Splash Screen Chapter 17 International Trade

2 Chapter Introduction 2 Chapter Objectives Explain the importance of international trade in today’s economy.  Describe the basis for international trade.  Explain why total world output increases when countries specialize to engage in trade. Section 1: Absolute and Comparative Advantage Click the mouse button or press the Space Bar to display the information.

3 Section 1-4 Click the mouse button or press the Space Bar to display the information. Did You Know? As the Industrial Revolution spread across Europe, its nations began to build colonial empires in Asia and Africa so that they would have a reliable supply of the raw materials they needed for their factories. Former colonies had to end European colonialism in order to benefit from the exportation of their own natural resources.

4 Section 1-5 Click the mouse button or press the Space Bar to display the information. The sheer volume of exports and imports indicates that international trade is beneficial.  Nations trade because they believe the products they receive (imports) are worth more than the products they sell (exports).  The U.S. and International Trade Without international trade, many products would not be available on the world market.  Many imports to the United States are necessities that would be unavailable without trade.

5 Section 1-7 The U.S. and International Trade (cont.) Figure 17.1

6 Section 1-8 Click the mouse button or press the Space Bar to display the information. A country has an absolute advantage whenever it is able to produce more of a given product than another.  Even when one country enjoys an absolute advantage, trade between it and another country is still beneficial because of comparative advantage.  The Basis for Trade A country has a comparative advantage when it produce a product relatively more efficiently. Relative efficiency is determined by the opportunity cost of producing one product over another.

7 Section 1-19 Click the mouse button or press the Space Bar to display the information. The Gains From Trade Each country must produce more of the good in which it has a comparative advantage and then exchange the extra output for the extra output of its trading partners.  Comparative advantage is based on the assumption that a country should produce a product that has a low opportunity cost.

8 Section 1-10 The Gains From Trade (cont.)

9 Section 1-18 Figure 17.2c The Gains From Trade (cont.)

10 Section 2-1 Click the mouse button or press the Space Bar to display the information. Section 2 begins on page 472 of your textbook. Study Guide Main Idea Tariffs and quotas are two restrictions on international trade.  Reading Strategy Graphic Organizer As you read the section, complete a graphic organizer similar to the one on page 472 of your textbook by describing the differences between a tariff and a quota.

11 Chapter Introduction 3 Chapter Objectives Click the mouse button or press the Space Bar to display the information. Explain how international trade can be restricted to protect special interests.  Cite the main argument used in support of protection.  Relate the history of the free trade movement. Section 2: Barriers to International Trade

12 Section 2-4 Click the mouse button or press the Space Bar to display the information. Did You Know? International trade benefits port cities— those with harbors—as well as cities with extensive industry. Ports in Louisiana, Texas, New York, and New Jersey together handle over 109 million tons of exports, based on 1997 figures.

13 Section 2-5 Click the mouse button or press the Space Bar to display the information. Two major ways of restricting trade are through a tariff, or tax placed on imports, and a quota, a limit on the quantities of a product that can be imported.  A protective tariff is one that is high enough to protect less efficient domestic industries.  Restricting International Trade A revenue tariff is one high enough to generate revenue.

14 Section 2-5 Click the mouse button or press the Space Bar to display the information. Restricting International Trade (cont.) Most quotas are used to reduce the supply of a product and keep prices high for domestic producers.  Other barriers to trade include overly rigorous health inspections and difficult licensing requirements.

15 Section 2-10 Click the mouse button or press the Space Bar to display the information. Protectionists are people who favor trade barriers that protect domestic industries and offer various arguments to defend their position.  According to one argument, a country could become so specialized that it would end up being dependent enough on other countries that it would affect national defense.  Arguments for Protection The infant-industries argument is the belief that new industries should be protected from foreign competition.

16 Section 2-10 Click the mouse button or press the Space Bar to display the information. Some argue that tariffs and quotas protect domestic jobs form cheap foreign labor.  The argument for keeping the money at home claims that limiting imports will keep American money in the United States.  Arguments for Protection (cont.) The balance of payments argument suggests that protection would keep down the difference between the money a country pays to and what it receives from other nations.

17 Section 2-19 Click the mouse button or press the Space Bar to display the information. Trade barriers work only if other countries do not retaliate, causing all countries to suffer.  Restrictive legislation in the past nearly halted international trade.  The Free Trade Movement Various trade agreements have allowed countries to reduce tariffs in cooperation with other nations.  The World Trade Organization (WTO) and the North American Free Trade Agreement (NAFTA) are examples of international agencies for promoting freer trade.

18 Section 2-27 Figure 17.3 The Free Trade Movement

19 Chapter Introduction 4 Chapter Objectives Section 3: Financing and Trade Deficits Click the mouse button or press the Space Bar to display the information. Explain how foreign currency is used in trade.  Describe the problem of a trade deficit and the main solution to the problem.

20 Section 3-4 Click the mouse button or press the Space Bar to display the information. Did You Know? Archaeologist can track the trade routes of ancient civilizations, such as that of the Phoenicians, by the distinctive goods with which they traded. Merchant records also provide clues into both their languages and their cultures.

21 Section 3-7 Click the mouse button or press the Space Bar to display the information. Foreign Exchange Figure 17.4 Foreign exchange is the buying and selling of the currencies of different nations.  The foreign exchange rate is the price of one country’s currency in terms of another country’s currency.

22 Section 3-5 Click the mouse button or press the Space Bar to display the information. Exchange rates are fixed or flexible.  Flexible exchange rates, commonly used today, establish the value of each currency through the forces of supply and demand. Foreign Exchange (cont.)

23 Section 3-15 Click the mouse button or press the Space Bar to display the information. Whether a country has a trade deficit or surplus depends in part on the international value of its currency.  The trade-weighted value of the dollar is an index that shows the strength of the dollar against foreign currencies. Trade Deficits and Surpluses A weaker dollar buys fewer foreign goods.  Deficits and surpluses tend to be self- correcting.