Unit 6

International trade allows nations to specialize in production increasing productivity

• nations trade because of uneven distribution of resources
• Absolute advantage- country produce more goods than another
• Comparative Advantage- country can produce goods at lower opportunity cost
• Free trade- government does not interfere
• Trade protection- policies that limit imports
• tariffs- tax on imports
• raises domestic price above international price which leads to fall in trade and consumption and a rise in domestic production
• domestic producers gains because they get assistance to compete internationally
• government gains by collecting higher tax revenue
• consumers lose because prices are higher
• foreign producers lose because there will be less consumption of their goods
• import quotas- limit how much imports can come into the country
• effects similar to tariff, but no revenue to government
• subsidies- government provides assistance to lower production cost
• causes supply to increase which decreases price, so consumers benefit
• Arguments for trade protection
• national security- we have to protect the steel industry because we need steel to make weapons
• job creation- factories create tons of jobs
• infant industry argument- we want to foster new industries here because they might grow to be extremely prosperous

Financial Account- buying/selling of real assets and financial assets

• real asset- house, land, building, something that can't be moved
• financial asset- stocks/bonds

Credit- when money comes into countries like through exports

Debit- when money goes out like through imports

Foreign Exchange Graph

•  this shows the relationship between two countries' currencies
• x axis= quantity of the country's currency focused on
• y axis= the exchange rate
• depreciation=when the exchange rate of the currency goes down
• appreciation= when exchange rate of currency goes up
• ***increase demand of one country's currency will increase supply of another country's currency and vise versa. REMEMBER demand of one country's currency will shift in the same direction as supply of the other country's currency!!!
• For example, if European goods become substantially cheaper than American goods, American import of European goods will increase. In order to purchase European goods, we need Euros, so the demand of Euros increase. But, we need dollars to exchange for Euros. So, the more Euros we demand, the more dollars we need to supply.
• Remember that MONEY CHASES HIGH INTEREST RATES because foreign investors can get more in return when interest rates (rate of return in this case) is higher. 
• So, if a country has higher interest rates relatively to the rest of the world, then there will more financial investment in the country which means higher demand for its currency causing the currency to appreciate or increase in value.