Unit 6

Module 81

A multinational corporation (MNC) operates in more than one country. As MNCs grow, they can become very large and powerful. While MNCs provide some benefits, there are also concerns about the power they hold and the consequences, often unintended, of their existence.

Module 73

An exchange rate is the price of one country's currency compared to another country's currency. Exchange rates are volatile, meaning they can change very frequently and sometimes very dramatically. When one currency becomes more valuable compared to another, it has appreciated (or strengthened) against that particular currency. When a currency becomes less valuable compared to another, it has depreciated (or weakened). A strong dollar has a high value compared to many, but not all, foreign currencies. A strong dollar often makes it cheaper to travel abroad or purchase foreign goods. On the other hand, a weak dollar has a low value compared to many, but not all, foreign currencies. A weak dollar usually makes it more expensive to travel abroad and purchase foreign goods because the dollar is likely worth less than the local currency. The stronger the dollar, however, the more expensive American goods and services are to foreign purchasers, causing demand to decrease. A weak dollar will make American goods and services cheaper, though, causing demand to increase.

Module 72

An individual, firm, or country has a comparative advantage in the production of a good or service if it possesses a lower opportunity cost than its trading partner. A production possibilities curve shows the maximum combinations for two goods or services that can be produced in an economy when all resources are used efficiently. It is a simplified representation of the real world. Nevertheless, it illustrates the idea of using resources efficiently and the gains from trade through specialization. A closed economy can achieve a consumption level within its production possibilities. An open economy can consume at levels outside its production possibilities. This means that through trade, a country can consume a bundle of goods greater than the amount of goods it could produce and consume on its own. Specialization occurs when an individual, firm, or country produces only the goods or services in which it has a comparative advantage. Comparative advantage is the motivating theory behind international trade. When countries specialize in the activity in which they have a comparative advantage, world production and consumption will increase. This results from each country's efficient use of its existing resources. According to the theory of comparative advantage and trade, countries will export those goods for which they have a low opportunity cost and import those goods for which they have a high opportunity cost.

Module 74

Exchange rates reflect whether the U.S. dollar is strong or weak. A strong dollar has a high value compared to a group of foreign currencies. A weak dollar has a low value compared to a similar group. Consumers who enjoy traveling abroad or importing foreign goods benefit from a strong dollar. At the same time, a strong dollar can negatively impact companies in the United States that export their goods abroad. A weaker dollar makes it more expensive for consumers to travel abroad and import foreign goods but makes it easier for U.S. companies to export goods to other countries. It is important to remember that changes in the dollar's strength benefit some while impacting others negatively.

Module 79

Globalization refers to the close relationships and communications among national governments, corporations, and individuals on a worldwide scale. Voluntary free trade offers many benefits for producers and consumers. More suppliers generate more product options and competition, so consumers benefit. As a result of globalization, international trade has become more important to most countries' economies. Some goods can be produced only in certain regions. This makes some countries dependent on other countries for these goods. The health of a country's economy also depends in part on the economic strengths or weaknesses of its trading partners.

Module 80

Improvements in transportation technologies have aided the process of globalization. Between maritime transportation and air transportation, large corporations can ship massive quantities of goods across long distances by sea or land. They can send smaller and more valuable quantities much more quickly by air. Improvements in communication technologies have allowed individuals and companies to communicate with others around the world for far less money and effort than it would take to send employees to do the same work. This has also increased economic activity.

Module 77

In this module, you learned about different types of trade barriers, including tariffs, quotas, non-tariff barriers, and embargos. With the aid of graphs, you learned that tariffs and quotas lead to higher prices for U.S. consumers, lower the quantity of imports, and create higher demand for domestic substitutes. While higher demand for domestic goods can be beneficial to a degree, overall, tariffs and quotas actually lead to inefficient domestic production. Trade barriers actually work against efficient allocation of resources, which support the best possible levels of economic growth and employment. As a result, most economists agree that trade barriers should not be imposed, with the exception of special circumstances, such as protecting national defense industries and new or "infant" industries.

Module 78

The existence of free trade agreements, such as the North American Free Trade Agreement (NAFTA) and the European Union (EU), along with the World Trade Organization (WTO), demonstrate the importance of the world's economic interdependence. When nations work together, they can improve total output through production efficiencies, lower prices for goods and services, and provide a greater variety of goods and services. Nations may also work together to foster other major initiatives, such as joint protection of the environment. For instance, curbing certain imports may help protect the world's rainforests for present and future generations.

Module 75

When the exchange rate changes, it has important effects on importers and exporters. There are time lags between exchange rate changes and changes in quantity exported. These time lags are often the results of contracts between exporters and importers and delayed changes in production. Another factor that impacts importers and exporters is price elasticity of products. Businesses that export inelastic products are affected differently than those that sell elastic products. The overall volatility of the exchange rate and the stability of trade policies also affect how much businesses are willing to export.

Module 76

You have learned how fixed exchange rate systems work and are maintained. The module also compared the modern floating exchange rate system to the fixed-rate Bretton Woods system. Countries maintain a fixed exchange rate by buying and selling their own currencies in the foreign exchange market, using foreign currencies. Today, most countries have floating exchange rate systems. People in favor of fixed exchange rates argue that it promotes trade by reducing uncertainty. An argument in favor of floating exchange rates is that it allows central banks to use monetary policy to stabilize the economy.