Why Nations Trade Resource Distribution -Factors of prod- duction: land, labor, & capital -Each country has different factors of production, making trade necessary Absolute & Comparative Advantage -Absolute adv: The ability of one person/nation to produce a good at A lower cost than another -Comparative adv: The ability of one person/nation to produce a good at an opportunity cost that is lower than that of another -A nation is better off when it produces goods/services for which it has comparative advantage The US And Trade -The US is the worlds leading exporter -The US leads in manufacturing advanced tech. and medical equipment -The US also exports services -The US is the world’s top importer Effects of Trade on Employment -International trade nations to produce limited no. of goods while consuming a greater variety of goods -Specialization can drastically change a nation’s employment patterns

Types and Effects of Trade Barriers Trade barriers result in higher prices and limit supply An import quota is a limit on the amount of a good that can be imported to a country Trade wars are the cycle of increasing trade restrictions that occur when escalating economic conflict occurs between 2 countries Governments may impose direct trade barriers by specifying product standards that are costly for foreign sellers to meet A custom duty is a tax on certain items purchased abroad A tariff is a tax imposed on imported goods which both individuals and businesses have to pay A voluntary export restraint is a self imposed limitation on the number of products shipped to a particular country Sometimes a government will require foreign companies to obtain a license to sell goods in that country

Measuring Trade Exchange Rates -Foreign exchange rate is value of a foreign nation’s currency in relation to yours -Exchange rates let you convert prices in one currency to prices in another -Exchange rates change daily; listed on internet & some papers -An appreciation is an increase in the value of a currency and a depreciation is a decrease in the value of a currency -Banks and other financial institutions buy & sell currencies on the foreign exchange market Exchange Rate Systems -Fixed exchange rate system: governments try to keep values of their currencies constant against one another, using stable currency as center -Flexible exchange rate systems: Allow the exchange rate to be determined by supply and demand The Balance Of Trade -Balance of trade: relationship b/t A nation’s imports & its exports -Trade surplus: When a nation exports more than it imports -Trade deficit: When nation imports more than it exports