International Trade Paul Callahan lives in California. On a typical day, he eats bananas from Guatemala in his cereal. He gets into a car that was made in Japan and drives to school. On his way, he stops for gas from the Middle East. His father works in a computer manufacturing company. These computers are used in schools and businesses around the world. Although Paul may ot think about it, he buys imports. Imports - goods and services bought from other countries. His father makes exports. Exports - goods that will be sold to other countries. International Trade - trade between different countries.

Trade & Specialization International trade has been going on since ancient times. As people began to travel, they found that one country might have fertile land, another might have acres of forest, while another might have an abundance of iron and copper. Countries and cultures specialized in different goods and services, depending on their resources and costs. Trade between countries enabled people to share in these different specialties. Countries become known for certain products. E.g. Japan = Electronics; US = Wheat; Africa = Coffee. Countries specialize in making products in which they have a comparative advantage. Comparative Advantage - a country can produce a product at a lower cost than other countries.

Check Your Understanding What are exports? Give and example of a good exported by the United States. What are imports? Give and example of a good imported by the United States. What is meant by a comparative advantage?

Benefits and Problems of International Trade There are some benefits International Trade. It allows countries to specialize and to use the resources in the best way possible. Another benefit is that people get to consume more and better products, at lower prices. One problem with international trade is that some countries may become dependent on the goods of another country. Example: The US imports the majority of its oil from the Middle East. The US Is dependent on the Middle East for oil. Another problem occurs when countries trade with one another. Each country is importing and exporting goods. The value of the imports and exports may not be equal. When the dollar value of exports is greater than the dollar value of imports, the nation is said to have a trade surplus. When the dollar value of imports is greater than the dollar value of exports, the nation is said to have a trade deficit. Over the years, the US has built up a large trade deficit with many of its trading partners. Japan has exported over 60 billion more dollars in goods than the US has exported to Japan. Many people believe that a large trade deficit is a problem for the US. It can cause a reduction in American jobs and lessen our ability to compete with foreign producers.

Check Your Understanding What are two benefits of international trade? Give one example of one country becoming dependent on another country for a product. What is a trade deficit? Why is it a problem?

Limiting Trade: Free Trade vs. Protectionism Many of the clothes that you buy are made in other countries. You buy these clothes because you liked them and the price was fair. When Americans buy imported goods, Americans companies lose business, which means American workers lose jobs. However, some people believe that the competition with imports forces American companies to produce better quality goods at a fair price. People who believe this are said to favor free trade. With free trade, countries have no or very few restrictions on imports and exports. On the other hand, people who believe that trade should be limited favor protectionism. One way to limit imports is to place a tariff on imports. A tariff is a tax on imports.

Limiting Trade: Free Trade vs. Protectionism (Cont’d.) There are two types of tariffs: 1. Revenue Tariff - meant to bring in government revenue. 2. Protective Tariff - raises the price of an imported good inorder to protective a certain industry. Another way to limit the amount of imports is to issue an import quota. An import quota restricts the amount of a certain product that can be imported into a country. Sometimes a nation will call for an embargo. An embargo means that the country will prohibit all trade with a certain country. The North American Free Trade agreement (NAFTA) - instituted in 1994, it allowed for all goods imported to ore exported from Mexico to be free of tariffs.

Check Your Understanding What is a tariff? Explain an embargo. What is NAFTA?