The Hatfields and the McCoys

• The Hatfields and the McCoys have been feuding families for years and years. The Hatfields are better off than the McCoys in just about every way. For example, it only takes the Hatfields 8 hours to grow one bushel of corn but it takes the McCoys 12 hours. The Hatfields can also make one yard of cloth in 9 hours but it takes the McCoys 10 hours.

• Are you following this so far?• Good

Hatfield Clan

• Now one day Old Ma Hatfield, after hours and hours of cognitating (thinking) said “Paw, I think we would be better off if we stopped fighting the McCoys and started doing business with them. I think we should stop making cloth and just make corn. Then we can swap some corn for their cloth.”

• Are you still with me?• Good Ma Hatfield

• Paw spat and said, “Darn it woman. I don’t want to be dependent on them varmits. Besides, we are better corn growers and cloth makers than they are.”

• The End• Not really, here’s the rest

of the story.• Who’s right, Ma or Paw? Paw Hatfield

Before Ma’s Idea

• 1 bushel 1 yd of cloth• Hatfields 8 hrs 9 hrs• McCoys 12hrs 10 hrs

• Ma was saying each family should specialize in what they do best.

• After specialization• Hatfields in 16 hours can get 2 bushels of corn• McCoys in 20 hours can get 2 yards of cloth• Now they trade!!• Hatfields can get 1 bushel and 1 yard in 16 hrs (was 17)• McCoys can get 1 bushel and 1 yard in 20hrs (was 22)

Two Important Concepts (look at your outline)

• Absolute advantage is when one country can out produce another country

• (who had the absolute advantage in corn production?)

• In cloth production?• Comparative advantage is when a country

can produce a product at a lower opportunity cost than another country.

Ways To Restrict Trade

1. A tariff is a tax on an import.

2. The purpose of a protective tariff is to make sure domestic jobs are secure.

3. A revenue tariff provides additional income for the government.

4. A quota limits the amount of a good or service that is allowed in the country.

5. A trade embargo is when a country ceases to trade with another country.

Balance of Trade

• The balance of trade is a comparison of a nation’s exports and their imports.

1. A trade deficit (negative balance of trade) is when the value of a country’s exports is less than the value of its imports.

2. A trade surplus is when the value of a country’s exports is more than the value of its imports.

Foreign Exchange Markets

1. The price of a nation’s currency stated in the currencies of other nations takes place in foreign exchange markets and is called a foreign exchange rate.

2. If the dollar becomes weaker to the Euro, it will take more dollars to buy each Euro. Thus, American exports to Europe will become cheaper and European exports to America will become more expensive.

3. In the above scenario, we would say the dollar has depreciated.

4. Dollar appreciation occurs when one would need more foreign currency units to buy each dollar. This would make American exports more expensive and foreign imports cheaper.

How many foreign currencies do you know?

• Argentina • Australia• Brazil • Chile • China • Denmark • India • Israel • Pakistan • Iran • South Africa • Saudi Arabia

• Peso• Dollar• Real • Peso• Yuan (RMB)• Krone • Rupee• Shekel • Rupee • Rial • Rand • Riyal

How To Convert Currencies

• Price of the Product in Dollars = price of product in foreign currency x price of foreign currency in dollars

• Ex. Dollar price of peso is .10$• 100 peso shirt• 100 x .10 = $10• Exchange rates are reciprocals of each

other. If .10 USD = 1 MXP then 1USD = 10 MXP

Ruble price of a dollar?

• 31.4 rubles = 1 dollar• How much would a 10,000 ruble coat cost in

U.S. dollars?• Covert rubles per dollar into dollars per ruble• Dollars per ruble = 1/rubles per dollar• So, 1/31.4 = .0318 dollars per 1 ruble• 10,000 rubles x .0318 = $318 • Or, divide 10,000 rubles by 31.4

• Dollar appreciation—an increase in the value of a currency

• Dollar depreciation—a decrease in the value of a currency

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