1. International Economics

The Basis for International Trade

• Comparative Advantage: The foundation for international trade. Nations specialize in producing and exporting goods for which they have the lowest opportunity cost and import goods for which other nations have a comparative advantage. This leads to increased total world output and allows all trading partners to consume beyond their domestic production possibilities.
• World Equilibrium Price: Determined by the global supply and demand for a good.

Trade Restrictions and Exchange Rates

• Trade Restrictions: Governments may restrict trade to protect domestic jobs or industries.
  • Tariffs: A tax placed on imported goods. This increases the price for consumers, reduces consumption, generates revenue for the government, and protects domestic producers.
  • Quotas: A legal limit on the quantity of a good that can be imported. This raises the price and protects domestic producers, but revenue goes to foreign producers who can sell at the higher price.
• Exchange Rates: The price of one nation’s currency in terms of another.
  • Flexible Exchange Rate System: Rates are determined by the forces of supply and demand in the foreign exchange market.
  • Appreciation vs. Depreciation: A currency appreciates when its value increases relative to another currency (demand for it rises or supply falls). It depreciates when its value decreases.
  • Determinants of Exchange Rates: Changes in tastes, relative income changes, relative price level changes, and relative interest rates.