Economics 53105 www'msu'edumilewsk6

1
Economics 5/31/05www.msu.edu/milewsk6

• OBJECTIVE Begin examination of international
  trade.
• I. Journal 50 pt. A
• -Read Profiles in Economics p.471
• -Answer question1 p.471
• II. Journal 50 pt. B
• -notes on imports and exports
• III. Homework due Friday 6/3/05
• 1.) Read Chapter 17 section 1 p.466-470
• -Answer questions (3-6) p.470
• 2.) Read Chapter 17 section 2 p.472-479
• -Answer questions (3-6) p.479

2
What is international trade?

• When good and services are bought and sold
  between nations.
• Import something made in another nation and
  sold here.
• Export something made here and sold in another
  nation.

3
Why do nations trade?

• Not all nations can produce what they need at
  home.
• For example, Japan is an industrial nation, yet
  they have no domestic sources of oil. They
  import it.
• The United States uses more energy than we
  produce, so we have to import oil. We produce
  more food than we can consume. We export crops
  like wheat and corn, but we also import food like
  bananas and coffee because the climate in the
  United States isnt right for those products.

4
Advantage

• Absolute advantage when one country can produce
  more of a product than another country
• Comparative advantage the ability of a nation
  to produce a product at a relatively lower
  opportunity cost than another nation.

5
Economics 6/1/05www.msu.edu/milewsk6

• OBJECTIVE Examine why nations choose to trade.
• I. Journal 51 pt. A
• -Read The Art of Communication p.476
• -Answer questions (1-3) p.476
• II. Journal 51 pt. B
• -notes on absolute comparative advantage
• III. Homework due Friday 6/3/05
• 1.) Read Chapter 17 section 1 p.466-470
• -Answer questions (3-6) p.470
• 2.) Read Chapter 17 section 2 p.472-479
• -Answer questions (3-6) p.479

6
Why nations choose to trade

• Opportunity cost cost of the next best
  alternative use of money, time, or resources when
  one choice is made over another.
• Specialization assignment of tasks so that each
  worker performs fewer tasks more frequently
• i.e. Detroit specializes in cars, Florida in
  oranges, Texas in cattle
• Exports what a nation specializes in.
• Individuals engage in trade because they believe
  what they gain is equivalent in value to what
  they give up.

7
Alpha Beta

• Country A
• PPF
• -40 lbs of coffee
• -8 lbs of cashew nuts
• Opportunity cost
• -5 coffee for 1 cashew

• Country B
• PPF-
• -6 lbs coffee
• -6 lbs cashew nuts
• Opportunity cost
• -1 coffee for 1 cashew

8
Gains from Trade
9
Before After Trade

• Before Trade
• Alpha produced
• -20 lbs coffee
• -4 lbs cashews
• Beta produced
• -5 lbs coffee
• -1 lbs cashews
• Totals
• -25 lbs coffee
• -5 lbs cashews

• After Trade
• Alpha specializes in coffee
• -40 lbs coffee
• -0 lbs cashews
• Beta specials in cashews
• -0 lbs coffee
• -6 lbs cashews
• Totals
• -40 lbs coffee
• -6 lbs cashews

10
Gains from Trade
11
Economics 6/2/05www.msu.edu/milewsk6

• OBJECTIVE Examine the balance of payments in
  international trade.
• I. Journal 52 pt. A
• -Read Business Week Newsclip p.480
• -Answer questions (1-2) p.480
• II. Journal 52 pt. B
• -notes on balance of payments
• III. Journal 52 pt. C
• -questions on Commanding Heights Day1(film)
• IV. Homework due tomorrow
• 1.) Read Chapter 17 section 1 p.466-470
• -Answer questions (3-6) p.470
• 2.) Read Chapter 17 section 2 p.472-479
• -Answer questions (3-6) p.479

12
Balance of Payments

• The sum of all transactions which take place
  between a nations residents and the residents of
  all foreign nations.
• The Formula for BOP
• Current Account
• Capital Account
• Official Reserves Account
• Balance of Payments
• If BOP is positive, trade surplus exists
• If BOP is negative, trade deficit exists

13
Current Account

• The section of BOP that records a nations exports
  and imports of goods and services, its net
  investment income, and its net transfers.
• Imports are recorded as a negative
• Exports are recorded as a positive

14
Capital Account

• The section of BOP that records a nations
  purchase of foreign assets abroad and the
  purchase of domestic assets by foreign nations.
• Capital inflows are recorded as a positive
• Capital outflows are recorded as a negative

15
Capital Account in a nut shell

• When we buy foreign companies, its an outflow of
  capital.
• When someone outside of the U.S. buys an American
  company its an inflow of capital.

16
Official Reserves

• Foreign currencies owned by the central bank of a
  nation.
• The foreign currency a central bank holds effects
  the value of that nations currency.
• For example If the Central Bank of Canada held
  3 Billion U.S. Dollars on reserve, the value of
  the Canadian Dollar would be effected when the
  U.S. Dollar changes in value

17
The Commanding Heights episode 1

• -Answer the following questions while viewing
• 1.) What was the old order how did it fall?
• 2.) What is Communism on the Heights?
• 3.) What was the capitalist collapse?
• 4.) What occurred during the global depression?

18
Flexible Exchange Rates
19
Economics 6/3/05www.msu.edu/milewsk6

• OBJECTIVE Examine the rise and fall of planned
  economies.
• I. Journal 53 pt. A
• -Read Profiles in Economics p.500
• -Answer question 1 p.500
• II. Journal 53 pt. B
• -notes on Karl Marx
• III. Journal 53 pt. C
• -questions on Commanding Heights Day2(film)

20
Karl Marx

• In the mid 1800s German born economic historian
  Karl Marx put together a theory called Communism.
• His theory was based on the idea that the story
  of history is a struggle between the haves and
  the have nots.
• The haves exploited the have nots, and captured
  the surplus.
• He predicted that the have nots would over throw
  the haves in a violent and bloody revolution
  during the final days of capitalism.

21
Marxs Epics

• Primitive Communism
• -no surplus
• Slavery
• -haves slave owners/have nots slaves
• Surplus
• Feudalism
• -haves lords/ have nots peasants
• Surplus
• Capitalism
• -haves bourgeoisie/ have nots proletariat
• Surplus
• Communism
• -everyone shares the surplus

22
Questions on the Commanding Heights Day 2

• 1.)How did Hyeck feel about central planning?
• 2.)Why did Churchill lose re-election after the
  war?
• 3.)How did the Soviet Union emerge from the war?
• 4.)What was the form of currency in post WWII
  Germany under the wage and price controls?
• 5.)What happened in Germany after the allied
  price controls were lifted?
• 6.)What became the Gospel in the developing world?