1BASIC CONCEPTS AND TERMINOLOGIES
1. Absolute Advantage
2. Comparative advantage
3. Opportunity cost
4. Terms of trade
5. Balance of trade vs. balance of payments
6. Trade Deficit and Trade Surplus
2If one country can make a product faster, cheaper, or in larger quantities than another country using the same resources
Absolute Advantage
3is when a country can produce a good at a lower opportunity cost than another country.
Comparative advantage
4is what you give up when you choose one thing instead of another.
Opportunity Cost
5how much a country can import compared to how much it exports.
Terms of trade
62 types of Terms of trade
1. Good terms of trade
2. Bad terms of trade
7If a country sells coffee to another country and buys machines:
If the price of coffee goes up, the country can buy more machines
Good terms of trade
8If a country sells coffee to another country and buys machines:
If the price of machines goes up, the country must sell more coffee to buy the same machines.
Bad terms of trade
9If export prices increase more than import prices, the country can buy more imports with the same amount of exports.
Favorable
10If import prices increase more than export prices, the country must export more to buy the same amount of imports.
Unfavorable
11is the difference between a country’s total exports and total imports in a given period of time
Balance of trade
12It focuses only on exports and imports of products, not services or money.
Balance of trade (BOT)
13is a complete record of all international transactions of a country.
Balance of Payments (BOP)
14(Imports > Exports)
Trade Deficit
15If a country buys more goods from other countries than it sells, several things may happen
1. Loss of money flowing out of the country
2. Increase in national debt
3. Weak local industries
4. Job losses
5. Currency value may fall
16some short-term benefits of trade deficit:
1. Money flows into the country
2. Increase in employment
3. Stronger currency
17Exports > Imports
Trade Surplus
18too much surplus can also cause problems:
1. Other countries may accuse it of unfair trade practices.
2. The country may depend too heavily on foreign markets.
3. It may create tension in international trade relationships.