecialization and increased productivity


What do we specialize in?

Lowest opportunity cost production

Comparative Advantage


Is your lowest opportunity cost production the same as

Do what you do best?


A+

C-

???

Lowest Opportunity Cost Production?


People Trade

Nations set trade polices

Who Trades?


Trade PolicyBarriers (limits) to Trade

Tariffs (tax on goods)Quotas (limit on goods)


NAFTA

Evidence:


WTO (formerly GATT)


1998 1999 2000 2001 2002 2003 2004 2005 2006

2007 2008

Canada 330 365 410 381 371 394 445 499 533 566 600

Mexico 173 197 247 233 232 236 267 290 332 347 367

China 85 95 116 122 147 181 231 285 343 384 408

Japan 180 188 211 184 173 170 184 193 207 206 204

Germany

76 82 88 89 89 97 109 119 130 143 152

UK 74 78 85 82 74 77 82 90 98 107 172

Korea 40 54 65 51 51 49 56 57 78 82 83

France 42 45 50 50 47 46 53 56 61 68 73

Top U.S. Trade PartnersTotal Trade: Exports Plus Imports

Rank by Exports( US $--billions)


Composition of U.S. Goods Exports 2008

Capital Goods36%

Automotive Vehicles etc.9%

Consumer Goods13%

Other Goods4%

Industrial Supplies30%

Foods, Feeds, & Beverages8%

http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf


Composition of U.S. Goods Imports 2008

Foods, Feeds, & Beverages

4%

Industrial Supplies37%

Other Goods3%

Consumer Goods23%

Automotive Vehicles, etc.11%

Capital Goods22%



U.S. Services Imports 2008

Other Transportation18%

Royalties and License Fees7%

Passenger Fares8%

Travel20%

Other Private Services37%

Transfers Direct defense Expenditures

9%

Misc U.S. Gov Services

1%



U.S. Service Exports 2008

Royalties and License7%

Travel24%

Other Private Services51%

Transfers under miltiary sales contracts

5%

Other Transportation13%

Misc. Gov services0%



Trade Balance

ImportsExports


U. S. Goods Trade Balance With Other Nations, 2008($US - billions)

Country Exports Imports Trade Balance

Canada 261 339 -78

Mexico 151 215 -64

China 69 337 -268

Japan 65 139 -74

Germany 55 97 -42

EU 271 367 -96

Taiwan 25 36 -11

Korea 35 48 -13

France 29 44 -15http://www.census.gov/foreign-trade/balance/


Balance of Payments

Current

Account Goods &

Services

Capital account

Financial flows


Pierre Sells (Exports) Bread . . . Then What?


What Can Pierre Do with $$US?

Take his Cheri to his favorite bistro at the Eiffel Tower?

Mais NON!

Buy U.S goods & services

OR

U.S. assets ?

Oui! Oui!


Indicators of Hourly Labor Costs For Production Workersin Manufacturing, Selected Countries, 2004

Labor Costs Labor Costs (in $ U.S.) (% of U.S. Labor Cost)

United States 22.87 100Canada 21.42 94France 23.89 104Germany 32.53 142Italy 20.48 90Japan 21.90 96United Kingdom 24.71 108Hong Kong 5.51 24Korea 11.52 50Mexico 2.50 11Singapore 7.44 33Sri Lanka 0.51 2


The “Big Ideas” from Lesson 10:

1. International trade is similar to domestic trade – people choose to trade.

2. Trade allows people to specialize in their lowest opportunity cost production.

3. Comparative advantage encourages specialization and trade, both domestically and internationally.

4. Specialization, based on comparative advantage, increases productivity and economic growth.


The “Big Ideas” from Lesson 10:

5. Exchange rates reflect the supply and demand for nations’ currencies. Changes in currency values affect the flow of trade.

6. Trade in goods, services, capital, and financial assets always balances.

Economics for Leaders Voluntary trade… creates wealth Any choice creates an… opportunity cost...

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