1. International Trade
Chapter 17

2. Why Nations Trade
Chapter 17, Section 1

3. Resource Distribution
The factors of production are not evenly distributed throughout the world
Natural resources are more plentiful in some areas
Human capital is more skilled in nations with higher literacy rates
Physical capital is deeper in some nations
Better machinery
Infrastructure is better

4. Resource Distribution
The unequal distribution of resources encourages nations to specialize
Although some countries could be self sufficient, it is to their advantage to specialize...why?

5. Absolute and Comparative Advantage
Absolute advantage...when one nation can produce a good at a lower cost than another
Comparative advantage...the ability for a nation to produce at a lower opportunity cost
Presented by David Ricardo
The nation with the lowest opportunity cost should specialize in that product
Known as the law of comparative advantage

6. International Trade
Since countries may have a comparative advantage over others, it makes sense for them to trade
The US and trade
The US is the largest importer and one of the top three exporters of goods (Germany and China)

7. US Exports
The US is among the top three exporters in the world ($1.5 Trillion)
Flips with Germany and China
China current leader

8. US Imports In total, we import more than we export
We have a trade deficit

9. Trade on Employment
International trade has caused many changes and trends in employment
Due to comparative advantage, workers need to gain certain skills in order to find employment

10. Trade Barriers and Agreements
Chapter 17, Section 2

11. Free Trade?
Many people argue that governments should regulate trade in order to protect industries and jobs from foreign competition
This is known as protectionism
Many nations set up trade barriers in order to provide protectionism

12. Trade Barriers
Trade barriers...trade restrictions that prevent foreign products or services from freely entering a nation’s territory
Import quotas...limits on the amount that can be imported
Voluntary Export Restraints...self imposed export restraint (hopes to avoid import quotas

13. Trade Barriers Tariffs...taxes on imported goods Other Trade Barriers
Customs duty
Used to encourage purchasing of domestic products
Other Trade Barriers
Licenses
Standards of production

14. Effects of Trade Barriers
Increased prices for foreign goods
Trade Wars
When countries institute restrictions on each other
Usually leads to poor trade for both countries

15. Arguments for Protectionism
Protects jobs
Protects infant industries
Protects national security

16. International Trade Agreements
Recent trends are encouraging free trade…why?
Raises living standards
Encourages world peace
Promotes competition
International Free Trade Agreements
Cooperation of two or more countries to reduce trade barriers

17. World Trade Organization
GATT...general agreement on tariffs and trade...founded in 1948
WTO…a worldwide organization whose goal is freer global trade and lower tariffs...founded in 1995 to ensure GATT
Acts as a referee for trade agreements

18. Free Trade Zones
Areas established by countries to reduce or eliminate trade barriers
Two such Organizations
European Union (EU)
North American Free Trade Agreement (NAFTA)

19. European Union
Regional trade organization made up of 27 member nations
Essentially developed a single market (EEC...European Economic Community) in Europe
Goal is to create a single economy that rivals the US
Currently the largest trading partner of the US
Canada and Mexico are next

20. EU

21. NAFTA
Created to eliminate all tariffs and barriers in the region (Canada, Mexico, US)
Ratified in 1994
Although there has been much controversy, NAFTA has increased trade between the three nations

23. Measuring Trade
Chapter 17, Section 3

24. Exchange Rates
Value of a foreign nation’s currency in terms of the home nation’s currency
Exchange rates fluctuate on a daily basis with the strength and weakness of a nation’s currency
Based on supply and demand for currency

25. Strength of Currency Appreciation...increase in the value of currency
When a currency appreciates, exports decline
Products are more expensive
Depreciation...decrease in the value of currency
When a currency depreciates, exports rise
Products become cheaper

26. Exchange Rate Systems
Fixed Exchange Rate System...governments try to keep their currency constant with another
Requires countries to keep similar economic systems
The euro
Flexible Exchange Rate System...exchange rate is determined by supply and demand and it fluctuates
Used by most major currencies today

27. Balance of Trade Trade surplus...export more than you import
Trade deficit...import more than you export
Balance of trade...relationship between exports and imports