1. Why Nations Trade

2. Why do nations trade? Because they have something to gain.
Because they have different terrains, climates, and resources – means that some countries can produce some goods that others can not or that they can only produce at a very high cost.

3. 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.
Specialization is determined by a nation’s natural resources and by its human and physical capital

4. Why Nations Trade
How do the nation’s factors of production determine the nation’s specialization?
Natural resources – help determine what goods and services an economy produces
Human capital – Measure literacy. A country with a high literacy rate is likely to have an education, skilled work force
Physical Capital – also includes public infrastructure (roads)
Economic Activity Patterns
Producing
Exchanging
Consuming
Saving
Investing
Geographic and human factors influence patterns of economic activity

5. Resource Distribution
The Need for Trade:
Specialization occurs when producers- either individuals or nations – decide to produce only certain goods and services, rather than producing all the goods and services they need
Specialization is determined by a nation’s natural resources and by its human and physical capital
Examples: US produces wheat, soybeans, etc. We do not produce diamonds or coffee

6. Absolute and Comparative Advantage
Absolute Advantage
Define:
Example:
Comparative Advantage
Define:
Example:
Law of Comparative Advantage

7. Absolute Advantage
When a country has an absolute advantage over another country, it simply means that country can produce more of a good than another country.
For example, Brazil has an absolute advantage over the United States in the production of sugar, while the United States has an absolute advantage over Brazil in the production of cars.

8. Comparative Advantage
While large countries will probably have an absolute advantage in production over smaller countries, when any two countries are producing two goods (like cars and sugar), one country will always have a comparative advantage over the other in the production of one of the two goods.
The key to determining which country should produce which good is opportunity cost
Put another way, given two countries that can both produce sugar and cars, one country should specialize in producing cars and one country should specialize in producing sugar so that they can trade.

9. Absolute and Comparative Advantage
A person or nation has an absolute advantage when it can produce more of a particular good 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.

10. In this example, both Kate and Carlos benefit from specialization.
Benefits of Trade
In this example, both Kate and Carlos benefit from specialization.
Specialization
Trade
Net Effect
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

11. Benefits for Trade Both sides agree on a price that benefits both
The nation that has the lower opportunity cost in producing a good has a comparative advantage in producing that good
It is the nation with the comparative advantage- not necessarily the absolute advantage – that should specialize in producing that good

12. 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.

13. TOP US TRADING PARTNERS JUNE 2011
Canada
China
Mexico
Japan
Germany
United Kingdom
South Korea
Brazil
Netherlands
Taiwan

14. EXPORTS
Goods produced within a country and sold to residents of a foreign country.
Major U.S. exports:
Automobiles, computers, aircraft, corn, wheat, soybeans, scientific instruments, coal, machinery, and plastic materials.

15. TOP US EXPORTS – JUNE 2011 Civilian aircraft Semiconductors
Passenger cars
Pharmaceutical preparations
Auto accessories
Other industrial machines
Fuel oil
Organic chemicals
Telecommunications
Plastic materials

16. IMPORTS
Goods produced in a foreign country and purchased by the residents of a domestic country.
Major U.S. imports:
Petroleum, clothing, iron, steel, office machines, footwear, fish, coffee, and diamonds.

17. TOP US IMPORTS – JUNE 2011 Crude oil Passenger cars
Medicinal preparations
Auto accessories
Other household goods
Computer accessories
Petroleum products
Cotton apparel
Telecommunications equipment
Video equipment (dvd players)

18. TRADE DEFICIT
U.S. buys more from the world than the world buys from it.

19. 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.