1. International Trade Chapter 17

2. Why Nations Trade What have you traded? What have you traded? When does trade occur? When does trade occur?

3. Trade Trade occurs whenever each of two parties has something that the other party wants or needs. Trade occurs whenever each of two parties has something that the other party wants or needs. Because resources are not allocated equally, people must trade to satisfy wants and needs. Because resources are not allocated equally, people must trade to satisfy wants and needs. Unequal distribution of resources prevents countries from producing everything that it needs or wants. Unequal distribution of resources prevents countries from producing everything that it needs or wants.

4. Specialization Occurs when individuals or nations decide to produce only certain goods or services, rather than producing all products it needs. Occurs when individuals or nations decide to produce only certain goods or services, rather than producing all products it needs. Specialization is determined by a nation’s natural resources and its human and physical capital. Specialization is determined by a nation’s natural resources and its human and physical capital.

5. Absolute Advantage A nation has an absolute advantage when it can produce more of a given product using a given amount of resources. A nation has an absolute advantage when it can produce more of a given product using a given amount of resources. If nation A can produce 500 pounds of pudding or 1000 pounds of jello it has an absolute advantage over nation B because it can only produce 250 pounds of pudding or 400 pounds of jello. If nation A can produce 500 pounds of pudding or 1000 pounds of jello it has an absolute advantage over nation B because it can only produce 250 pounds of pudding or 400 pounds of jello.

6. Comparative Advantage Opportunity cost– what you must give up in order to produce something. Opportunity cost– what you must give up in order to produce something. The nation that has the lower opportunity cost in producing a good has a comparative advantage in producing that good. The nation that has the lower opportunity cost in producing a good has a comparative advantage in producing that good. The LAW of COMPARATIVE ADVANTAGE states that a nation is better off when it only produces goods/services for which it has a comparative advantage. The LAW of COMPARATIVE ADVANTAGE states that a nation is better off when it only produces goods/services for which it has a comparative advantage. If nation A gives up 1 cupcake for every cookie it produces it has a comparative advantage over nation B that gives up 5 cupcakes for every cookie it produces. If nation A gives up 1 cupcake for every cookie it produces it has a comparative advantage over nation B that gives up 5 cupcakes for every cookie it produces. A nation uses its resources more efficiently when it produces only those products in which it has the comparative advantage. A nation uses its resources more efficiently when it produces only those products in which it has the comparative advantage.

7. Create a schedule for each situation A. Country X produces 12 flags or 6 swords. Country Y produces 4 flags or 5 swords. A. Country X produces 12 flags or 6 swords. Country Y produces 4 flags or 5 swords. B. Country Alpha produces 20 toy trains or 20 toy trucks. Country Beta produces 30 trains or 60 trucks. B. Country Alpha produces 20 toy trains or 20 toy trucks. Country Beta produces 30 trains or 60 trucks. C. Country X men produces 2000 action figures or 1000 robots. Country Blue man produces 500 action figures or 100 robots. C. Country X men produces 2000 action figures or 1000 robots. Country Blue man produces 500 action figures or 100 robots.

8. What should each country produce? Using the schedules you just made for each situation, answer the following questions: Using the schedules you just made for each situation, answer the following questions: 1. Which country has the absolute advantage? 1. Which country has the absolute advantage? 2. What is the opportunity cost for each product for each country? 2. What is the opportunity cost for each product for each country? 3. Who has the comparative advantage for each product? 3. Who has the comparative advantage for each product? 4. What product should each country specialize in? 4. What product should each country specialize in?

9. In this example, both Kate and Carlos benefit from specialization. SpecializationTradeNet Effect CarlKate SpecializationTradeNet Effect Carl Kate Carl Kate Carl specializes, switching 2 hours from T- shirt production to birdhouse production. Carl trades 1 birdhouse for 2 T-shirts. Net effect is same number of T-shirts and 1 more birdhouse. Kate specializes, switching 1 half- hour from birdhouse production to T- shirt production. Carl trades 2 T-shirts for 1 birdhouse. Net effect is same number of birdhouses and 1 more T-shirt. Benefits from Specialization and Trade for Carl and Kate Benefits of Trade

10. The United States is the world’s largest exporter. The United States’ main trading partners are Canada, Mexico and Japan. The United States is also the world’s largest importer. Imports and Exports of the United States

11. As nations begin to specialize in certain goods, dramatic changes in the nation’s employment patterns also occur. Trade and Employment Workers who lose their jobs due to specialization face three options: Workers who lose their jobs due to specialization face three options: –Unemployment: Inability to adapt and find a new job –Relocation: Moving to where current skills meet current jobs –Retraining: Gaining new human capital to meet the demands of specialized labor markets

12. Trade Barriers and Agreements Section 2 Section 2

13. A trade barrier is a means of preventing a foreign product or service from freely entering a nation’s territory. What Are Trade Barriers? Import Quotas Import Quotas –An import quota is a limit on the amount of a good that can be imported. Voluntary Export Restraints Voluntary Export Restraints –A voluntary export restraint (VER) is a self-imposed limitation on the number of products shipped to a certain country. Tariffs Tariffs –A tariff is a tax on imported goods, such as a customs duty.

14. The Effects of Trade Restrictions Increased Prices for Foreign Goods –Tariffs and other trade barriers increase the cost of imported products, making domestic products more competitive. –Although manufacturers of many products may benefit from trade barriers, consumers can lose out. Trade Wars –When one country restricts imports, its trading partner may impose its own retaliatory restrictions.

15. Protectionism is the use of trade barriers to protect a nation’s industries from foreign competition. Arguments for Protectionism Protecting Jobs Protecting Jobs –Protectionism shelters workers in industries that would be hurt by specialization and trade. Protecting Infant Industries Protecting Infant Industries –Protectionist policies protect new industries in the early stages of development. Safeguarding National Security Safeguarding National Security –Certain industries may require protection from foreign competition because their products are essential to the defense of the United States.

16. International Cooperation Recent trends have been toward lowering trade barriers and increasing trade through international trade agreements. Recent trends have been toward lowering trade barriers and increasing trade through international trade agreements. In 1948, the General Agreement on Tariffs and Trade (GATT) was established to reduce tariffs and expand world trade. In 1948, the General Agreement on Tariffs and Trade (GATT) was established to reduce tariffs and expand world trade. In 1995, the World Trade Organization (WTO) was founded to ensure compliance with GATT, to negotiate new trade agreements, and to resolve trade disputes. In 1995, the World Trade Organization (WTO) was founded to ensure compliance with GATT, to negotiate new trade agreements, and to resolve trade disputes.

17. Major Trade Organization Members EU CA RICOM MERCOSUR APEC NAFTA & APEC PACIFIC OCEAN ATLANTIC OCEAN INDIAN OCEAN PACIFIC OCEAN Global Trade Agreements Many nations have formed regional trade organizations. These trade organizations establish free-trade zones, or regions where a group of countries has agreed to reduce trade barriers among themselves.

18. Measuring Trade Section 3 Section 3

19. The value of a foreign nation’s currency in relation to your own currency is called the exchange rate. Exchange Rates and International Markets An increase in the value of a currency is called appreciation. An increase in the value of a currency is called appreciation. A decrease in the value of a currency is called depreciation. A decrease in the value of a currency is called depreciation. Multinational firms convert currencies on the foreign exchange market, a network of about 2,000 banks and other financial institutions. Multinational firms convert currencies on the foreign exchange market, a network of about 2,000 banks and other financial institutions.

20. The following table shows an example of exchange rates. Foreign Exchange Rates U.S. $ Australian $ U.K. £ Canadian $ ¥en Euro Mexican nuevo peso Chinese renminbi 1 1.541 0.6252 1.478 114.3 0.9516 9.33 8.28 Aust $U.K. £Canadian $¥enEuroMexican NPChinese renminbi 0.6489 1 0.4057 0.9593 74.19 0.6175 6.06 5.37 1.599 2.465 1 2.365 182.9 1.522 6.3 13.25 0.6764 1.042 0.4229 1 77.34 0.6436 6.3 5.6 0.01 0.01293 1 0.01 0.08 0.07 1.051 1.62 0.657 1.554 120.2 1 9.81 8.7 0.11 0.17 0.07 0.16 12.24 0.1 1 9.8 0.12 0.19 0.08 0.18 13.81 0.11 1.13 1 Reading an Exchange Rate Table

21. Types of Exchange Rate Systems Fixed Exchange-Rate Systems A currency system in which governments try to keep the values of their currencies constant against one another is called a fixed exchange-rate system. A currency system in which governments try to keep the values of their currencies constant against one another is called a fixed exchange-rate system. Flexible Exchange-Rate Systems Flexible exchange- rate systems allow the exchange rate to be determined by supply and demand. Flexible exchange- rate systems allow the exchange rate to be determined by supply and demand.

22. The relationship between a nation’s imports and its exports is called its balance of trade. Balance of Trade When a nation exports more than it imports, it has a trade surplus. When a nation exports more than it imports, it has a trade surplus. When a nation imports more than it exports, it creates a trade deficit. When a nation imports more than it exports, it creates a trade deficit.

23. The United States Trade Deficit The Trade Deficit The Trade Deficit –The United States has run a trade deficit since the early 1970s. Why the Trade Deficit? Why the Trade Deficit? –Imports of foreign oil as well as Americans’ enjoyment of imported goods account in part for the large American trade deficit. Reducing the Trade Deficit Reducing the Trade Deficit –Quotas and other trade barriers can be used to raise prices of foreign-made goods and urge consumers to buy domestic goods.