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Section 1: Absolute and Comparative Advantage Chapter Introduction Section 1: Absolute and Comparative Advantage Section 2: Barriers to International Trade Section 3: Foreign Exchange and Trade Deficits Visual Summary Chapter Menu

You and a classmate are planning to open a lawn-service business You and a classmate are planning to open a lawn-service business. You will each contribute $200 toward the purchase of a mower, gas can, trimmer, and other materials for the business. Now it is time to get organized. Work with a classmate and make a list of the different “jobs” associated with your lawn-service business. What criteria will you use to divide up these jobs? Why? Read Chapter 16 to find out how nations make decisions about what to produce and trade with other nations. Chapter Intro 1

Trade and specialization lead to economic growth for individuals, regions, and nations. Chapter Intro 2

Chapter Intro-End

Section Preview In this section, you will learn that comparative advantage is the basis for international trade. Section 1-Preview

Content Vocabulary Academic Vocabulary exports imports absolute advantage production possibilities frontier comparative advantage opportunity cost Academic Vocabulary volume enabled Section 1-Key Terms

What products do you think the state of Texas primarily trades? A. Citrus fruits B. Oil and cattle C. Cattle and wine D. Computers A B C D Section 1

Why Nations Trade Trade allows nations to specialize in some products and then trade them for goods and services that are more expensive to produce. Section 1

Why Nations Trade (cont.) Reasons to trade Some countries lack essential raw materials. Specialization Exports Imports American Dependence on Trade Section 1

Why Nations Trade (cont.) Sheer volume of trade between nations is proof that trade is beneficial. U.S. Merchandise Trade by Area Section 1

The United States imports goods that amount to approximately how much per capita? B. $6,500 C. $5,500 D. $2,500 A B C D Section 1

The Basis for Trade Trade works best when countries focus on those products they can produce best. Section 1

The Basis for Trade (cont.) Countries find it cheaper to import some products than to manufacturer them. Absolute advantage—country can produce more of a product than another country. Section 1

The Basis for Trade (cont.) Production possibilities frontier—diagram illustrating the maximum combinations of goods and/or services one can produce utilizing fully employed resources. The Gains from Trade Section 1

The Basis for Trade (cont.) Countries with an absolute advantage benefit from trade with another country whenever it has a comparative advantage because its opportunity cost is lower than another country’s. Total world output grows when there is specialization and trade among nations. Section 1

A. Growth is slow but worthwhile. What happens to world output when there is specialization and international trade? A. Growth is slow but worthwhile. B. Growth is significant in concentrated areas. C. No additional growth in output takes place. D. There is a drop in world output. A B C D Section 1

Section 1-End

Section Preview In this section, you will learn that nations use tariffs and quotas to protect special interests, while the free trade movement tries to eliminate trade barriers. Section 2-Preview

Content Vocabulary Academic Vocabulary tariff quota protective tariff revenue tariff protectionists free traders infant industries argument balance of payments most favored nation clause World Trade Organization (WTO) North American Free Trade Agreement (NAFTA) Academic Vocabulary imposed justify Section 2-Key Terms

A. Yes, saving money is my goal. Would you purchase a cell phone imported from Japan just because the price is a few dollars less than the one manufactured here? A. Yes, saving money is my goal. B. No, a few extra dollars in my pocket doesn’t compare to lost American jobs. C. It depends. A B C Section 2

Restricting International Trade Tariffs and quotas are the main ways to restrict international trade. Section 2

Restricting International Trade (cont.) Restrictions to trade Tariff Protective tariff Revenue tariff Quota Imported foods subjected to rigorous health inspections Section 2

Restricting International Trade (cont.) Restrictions to trade Requiring a license to import Culture and nationalism Section 2

Before the Civil War, tariffs were used largely to generate revenue for the federal government. A. True B. False A B Section 2

Arguments for Protection Protectionists disagree with free traders over the best way to protect a country’s independence, industries, and workers. Section 2

Arguments for Protection (cont.) Protectionists and free traders are constantly in debate. National defense Infant industries argument Protecting American jobs Keeping the money at home Balance of payments National pride Section 2

The United States imports significantly more products from China than it exports. The balance of payments is therefore significant. With which side of the debate do you align yourself? A. Protectionists B. Free traders C. Neither A B C Section 2

The Free Trade Movement Because tariffs hurt more than they helped during the Great Depression, the United States has found ways to reduce trade restrictions. Section 2

The Free Trade Movement (cont.) Smoot-Hawley Tariff Act passed in 1930 One of most restrictive tariffs in U.S. history Import duties so high that other countries did same International trade nearly ceased Section 2

The Free Trade Movement (cont.) Reciprocal Trade Agreements Act passed in 1934 Reduced tariffs up to 50% if other countries did the same. Most favored nation clause General Agreement on Tariffs and Trade (GATT) in 1947 Section 2

The Free Trade Movement (cont.) World Trade Organization (WTO) replaced GATT. Administers trade agreements signed under GATT Settles trade disputes between nations Organizes trade negotiations Provides tech assistance and training to developing countries Section 2

The Free Trade Movement (cont.) North American Free Trade Agreement (NAFTA) Has allowed NAFTA partners to capitalize on their comparative advantages Section 2

C. Most favored nation clause D. None of the above A B C D If you were in charge of trade for all businesses or government agencies in your community, which trade practices would you engage in? A. Quotas B. Tariffs C. Most favored nation clause D. None of the above A B C D Section 2

Section 2-End

Section Preview In this section, you will learn that a long-lasting trade deficit affects the value of a nation’s currency as well as the value and volume of its exports and imports. Section 3-Preview

Content Vocabulary Academic Vocabulary foreign exchange foreign exchange rate fixed exchange rates flexible exchange rates floating exchange rates trade deficit trade surplus trade-weighted value of the dollar Academic Vocabulary secure persistent Section 3-Key Terms

Which do you think is better for the U.S. economy? A. Strong dollar B. Weak dollar C. Doesn’t matter A B C Section 3

Financing International Trade International trade relies on the ability to exchange foreign currencies. Section 3

Financing International Trade (cont.) Supply and demand causes the dollar and other international currency to fluctuate daily. Foreign exchange—different currencies are bought and sold for international trade Foreign exchange rate—price of one country’s currency in terms of another country’s Foreign Exchange Rates Section 3

Financing International Trade (cont.) Two major kinds of exchange rates exist: Fixed exchange rates Flexible exchange rates or floating exchange rates Flexible Exchange Rates Section 3

Financing International Trade (cont.) Whenever the dollar falls—exports tend to go up and imports down. If dollar rises, the reverse is true. The Global Economy & YOU Big Mac Index Section 3

A. No, price in Russia would be overvalued against the dollar. Would the price of a pair of Levi jeans in Russia be the same as the price here in the United States? A. No, price in Russia would be overvalued against the dollar. B. No, price in Russia would be undervalued against the dollar. C. Yes, price would be the same. A B C D Section 3

Trade Deficits and Surpluses The strength of the dollar affects trade and therefore trade deficits and surpluses. Section 3

Trade Deficits and Surpluses (cont.) The international value or strength of the dollar affects trade: Trade deficit Trade surplus Section 3

Trade Deficits and Surpluses (cont.) Federal Reserve System tracks the trade-weighted value of the dollar. If index falls—dollar is weak in relation to other currencies. If index rises—dollar is strong. International Value of the Dollar Section 3

Trade Deficits and Surpluses (cont.) A persistent trade imbalance can affect income and employment. No net gain in having a strong or a weak dollar—one sector is helped, another hurt. Profiles in Economics: Jerry Yang Section 3

What is the result of U.S. exports when the dollar is strong? A. U.S. imports decline. B. Exports become cheaper for other nations. C. U.S. imports increase. D. U.S. trade surplus results. A B C D Section 3

Section 3-End

Absolute and Comparative Advantage A country has absolute advantage when it can produce more of a product than can another country. It has comparative advantage when it can produce a product at a lower opportunity cost than another country. When countries focus on those products for which they have comparative advantage, world production increases. VS 1

Free Trade Movement After strict tariffs severely limited world trade during the early years of the Great Depression, the United States and other countries worked to open trade. VS 2

Trade Deficits and Surpluses The strength of the dollar affects the balance of trade of the United States. VS 3

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Jerry Yang (1968– ) cofounder of the Internet Web portal Yahoo! became a billionaire three years after starting the company ranked on Forbes’s list of the world’s richest people Profile

Select a transparency to view. Economic Concepts Transparencies Transparency 20 Absolute and Comparative Advantage Transparency 21 Exchange Rates and Balance of Payments Select a transparency to view. Concept Trans Menu

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exports the goods and services that a nation sells to other nations Vocab1

imports the goods and services that a nation buys from other nations Vocab2

absolute advantage country’s ability to produce more of a given product than another country can produce Vocab3

production possibilities frontier diagram showing the maximum combinations of goods and/or services an economy can produce when all resources are fully employed Vocab4

comparative advantage country’s ability to produce a given product relatively more efficiently than another country by doing it at a lower opportunity cost Vocab5

opportunity cost cost of the next-best alternative use of money, time, or resources when making a choice Vocab6

volume amount; quantity Vocab7

enabled made possible Vocab8

tariff tax placed on an imported product Vocab9

quota limit on the amount of a good that is allowed into a country Vocab10

protective tariff tax on an imported product designed to protect less-efficient domestic producers Vocab11

revenue tariff tax placed on imported goods to raise revenue Vocab12

protectionist person who wants to protect domestic producers against foreign competition with tariffs, quotas, and other trade barriers Vocab13

free trader person who favors fewer or even no trade restrictions Vocab14

infant industries argument argument that new and emerging industries should be protected from foreign competition until they are strong enough to compete Vocab15

balance of payments difference between money paid to, and received from, other nations in trade Vocab16

most favored nation clause trade law allowing another country to enjoy the same tariff reductions the United States negotiates with any third country Vocab17

World Trade Organization (WTO) international agency that administers trade agreements, settles trade disputes between governments, organizes trade negotiations, and provides technical assistance and training for developing countries Vocab18

North American Free Trade Agreement (NAFTA) agreement signed in 1993 to reduce tariffs and increase trade among the United States, Canada, and Mexico Vocab19

imposed established; applied Vocab20

justify to defend as warranted or necessary Vocab21

foreign exchange various currencies used to conduct international trade Vocab22

foreign exchange rate price of one country’s currency in terms of another country’s currency Vocab23

fixed exchange rate system under which the values of currencies are fixed in relation to one another Vocab24

flexible exchange rates system that relies on supply and demand to determine the value of one currency in terms of another Vocab25

floating exchange rates system that relies on supply and demand to determine the value of one currency in terms of another Vocab26

trade deficit balance of payments outcome when spending on imports exceeds revenues received from exports Vocab27

trade surplus balance of payments outcome when revenues received from exports exceed spending on imports Vocab28

trade-weighted value of the dollar index showing strength of the U.S. dollar against a group of major foreign currencies Vocab29

secure obtain Vocab30

persistent continuous, without signs of weakening Vocab31

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