specialization The gains from specialization and trade are based on comparative advantage, which reflects the relative opportunity cost. When countries specialize in producing goods and services for which they have comparative advantages, total production in the global economy rises. Trade advocates argue that this increase in the size of the economic pie can be used to make all trading countries better off through international trade. Economists also use the principle of comparative advantage to advocate free trade among countries as a better policy. Trade is not based on absolute advantages countries have but the relative (comparative) advantage. 1. Does free trade contribute to the improvement of economic well-being? 2. Who gains and who loses from free trade among countries, and how do the gains compare to the losses? Explain using examples. 3. Do you think the USA export and import of goods and services are based on the principle of a comparative advantage of trade? Explain. A balance of trade (trade balance) is the difference between the monetary values of exports and imports of a countrys economic output over a given period of time. Trade balance can be positive (favorable) when the value of exports is greater than the value of imports. The positive trade balance is also called trade surplus. On the other hand, if the value of imports is greater than the value of exports, the trade balance indicates trade deficit. Trade balance affects the Gross Domestic Product (GDP) of a country since net export is a component of the GDP. It also affects the exchange rate of a countrys currency. 1. How does trade stimulate long term economic growth? Explain. 2. Which part of international trade creates more jobs? Is it export or import? Why? 3. Is it trade deficit or trade surplus that contributes more to economic growth? Why? 4. Why do countries impose trade restrictions on goods and services they import from other countries? What are the pros and cons of trade protectionism? DQ#3 Quantity supplied and demanded for products change as the prices of the products change. Similarly, supply and demand for foreign currency result in changing prices of a currency. The price of a currency changes as demand for foreign currencies changes. This price of foreign currency, in terms of U.S. currency, is known as the foreign exchange rate. Exchange rate simply indicates how many USA dollars it will cost us to purchase a unit of foreign currency. This floating foreign exchange rate changes daily with the international supply and demand for currency. 1. What are the impacts of currency devaluation and revaluation on international trade? 2. What are the factors that increase and decrease the demand for a foreign currency? 3. What is the difference between pegged currency (fixed exchange rate) and floating exchanged? What are their pros and cons of the two forms of the exchange rates? 4. What is currency war? How does it affect trade between countries?