UNIT 7 

Absolute Advantage

•The producer that can produce the most output OR requires the least amount of inputs (resources)

•Ex: Papa John has an absolute advantage in pizzas because he can produce 100 and Ronald can only make 20.

Comparative Advantage

•The producer with the lowest opportunity cost.

•Ex: Ronald has a comparative advantage in burgers because he has a lowest PER UNIT opportunity cost.

Countries should trade if they have a relatively lower opportunity cost.

Balance of trade includes only goods and service but balance of payments considers ALL international transactions.

•The balance of payments is a broader measure of international trade.

Details:

The BOP summary is within a given year

Prepared in the domestic country’s currency

Ex. If accounting the BOP of the U.S. it would be in the Dollar.

The balance of payments is made up of two accounts. The  current account and the capital account.

The Current Account is made up of three parts:

1.Trades in Goods and Services (Net Exports)- Difference between a nation’s exports of goods and services and its imports of goods and services

Ex: Toys imported from China, US cars exported to Mexico 

2.Investment Income- income from the factors of productions including payments made to foreign investors.

Ex: Money earned by Japanese car producers in the US

3.Net Transfers- Money flows from the private or public sectors

Ex: donations, aids and grants, official assistance

The Capital Account measures the purchase and sale of financial assets abroad.

Purchases of things that stay in the foreign country.

Examples: 

–US company buys a hotel in Russia

–A Korean company sells a factory in Ohio

–Dividends earned by Chinese citizens in the New York Stock Exchange (NYSE)

–Australian company owns local Mall

The official reserve account, a subdivision of the capital account, is the foreign currency and securities held by the government, usually by its central bank, and is used to balance the payments from year to year.