1. Chapter 17: International Trade Opener

2. Essential Question
Should free trade be encouraged?

3. Guiding Questions Section 1: Absolute and Comparative Advantage
Why do nations trade?
Nations trade because they are not self-sufficient. They specialize in producing certain goods and services based on their resources and get goods and services that they cannot produce by trading with other nations.

4. Guiding Questions Section 2: Trade Barriers and Agreements
What are the arguments for and against trade barriers?
Supporters of trade barriers argue that they save jobs, protect infant industries, and safeguarding national security. Critics of trade barriers argue that free trade is the best way to pursue comparative advantage, raise living standards, and further cooperative relationships among nations.

5. Guiding Questions Section 3: Measuring Trade
How do exchange rates affect international trade?
As the U.S. dollar appreciates and depreciates, the amount of goods that the country imports and exports will fluctuate, affecting international trade.

6. Chapter 17: International Trade Section 1

7. Objectives
Evaluate the impact of the unequal distribution of resources.
Apply the concepts of specialization and comparative advantage to explain why countries trade.
Summarize the position of the United States on world trade.
Describe the effects of trade on employment.

8. Key Terms export: a good or service sent to another country for sale
import: a good or service brought in from another country for sale
absolute advantage: the ability to produce more of a given product using a given amount of resources

9. Key Terms, cont.
comparative advantage: the ability to produce a product most efficiently give all the other products that could be produced
law of comparative advantage: the principle that a nation is better off when it produces goods and services for which it has a comparative advantage
interdependence: the shared need of countries for resources, goods, services, labor, and knowledge supplied by other countries

10. Introduction Why do nations trade?
Nations trade because they don’t have enough natural resources or the right kind of natural resources to provide for their entire population.
Different nations specialize in different products, but can’t specialize in all products so they need to trade with other nations to obtain the products they can’t make themselves.

11. Natural Resources
Natural resources, capital (both human and physical), and labor help determine what goods and services an economy will produce.
The availability of resources varies greatly from one country to another. A nation’s ability to use its physical resources, is affected by culture and history.

12. Resource Distribution
Like all countries, the countries shown on the table below possess different natural, human, and physical resources.
Which resource on this chart is most closely related to human capital?
Answer: Literacy rate

13. Specialization
Checkpoint: How does specialization create a need for trade?
When nations specialize in certain goods, they obtain the goods they cannot produce through importing and exporting.
In some cases, more than 70 percent of a nation’s export trade depends upon a single resource.
Examples include Kuwait (petroleum and natural gas), Guinea-Bissau (cashews), and the Marshall Islands (fish).
Checkpoint Answer: When nations specialize in certain goods, they obtain the goods they cannot produce through importing and exporting.

14. Absolute Advantage Most nations are not self-sufficient.
It is actually better for countries to specialize in some products and trade for others. This can be understood by looking at absolute and comparative advantage.
A person or nation has an absolute advantage when it can produce more of a given product than another person or nation using a given amount of resources.

15. Productivity and Opportunity Cost
Carlos has an absolute advantage over Jenny in producing both T-shirts and birdhouses. However, their opportunity costs are different.
How many T-shirts can Carlos make in the time it takes Jenny to make 5 T-shirts?
Answer: 30

16. Comparative Advantage
A country has a comparative advantage in the product that it can produce most efficiently given all the products it could choose to produce.
A nation is better off when it produces goods and services for which it has a comparative advantage.
According to the law of comparative advantage, each person should produce the good for which he or she has a lower opportunity cost.
Comparative advantage also mutually benefits both parties.
Checkpoint: How is trade affected by opportunity cost?
Checkpoint Answer: a person, or country, will produce the good for which they have the lower opportunity cost, which affects which goods that country trades

17. Comparative Advantage and Trade
Trade allows countries to obtain could for which they might have a high opportunity cost.
As a result, one country can use the money it earns from exporting to import other goods and services that it cannot efficiently produce itself.
The growth of international trade has led to greater economic interdependence.
Because countries are interdependent, changes in one country’s economy influences other countries.

18. The United States and Trade
The United States is the world’s second largest exporter, close behind Germany.
The United States has a wide range of exports and excels in manufacturing technologically sophisticated goods such as software, chemicals, and medical testing supplies.The United States is also the world’s leading exporter of services.
U.S. imports total nearly $1.9 trillion, making it the world’s top importer.

19. Effects on Employment
Trade allows nations to specialize in producing a limited number of goods yet specialization can also change a nation’s employment patterns.
Once the skills of specialization are no longer needed in a particular nation, workers have a few options:
Gain new job skills that are more in demand
Move to another location where their existing skills are more in demand
Stay where they are and take a job that requires lesser skills
Be unemployed

20. Effects on Employment, cont.
In the past two decades, international trade has led to significant changes in U.S. employment patterns.
Many jobs have gone overseas increasing unemployment in the United States.
Businesses and government often provide help to retrain laid-off workers or assist them in relocating.

21. Effects on Employment, cont.
Job loss is not the only possible result of trade.
If American exports grow, making those products will increase demand for workers who lost jobs because they were on the negative end of comparative advantage but can now try to find work in those growing industries.

22. Review
Now that you have learned why nations trade, go back and answer the Chapter Essential Question.
Should free trade be encouraged?

23. Chapter 17: International Trade Section 2

24. Objectives Define various types of trade barriers.
Analyze the effects of trade barriers on economic activities.
Summarize arguments in favor of protectionism.
Evaluate the benefits and costs of participation in international trade agreements.
Explain the role of multinationals in the global market.

25. Key Terms
trade barrier: a means of preventing a foreign product or service from freely entering a nation’s territory
tariff: a tax on imported goods
import quota: a set limit on the amount of a good that can be imported
sanctions: actions a nation or group of nations takes in order to punish or put pressure on another nation
embargo: a ban on trade with a particular country

26. Key Terms, cont. trade war: a cycle of escalating trade barriers
protectionism: the use of trade barriers to shield domestic industries from foreign competition
infant industry: an industry in the early stages of development
free trade: the lowering or elimination of protective tariffs and other trade barriers between two or more nations
free-trade zone: region where a group of countries agrees to reduce or eliminate trade barriers

27. Introduction
What are the arguments for and against trade barriers and agreements?
Supporters of trade barriers and agreements argue that they save jobs, protect infant industries, and safeguard national security.
Critics of trade barriers and agreements argue that free trade is the best way to pursue comparative advantage, raise living standards, and further cooperative relationships among nations.

28. Trade Barriers: Tariffs
A trade barrier, or trade restriction, is a means of preventing a foreign product or service from freely entering a nation’s territory.
Tariffs are a common trade barrier. Tariffs today are much lower than in the past.

29. Import Quotas and VERs
Checkpoint: How do voluntary export restraints differ from import quotas?
Another barrier is an import quota, which places a limit on the amount of a good that can be imported.
Tariffs and quotas are set by the importing country.
By contrast, a voluntary export restraint (VER) is a voluntary limit set by the exporting country, restricting the quantity of a product it will sell to another country.
Checkpoint Answer: VERs are set by the exporting country and restricts the quantity of a product that it will sell to another country while import quotas are set by the importing country and limits the amount of a good that can be imported.

30. Other Barriers Other barriers include:
High licensing fees or slow licensing processes
Customs duties
Health, safety, or environmental regulation
Political sanctions

31. Effects of Trade Barriers
The effects of trade barriers include:
Increased prices for foreign goods—trade barriers can help domestic producers compete with foreign firms.
By limiting imports from those firms trade barriers help domestic companies.
Consumers may suffer, though, as import restrictions result in higher prices.
Trade wars—when one country restricts imports, its trading partner may retaliate by placing its own restrictions on imports.
If the first country responds with further trade limits, the result is a trade war.

33. Protectionism
Checkpoint: What are three arguments given for protectionism?
Nations impose trade barriers as a form of protectionism.
Protectionists believe that trade barriers:
Save jobs that may be hurt by foreign competition
Protect infant industries and give them the time and experience to become efficient producers
Safeguard national security by making sure that U.S. steel, energy, and advanced technological industries remain active in the event of war
Checkpoint Answer: saves jobs, protects infant industries, and safeguards national security

34. Free Trade
In opposition to protectionism is the principle of free trade.
Free trade involves the lowering or elimination of protective tariffs and other trade barriers between two or more nations.

35. Trade Agreements
To encourage free trade, a number of countries in recent decades have signed international free trade agreements.
World Trade Organization (WTO)—founded in 1995 with the goal of making global trade more free
Today the WTO acts as a referee, enforcing the rules agreed upon by the member countries.
The European Union—27 nations, almost all of Europe, are members of the EU, which abolishes tariffs and trade restrictions among member nations

36. NAFTA
Ratified in 1994, the North American Free Trade Agreement, created a a free trade zone linking the United States, Canada, and Mexico.
Opponents of NAFTA worried that American companies would move factories to Mexico where wages and lower and environmental regulations were less strict.
The agreement remains controversial today with critics continuing to charge that NAFTA has led to the loss of American jobs and damage to the environment.

37. Other Trade Agreements
The DR-CAFTA created a free trade agreement between the United States and six nations of Central America.
Other free trade agreements include:
The Asia- Pacific Economic Cooperation (APEC)
The Southern Common Market (MERCOSUR)
The Caribbean Community and Common Market (CARICOM)
The Association of Southeast Asian Nations (ASEAN)

39. The Debate Over Free Trade
Debate over NAFTA became a campaign issue in the American presidential election of 2008.
Meetings of the WTO have spurred large protests.
At WTO meetings in Seattle in 1999 and Hong Kong in 2005, thousands of protestors gathered to oppose the WTO.

40. The Role of Multinationals
A multinational is a large corporation that sells goods and services throughout the world.
The decision to build production facilities in a foreign country benefits both the multinational and the host nation.
The corporation avoids some fees and tariffs.
The corporation may benefit from cheaper labor.
The host nation benefits by gaining jobs and tax revenue.
Host nations, however, worry about MNCs gaining political power, driving out domestic industries and exploiting workers.

41. Review
Now that you have learned about the arguments for and against trade barriers and agreements, go back and answer the Chapter Essential Question.
Should free trade be encouraged?

42. Chapter 17: International Trade Section 3

43. Objectives Explain how exchange rates of world currencies.
Describe the effect of various exchange rate systems.
Define balance of trade and balance of payments.
Analyze the causes and effects of the U.S. trade deficit.

44. Key Terms
exchange rate: the value of a nation’s currency in relation to a foreign country
appreciation: an increase in the value of a currency
depreciation: a decrease in the value of a currency
foreign exchange market: system of financial institutions that facilitate the buying and selling of foreign currencies
fixed exchange-rate system: a system in which governments try to keep the values of their currencies constant against one another

45. Key Terms, cont.
flexible-exchange rate system: a system in which the exchange rate is determined by supply and demand
balance of trade: the relationship between the value of a country’s exports and the value of its imports
trade surplus: situation in which a nation exports more goods and services than it imports
trade deficit: situation in which a nation imports more goods and services than it exports
balance of payments: the value of all monetary transactions between a country’s economy and the rest of the world

46. Introduction How do exchange rates affect international trade?
Appreciating currency causes prices to rise on goods produced in a country, which means exports will likely decline and consumers will purchase more imports.
Depreciating currency causes prices to fall on goods produced in a country, which means exports will likely increase.

47. Foreign Exchange
Changing money from one nation’s currency is never easy because it is seldom an even exchange, like one peso for one dollar.
The value of a nation’s currency in relation to a foreign currency is called the exchange rate.
Understanding how exchange rates work enables you to convert prices in one currency to prices in another currency.

48. Foreign Exchange Rates
This table shows exchange rates on a single day. Read down the first column of the chart to find out what one U.S. dollar was worth in various foreign currencies. Read across the top to find out how much a selected foreign currency was worth in U.S. dollars.
On this day, how much was a U.S. dollar worth in Chinese yuan? In Canadian dollars?
Answer: 7.449; .99

49. Calculating Prices
A simple formula allows you to convert the price of an item from foreign currency to American dollars. Simply divide the price by the value of the currency per one dollar according to the exchange rate.

50. Appreciation
Checkpoint: What are the likely effects of the dollar becoming stronger?
An increase in the value of a currency is called appreciation.
When a currency appreciates, it becomes “stronger.”
When a nation’s currency appreciates, its products become more expensive in other countries.
A strong dollar is therefore likely to lead consumers in the United States to purchase more imported goods.
Checkpoint Answer: A strong dollar is therefore likely to lead consumers in the United States to purchase more imported goods and export less.

51. Depreciation
A decrease in the value of a currency is called depreciation, often referred to as “weakening.”
When a nations’ currency depreciates, its product become cheaper to other nations.

52. Foreign Exchange Market
International trade is made possible by the foreign exchange market, which consists of about 2,000 banks and other financial institutions that facilitate the buying and selling of foreign currencies.
These banks are located in various financial centers throughout the world and maintain close links to one another through telephone and computer.

53. Exchange Rate Systems
In the United States today, all prices are in dollars and all dollars have the same value.
Complications exist in international trade because exchange rates can shift.
A system in which governments try to keep the values of their currencies constant against one another is called a fixed exchange-rate system. In this system, governments intervene in order to maintain the rate.
Checkpoint: How are exchange rates set in a fixed exchange-rate system?
Checkpoint Answer: In a fixed exchange-rate system, governments try to keep the values of their currencies constant against one another.

54. The Bretton Woods Conference
As World War II was drawing to a close, representatives from 44 countries met in Bretton Woods, New Hampshire to make financial arrangements for the postwar world.
The Bretton Woods conference resulted in the creation of a fixed-rate system for the United States and much of western Europe.
To make the new system work, the Bretton Woods conference established the International Monetary Fund (IMF). Today, the IMF promotes international monetary cooperation, currency stability, and trade.

55. Flexible Exchange-Rate Systems
By 1973, many countries, including the United States, abandoned the fixed rate-exchange system and adopted a system based on flexible exchange rates, in which the exchange rate is determined by supply and demand.
Today, the countries of the world use a mixture of fixed and flexible exchange rate and trade has grown rapidly.

56. The Euro
Although the flexible exchange-rate system works well, some countries whose economies are closely tied together want the advantages of fixed rates.
One way to enjoy the advantages but avoid some of the difficulties of fixed exchange rates is to abolish individual currencies and establish a single currency, which is what 12 members of the European Union did by adopting the euro.
The euro helps simplify trade in member nations.

57. Balance of Trade
Exchange rates can affect a nation’s balance of trade.
Nations seek to maintain a balance of trade by avoiding trade surpluses and trade deficits.
By balancing trade, a nation can protect the value of its currency on the international market.
When a country continually imports more than it exports, the value of its currency falls.
This can be corrected either by limiting imports or by increasing the number or value of exports.

58. Balance of Payments
Economists get a more complex picture of international trade by looking at balance of payments, or the value of all monetary transactions between all sectors of a country’s economy and the rest of the world.
Income from foreign companies, government aid to foreign banks, and exchange rates must all be factored into the balance of payments

59. U.S. Balance of Trade
The United States currently runs a trade deficit.
As a result of these deficits, people from other countries now own a large part of the U.S. economy.
What was the difference between imports and exports in 1980? In 2005?
Answer: there was a minimal difference in 1980, maybe about $5 billion; $750 billion in 2005

60. Effects of the Trade Deficit
The fact that other countries own parts of the U.S. economy leads some to fear that U.S. national security is at risk and that overseas investors may be reluctant to purchase American assets, which would slow the monetary flow in the United States.
To reduce the trade deficit, the government could depreciate the exchange rate. As a result, exports would rise and imports would fall.
The government could also cut back spending by adjusting its monetary or fiscal policy.

61. Review
Now that you have learned about how exchange rates affect international trade, go back and answer the Chapter Essential Question.
Should free trade be encouraged?