INTERNATIONAL TRADE

EXPORTS- goods sold to another country IMPORTS- goods sold from another country to the U.S.

ABSOLUTE ADVANTAGE- The ability of one country using the same quality of resources as another country, to produce a particular product at less cost. EXAMPLE: Kentucky has significant coal reserves. Illinois does not and uses nuclear energy. Assume that energy production is cheaper with coal than with nuclear energy. Kentucky has an absolute advantage in energy production. Why?

COMPARARTIVE ADVANTAGE- the ability of a country to produce a product at a lower opportunity cost than another country. (soybeans vs corn)

Example Two men live alone in an isolated island. To survive they must undertake a few basic economic activities like water carrying, fishing, cooking and shelter construction and maintenance. The first man is young, strong, and educated and is faster, better, more productive at everything. He has an absolute advantage in all activities. The second man is old, weak, and uneducated. He has an absolute disadvantage in all economic activities. In some activities the difference between the two is great; in others it is small. Is it in the interest of either of them to work in isolation? No, specialization and exchange (trade) can benefit both of them. How should they divide the work? According to comparative, not absolute advantage: the young man must spend more time on the tasks in which he is much better and the old man must concentrate on the tasks in which he is only a little worse. Such an arrangement will increase total production and/or reduce total labour. It will make both of them richer.

SPECIALIZATION- produce products for which you are well suited How do we specialize in our everyday jobs?

INTERDEPENDENCE- The reliance of each nation on selling and buying goods and services from other nations

ANTITRUST LEGISLATION- to make sure the marketplace is fair and competitive Prohibit monopolies Protect consumers Protect environment

TRADE POLICY- The federal Government regulates American trade with other countries. Tariffs Quotas Blockade or embargo PROTECTIONISM: Economic policy of restraining trade between nations.

TARIFFS- special taxes on imported goods Adds to cost of buying foreign goods in the United States. Why?

QUOTAS- restrictions on the number of goods a country can import into the United States (sometimes imposed on countries with unfair trade practices)

Blockade or embargo- complete prohibition of trade with another country (U.S. government has imposed an embargo on trade with Cuba/political protest)

PROTECTIONISM VS FREE TRADE

AGAINST FREE TRADE: 1. JOB SECURITY 2. NEED PROTECTION FOR OUR NATION’S ECONOMIC SECURITY 3. NEED TO PROTECT INFANT INDUSTRIES

FOR FREE TRADE: 1. COMPETITION MEANS IMPROVED PRODUCTS 2. TRADE RESTRICTIONS DAMAGE EXPORT INDUSTRIES PUTTING AMERICANS OUT OF WORK 3. SPECIALIZATION HELPS KEEP PRICES LOW