Trade

United States Balance of Trade So, why doesn’t the United States just export more goods, or import fewer goods, and balance out its trade?

Exports & GDP, % Annual Change 1950-2012

So Trade is important for an economy to grow Past: countries imported goods that they could not produce themselves (e.g.: England & tea) Present: countries import goods when it is cheaper to do so than to produce them domestically (such as the US and t-shirts)

Absolute Advantage A country has an absolute advantage when it can produce a product more efficiently Case in point: It costs $2 for Russia to make a tire, and $14 for the United States to do so Russia has absolute advantage in tire production

Comparative Advantage Comparative advantage refers to the ability of a country to produce a product at a lower opportunity cost The opportunity cost of 1 Russian tire is 6 pounds of bacon The opportunity cost of 1 American tire is 3 pounds of bacon The US has a comparative advantage in tire production Comparative advantage leads to TRADE

Outsourcing

Restricting Trade Tariffs: taxes on the import of goods; makes imported goods more expensive Quotas: limit on how many goods can be imported Other barriers (mainly regulatory: inspections, licenses, etc.

Arguments for Protection Group activity time! In your group, review the appropriate section of the text (pgs 474-476) about “Arguments for Protection” For your section, you must: Explain the concept Give an example using a good/product NOT listed in the text Give a counter argument in favor of free trade 6 minutes of work time… GO!

Free TRade In general, international economics favors a move toward Free Trade, or trade without tariffs or quotas Some examples include the World Trade Organization (WTO) and the North American Free Trade Agreement (NAFTA)