Trading Goods and Services
SSEIN1a, b, c
What is specialization?
• Doing one job or producing one product/service
• Why? • Increases the total
amount of things a society can produce and leads to an efficient use of resources.
What is voluntary exchange?
• Buying goods and services from others that we cannot produce ourselves
How do we decide what to produce?
• Depends on its resources.
• Example: land, water, metals, and climate.
• Also, educated workers and capital goods (computer/machine)
What is trade?
• Nations sell products to other nations.• Exports: goods and services sold to other nations• Imports: goods and services bought from other nations• Goal: increase the amount and variety of goods
available to all nations.
Absolute Advantage• Absolute advantage:
One nation can produce more output with the same resources as the other.
• The U.S. can produce more sugar and fertilizer than Nicaragua.
Comparative Advantage
• Comparative Advantage: a nations ability to make something at a lower opportunity cost than another nation can.
• Give up• Make• 100= 1.25• U.S. to make 1 sugar= Opportunity Cost 80• 1 Fertilizer= Opportunity Cost 80=.8• 100• Nicaragua to make 1 sugar= Opportunity Cost 50= .7• 70• 1 Fertilizer= Opportunity Cost 70= 1.4• 50• You make what benefits you.
Practice Problem
TV Computer
U.S. 100 20
Japan 80 15
Total 180 35
• Which nation has an absolute advantage?• U.S.• Which nation has a comparative advantage in
making computers?• Which nation has a comparative advantage in
making TVs?
Balance of Trade
• balance of trade: the relationship between a nation’s imports and exports
• trade surplus: a nation exporting more than it imports Example: The US exports $5 million and imports $3 Million• trade deficit: the result of a country importing more
than it exportsExample: Mexico exports $4 million and imports $7 million• credit: any transaction that brings money into a country• debit: any transaction that takes money out of a nation• balance of payments: the difference between the total
amount of money coming into a nation and the total amount