1. Chapter 21 Section 4 (Pgs.570-574) Living in a World Economy
Essential Question: Why do countries trade with each other?

2. Specialization and Interdependence
Many countries specialize in producing certain kinds of goods and services
Interdependence means that countries depend on each other for different goods and services
What is interdependence?
What are some advantages and disadvantages of specialization for a country? It can gain a competitive advantage and increase trade, but it must make trade-offs and lose money through opportunity costs

3. Trade and Comparative Advantage
Absolute advantage- country’s ability to produce something more cheaply than its trading partners
Comparative advantage- country’s ability to make a product more efficiently
Opportunity cost- value of the next best alternative that is given up when a country specializes

4. Free Trade Versus Protectionism
Trade barrier- limit on the exchange of goods
Also called protectionism
Protects domestic jobs from foreign competition

5. Trade Barriers Tariffs Import Quotas and Voluntary Restrictions
Revenue tariffs raise money for the government
Protective tariffs encourage people to buy domestically made products
Import Quotas and Voluntary Restrictions
Embargoes
Bans trade with specific countries

6. International Cooperation
Reciprocal Trade Agreements
Reduce protective tariffs
Regional Trade Agreements
Reduce or eliminate trade barriers
International Trade Agreements
World Trade Organization (WTO)
The North American Free Trade Agreement (NAFTA)
What tools can countries use to restrict or promote trade? They can use trade barriers, tariffs, import quotas, voluntary restrictions, and embargoes to restrict trade. They can use reciprocal trade agreements, regional trade organizations, and international trade agreements to promote trade

7. Free Trade and Protectionism
Reasons people support protectionism:
To protect industries and jobs
To maintain high wages
To protect national security
So as not to support countries with poor labor laws
Reasons people oppose protectionism:
Could harm the economy
Lead to price increases
In what ways do protectionist policies affect both other countries and American consumers? They may harm the economies of other countries and may lead to price increases and trade wars, which could mean that American consumers would end up paying higher prices for their goods and services

8. Balance of Trade
Balance of trade- difference between the value of a country’s exports and its imports
Trade surplus- when a country sells more than it buys
Trade deficit- when a country buys more than it sells
How does international trade affect consumers? It gives consumers more choices and access to more goods. It also increases competition, leading to lower prices
Why do you think the U.S. usually has a trade deficit? Lower labor costs make it cheaper to produce goods in other countries, so many American consumers buy these cheaper imported goods rather than goods produced in the U.S.