International Trade and Its Benefits Ch. 26 Section 1 International Trade and Its Benefits

Why Nations Trade In 2005, about 10% of all the goods produced in the U.S. were exported, or sold to other countries. A larger amount of goods were imported, or purchased from abroad Importing goods gives Americans products they might not otherwise be able to enjoy.

Trade is one way that nations solve the problem of scarcity Nations trade for goods/services because they do not have them or are unable to make them cheaply. We buy bananas from Central America because we do not have the soil or climate to grow them; Commercial aircraft are sold to other countries because they do not have the factories or skilled workers.

Comparative Advantage Comparative Advantage is the ability of a country to produce a good at a lower opportunity cost than another country can. The U.S. could manufacture electronics but other countries can make them at a lower cost, so we buy them from other countries that make them Comparative Advantage leads nations to specialize

Specialization allows countries to use their scarce resources to produce items better than any other country When a country produces more than their people can actually use, they sell the extra amount abroad. Countries can have a comparative advantage in particular resources such as Saudi Arabia (oil deposits), or the U.S. (skilled workers, advanced technology)

International trade does accomplish two things: 1. Creates jobs 2. Creates new markets

Barriers to International Trade Foreign countries with a comparative advantage can sell their product more cheaply than companies making the product in their own country. As a consumer you would likely buy the cheaper product Workers who make the product domestically may lose their jobs when sales drop When this happens, government may step in to impose trade barriers to protect domestic workers and industry

Two most common trade barriers are tariffs and quotas A tariff is a tax on an imported good; 20% tariff means an additional 20% to the final price of a foreign good. The goal is to make the price of an imported good higher than the price of the same good produced domestically As a result, consumers would be more likely to buy the domestic product.

However, when people want the foreign product so badly that higher prices have little effect on demand, countries have to set quotas. Quotas set limits on the amount of foreign goods allowed into a country (imported) During the 1980’s, Japanese cars were so popular that American autoworker jobs were threatened. President Ronald Reagan placed quotas on Japanese-made automobiles

Trade Agreements In general, trade barriers cost more than the benefits gained Most countries try to achieve free trade with other nations Most countries try to convince other countries to not pass laws that block or limit trade A trend the world has been seeing lately is the formation of free trade zones among key trading partners

The European Union (EU) is an organization of independent European nations, which formed a huge market Goods, services, and even workers flow freely among these nations because the EU has no trade barriers Since 2002, these countries have been linked even closer due to the adoption of a common currency, the euro.

In the 1990’s, the U.S., Canada, and Mexico signed their own free trade agreement: North American Free Trade Agreement (NAFTA). Elimination of all trade barriers among these countries. Since its implementation, trade among the three countries has grown twice as fast as the separate economies themselves have grown

Opponents of NAFTA claimed that American workers would lose their jobs because U.S. plants would move to Mexico (cheaper labor, less regulation, environmental and workers’ rights laws ignored) Supporters of NAFTA argue that increased trade would stimulate growth and put more low cost products on the market.

Financing Trade Different nations use different currencies as a medium of exchange: U.S. = dollar Mexico = peso Japan = yen To buy something in Mexico, an American would have to exchange your dollars for pesos by using the exchange rate, or the price of one nation’s currency in terms of another country’s currency

Most nation’s use an adjustable exchange rate system which allows supply and demand to set the price of various currencies; currency prices change each day Exchange rates have an important effect on a nation’s balance of trade. Balance of Trade is the difference between the value of a nations exports and its imports.

If a nation’s currency depreciates, or becomes weak, the nation will likely export more goods because its products will become cheaper for other nations to buy. If a nation’s currency appreciates, or becomes stronger, exports will decline

Positive vs. Negative Balance of Trade When a countries value of exports exceeds the value of imports, the country has a positive balance of trade or trade surplus - A country is selling more than it is actually buying When a countries value of imports exceeds the value of exports, the country has a negative balance of trade or trade deficit - A country is buying more than it is actually selling