1. [ 10.1 ] Why Nations Trade

2. [ 10.1 ] Why Nations Trade Learning Objectives
Evaluate the impact of the unequal distribution of resources.
Analyze the concepts of specialization and comparative advantage to explain why nations trade.
Summarize the position of the United States in world trade.
Describe the effects of trade on employment.

3. [ 10.1 ] Why Nations Trade Key Terms export import absolute advantage
comparative advantage
law of comparative advantage,
Interdependence

4. Resource Distribution and Specialization
Have you used a computer or bought a pair of jeans lately? The chances are good that the computer and the jeans were made outside the United States. But why do Americans buy so many goods from overseas? Wouldn’t it make a lot more sense for us to produce everything we need ourselves?

5. Resource Distribution and Specialization
Natural Resources
Capital and Labor
Unequal Resource Distribution
Specialization and Trade

6. Resource Distribution and Trade
Each country of the world possesses different types and quantities of land, labor, and capital resources.
By specializing in the production of certain goods and services, nations can use their resources more efficiently.
Specialization and trade can benefit all nations.

7. Resource Distribution and Specialization
Stores in the U.S. are full of a vast array of appliances imported from other countries. Labor, one of the factors of production, often determines where appliance makers manufacture their goods.

8. Resource Distribution and Specialization
Analyze Charts Which factors of production does India have in abundance? Which factors of production does it lack in comparison to the United States?

9. Absolute and Comparative Advantage
Suppose a nation enjoys an abundance of resources, including a rich natural environment, an educated workforce, and the latest technologies. In theory, such a nation could be self-sufficient, producing almost all that it needs by itself. Why, then, would it choose to engage in foreign trade?

10. Absolute and Comparative Advantage
Explaining Absolute Advantage
Explaining Comparative Advantage
Opportunity Cost and Comparative Advantage
The Mutual Benefits of Specialization

11. Absolute and Comparative Advantage
A person or nation has an absolute advantage when it can produce a particular good at a lower cost than another person or nation.
Comparative advantage is the ability of one person or nation to produce a good at a lower opportunity cost than that of another person or nation.
The law of comparative advantage states that nations are better off when they produce goods and services for which they have a comparative advantage in supplying.

12. Absolute and Comparative Advantage
Canada’s vast forests give it a comparative advantage in lumber. It is the largest exporter of wood pulp, newsprint, and softwood lumber in the world.

13. Absolute and Comparative Advantage
Analyze Charts How many T-shirts can Carlos make in the time it takes Jenny to make five T-shirts?

14. Absolute and Comparative Advantage
Analyze Information Why does Ricardo think Portugal should import cloth from England and produce wine rather than producing both?

15. Comparative Advantage and World Trade
The lessons from the example of Carlos and Jenny also apply to trade between nations. As you read, David Ricardo argued that the nation having the lower opportunity cost in producing a good has a comparative advantage in producing that good. It is the nation with the comparative advantage in producing a good—not necessarily the absolute advantage—that should specialize in producing that good. It carries out that trade by shipping its goods to other countries and allowing them to ship goods to it.

16. Comparative Advantage and World Trade
Comparative Advantage in Action
Growing Interdependence

17. Comparative Advantage and World Trade
Analyze Charts Based on this commodities chart, is China likely to have a comparative advantage in coal or beef production? Why?

18. Comparative Advantage and World Trade
Cities, as well as countries, produce goods in which they have a comparative advantage. The skilled weavers in Cuenca, Ecuador, make Panama hats that sell for hundreds of dollars overseas.

19. Comparative Advantage and World Trade
Analyze Charts The chart illustrates two countries and the benefits of trade. How much better off are the countries after specialization and trade than when they did not specialize or trade?

20. The United States and Its Trading Partners
The United States enjoys a comparative advantage in producing many goods and services. What, then, is its position as an importer and exporter, and what is the impact of that trade?

21. The United States and Its Trading Partners
The Impact of U.S. Exports
The Impact of U.S. Imports

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

23. The United States and Its Trading Partners
The United States is a major exporter of crops. The use of labor-saving machines and sophisticated technology combine with good soil and climate to make American farms among the world’s most productive.

24. The United States and Its Trading Partners
Analyze Graphs What two categories make up more than three quarters of U.S. exports?

25. The Impact of Trade on Jobs
Trade allows nations to specialize in producing a limited number of goods while consuming a greater variety of goods. However, specialization can also dramatically affect a nation’s employment patterns. The impact may be negative (loss of jobs) or positive (creation of new job opportunities)—or both.

26. The Impact of Trade on Jobs
Specialization and Job Loss
Trade and Employment in the United States

27. Trade and Employment
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
As nations begin to specialize in certain goods, dramatic changes in the nation’s employment patterns also occur.

28. The Impact of Trade on Jobs
Once a leading maker of cameras and film, Eastman Kodak saw sharply declining sales in the age of digital images. Factory closings, massive job layoffs, and bankruptcy resulted.

29. The Impact of Trade on Jobs
Analyze Charts A worker must make choices and adjustments after a job loss. What are the possible advantages and disadvantages of choosing relocation?

30. Quiz: Resource Distribution and Specialization
The scarcity of resources and resulting need for choice forces societies to
A. fully develop human capital resources.
B. produce as many goods as possible.
C. specialize in producing certain goods.
D. stockpile their natural resources.

31. Quiz: Absolute and Comparative Advantage
According to the law of comparative advantage, what good should a producer specialize in making?
A. one for which a producer has a lower opportunity cost than other producers
B. one that a producer can make with fewer workers than all other goods
C. one that a producer can sell for a higher price than other goods
D. one that a producer has the most resources on hand to produce

32. Quiz: Comparative Advantage and World Trade
Comparative advantage leads countries to trade for what they need because it results in
A. isolation.
B. specialization.
C. unequal distribution of resources.
D. unlimited wants.

33. Quiz: The United States and Its Trading Partners
Which commodities are among the leading U.S. imports from China?
A. wheat, soy, and flax
B. petroleum products, natural gas
C. cars, trucks, and heavy machinery
D. computer equipment, communication devices

34. Quiz: The Impact of Trade on Jobs
Based on what you know about U.S. exports, which American industry benefits most from world trade?
A. apparel
B. energy resources
C. entertainment
D. wood products