Embedded Files
Main Point - International trade is the way countries, even poor countries, can use their comparative advantage to become wealthier.
Main Point - While international trade benefits countries, that does not mean it benefits everyone in a country, which is the cause of protectionist trade policies.
Part # 1 - International Trade
Reading - Basics of International Trade - click here
Practice Problem - Trade Based on Comparative Advantage - The table to the right describes the amount of bananas and grapes that can be produced each day in Mexico and Brazil. (Answers)
1. Based on this information, what is the opportunity cost for each country?
2. Based on the information in the table, how should trade flow between these countries?
Due to changes in the global environment, Mexico and Brazil's ability to produce bananas and grapes changes. The table to the right describes the amount of bananas and grapes that can be produced each day in Mexico and Brazil.
3. Based on this information, what is the new opportunity cost for each country?
4. Based on the information, how does trade now flow between Mexico and Brazil?
Part # 2 - Exchange Rates, Flow of Trade & Crises
Reading - Exchange Rates, Flow of Trade & Crises - click here
Practice Problem - Exchange Rates & Trade - The chart to the right shows the current price of both sombreros and bowlers in England and Mexico in each country's local currency.
A. Without knowing the exchange rate between British pounds and Mexican pesos, is it possible to know how trade should flow between these assuming each country should specialize in the producing and exporting one type of hat? If so, which country should produce and export which type of hat? (hint - think of comparative advantage)
B. How would trade flow between England and Mexico if the exchange rate was 1 ₤ to 2 $?
C. What would happen to the flow of trade if the exchange rate shifted to 1 ₤ to 10 $?
D. What effect would a shift from an exchange rate of 1 ₤: 2 $ to 1 ₤: 10 $ have on Mexican GDP?
E. What effect would a shift from an exchange rate of 1 ₤: 2 $ to 1 ₤: 10 $ have British investors who already held investments in Mexico?
F. How could a person in Mexico make money from the change in the exchange rate from 1 ₤ to 2 $ to 1 ₤ to 10 $?
G. How could a person in England make money from a change in the exchange rate from 1 ₤ to 2 $ to 1 ₤ to 10 $?
Supplementary Materials
Video - How a Steel Box Changed the World - click here
Reading - Parable of World Trade - click here
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