economics unit 8

UTHS

Absolute Advantage

• A country can produce a good using fewer resources than another country.

• Usually comes from natural resources, climate, or technology.

• Example: Saudi Arabia has an advantage in oil production because oil is easier to extract there.

Comparative Advantage

• A country produces something at a lower opportunity cost than another country.

• Countries should focus on what they do best and trade for what they cannot produce efficiently.

• This is the main reason countries trade.

Opportunity Cost

• What you give up when choosing one option over another.

• Example: If Zambia focuses on copper, it gives up producing other goods like corn.

Why Nations Trade

Countries trade because:

• No country has all the resources it needs.

• Trade allows countries to specialize and use resources efficiently.

• Countries export goods they produce well and import goods they need.

Exports

Goods/services sold to other countries.

Imports

Goods/services bought from other countries.

Free Trade

Trade between countries with few or no restrictions.

Benefits of Free Trade

✅ Encourages innovation and competition
✅ Creates economic growth
✅ Increases consumer choices
✅ Promotes economic freedom
✅ Can spread democratic values
✅ Helps businesses expand and create jobs

negatives of free trade

❌ Poor working conditions in developing countries
❌ Environmental damage
❌ Some workers may lose jobs due to competition
❌ Unions may oppose trade agreements

Trade barriers

Government restrictions on international trade.

Tariff

• A tax placed on imported goods.

• Raises the price of foreign products.

Quota

Limits the amount of a product that can be imported or exported.

Subsidy

Government financial support for certain industries.

Embargo

A government ban or restriction on trade with another country.

Benefits of Trade Barriers

• Protect domestic businesses from foreign competition.

• Increase local production.

• Create domestic jobs.

• Improve national security.

• Generate government revenue through tariffs.

• Protect consumers by requiring safety standards.

Problems with Trade Barriers

• Higher prices for consumers.

• Protected businesses may become less competitive.

• Can slow economic growth.

• Developing countries may struggle to sell products internationally.

Major U.S. Import Partners

• China

• Canada

• Mexico

• Japan

• Germany

Major U.S. Exports

• Capital goods (computers, machinery, aircraft)

• Industrial supplies

• Consumer goods

• Agricultural products

Why exports matter

• Create jobs.

• Increase business growth.

• Improve productivity.

Circular Flow Model

Shows how money, goods, and services move through an economy.

Households

• Provide labor.

• Buy goods and services.

• Receive income.

Firms

• Produce goods/services.

• Pay workers.

Government

• Collects taxes.

• Provides services.

• Buys goods.

Financial Sector

• Banks and financial institutions.

• Handles saving, borrowing, and investment.

Foreign Sector

Represents imports, exports, and international trade.

Circular Flow Pattern

Production → Income → Expenditure → Production

• Businesses produce goods.

• Workers earn income.

• Consumers spend money.

• Spending supports more production.

Government in the Economy

Government:

• Collects taxes.

• Provides public services.

• Supports businesses and individuals.

Deficit

When government spends more money than it receives

Surplus

When government receives more money than it spends.

Financial Sector

• Households save money in banks.

• Banks lend money to businesses.

• Businesses use loans for investment.

• Governments can borrow money from financial markets.

NAFTA (North American Free Trade Agreement)

• Agreement between the U.S., Canada, and Mexico.

• Began in 1994.

• Reduced tariffs and increased trade.

Benefits of NAFTA

✅ Increased trade between countries
✅ Supported millions of jobs
✅ Lowered prices for consumers
✅ Increased exports

Criticism of NAFTA

❌ Some workers feared job losses
❌ Some factories moved to areas with cheaper labor

World Trade Organization (WTO)

• Global organization that creates rules for international trade.

• Helps countries negotiate trade agreements.

• Resolves trade disputes.

Benefits:

• Reduces trade barriers.

• Encourages fair trade.

• Opens markets for businesses.

Criticism:

• Some believe it favors wealthy nations.

• Concerns about workers’ rights and the environment.

Currency Exchange Rates

Countries must exchange currencies to trade.

Appreciation

• Currency becomes more valuable.

• Buys more foreign currency.

Effects:

• Imports become cheaper.

• Exports become more expensive.

Depreciation

• Currency loses value.

Effects:

• Imports become more expensive.

• Exports become cheaper.