Unit 10: International Trade and Exchange Rates
Why two countries both come out ahead by specializing and trading, and what actually moves a currency's price.
6 topics · 19 questions
Each topic is a path, not a menu: work down it in order and every question builds on the one above. Click any of them to watch the answer draw itself.
Absolute Advantage Versus Comparative Advantage
- How it worksHow does comparing opportunity costs instead of raw output reveal a country's comparative advantage?
- Worked exampleFind which country has the comparative advantage in cloth when Country A gives up 2 tons of wheat per bolt of cloth and Country B gives up 4.
- Common mistakeWhy isn't having the comparative advantage the same thing as being better at making a good in absolute terms?
Your turn1 of 2
Country A gives up 2 tons of wheat to produce one bolt of cloth. Country B gives up 6 tons of wheat to produce one bolt of cloth. By how many tons of wheat is Country A's opportunity cost of cloth lower than Country B's?Gains From Trade and Specialization
- How it worksHow does each country specializing in its comparative advantage and then trading expand what both countries can consume?
- Worked exampleFind a trading ratio between wheat and cloth that leaves both countries better off when one gives up 2 wheat per cloth and the other gives up 5.
- Common mistakeWhy isn't trade a fixed pie where one country's gain must be another country's loss?
Your turn1 of 2
One country gives up 2 tons of wheat per bolt of cloth, and the other gives up 6. What trading ratio, in tons of wheat per bolt of cloth, exactly splits the gains from trade evenly between both countries?Tariffs and Quotas
- How it worksHow does a tariff raise the domestic price of an imported good and shrink the quantity traded?
- Worked exampleFind the new quantity of imports after a 20 percent tariff is placed on a good with a world price of 10 dollars and domestic demand Qd = 100 - 2P.
- Common mistakeWhy doesn't a tariff help an economy overall even though it does help the domestic industry it protects?
Your turn1 of 2
A country's demand for a good is Qd = 108 - 2P. The world price is 15 dollars, and the country imports all it consumes at that price. After a 16 percent tariff is imposed, what is the new quantity imported?The Trade Balance: Deficits and Surpluses
- How it worksHow does subtracting the value of imports from exports produce the trade balance?
- Common mistakeWhy doesn't running a trade deficit mean a country is losing at trade?
- Going furtherWhat happens to a country's trade balance when a recession abroad cuts foreign demand for its exports?
Your turn1 of 2
A country's exports are 379 billion dollars and its imports are 360 billion dollars. What is the trade balance?How Exchange Rates Are Determined
- How it worksHow does the supply and demand for a currency in the foreign exchange market set its exchange rate?
- Worked exampleFind how many euros 500 dollars buys when one euro costs 1.25 dollars.
- Common mistakeWhy isn't a currency's value set by government decree the way it might have been under a fixed exchange rate?
Your turn1 of 2
One euro costs 1.287 dollars. How many euros does 1333 dollars buy?What Shifts an Exchange Rate
- How it worksHow do interest rates, inflation, and demand for a country's exports each shift a currency's exchange rate?
- Worked exampleFind whether the dollar strengthens or weakens against the euro when demand for American exports rises sharply.
- Common mistakeWhy doesn't a stronger currency benefit every part of a country's economy equally?
- Ties togetherHow does a stronger dollar connect to a shrinking trade surplus or a growing trade deficit?
Your turn1 of 2
Why does a currency tend to get stronger the moment its country's interest rates rise above other countries'?