Page 201 - TrumpsEconEra_Flat

Trump’s Economic Era

countries. Each nation has an absolute advantage in
something. For example, Brazil has an absolute
advantage in coffee due to its climate and geography.
The United States has an absolute advantage in wheat
due to its excellent farmland and climate.

A country should produce goods whereby it has a
comparative advantage. It has a comparative advantage
if it can produce something with lower opportunity
costs than other nations. A country may have an
absolute advantage in a product, but it would be a
mistake to produce that product unless it also had a
comparative advantage.

EXCHANGE RATES
When President Nixon closed the gold window in
1971, the world embraced a freely flexible international
exchange rate system. Out of desperation, governments
gave up trying to control the system and allowed their
currencies to float. In other words, nations favored the
free market to determine currency values. A dirty float
occurs when a country influences the value of its
currency.

Some countries peg their currency to a major
currency, usually the U.S. dollar, or to a group of
currencies. For example, China has a managed float
system whereby it pegs the yuan (renminbi) to a basket
of major currencies that include the U.S. dollar. A
cornerstone of China’s economic policy is maintaining
the yuan exchange rate to benefit its exports. China’s
central bank has used its foreign reserves to support the
yuan.

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