1. Chapter 17
International Trade

2. Why Do Nations Trade? There is an unequal distribution of resources
High school terms – other countries have stuff that we don’t
All nations need goods and services, but may not have the factors of production required

3. Resource Distribution
Natural Resources – Farm land, mineral deposits, oil, natural gas, water, woodlands
U.S. Strengths – farm land
U.S. Weaknesses – none (though oil consumption far exceeds supply)

4. Resource Distribution
Human Capital – knowledge and skills of workers, overall education level
U.S. Strengths – very high literacy rate 97%, largest network of universities
U.S. Weaknesses – none

5. Resource Distribution
Physical Capital – manmade objects used to produce other goods and services
U.S. Strengths – extensive communications network, roads and transportation
U.S. Weaknesses – none

6. Resource Distribution

7. How Do Nations Decide What to Produce and Trade?
Determine your country’s absolute and comparative advantages
Absolute Advantage – you can produce it at a lower cost than other countries
Comparative Advantage – your opportunity cost is lower than other countries for producing that good
The best option is to trade based on comparative advantage

8. Lets take a look
Grab a text book and open to page 443
Lets read an example about Absolute and Comparative Advantage

9. Benefits of Specialization

10. Huh? U.S. can make 4 barrels of oil, or 12 bales of wheat
Mexico can make 2 barrel of oil, or 2 bale of wheat
Who has the absolute advantage for oil?
For wheat?

11. Huh? What is the U.S. opportunity cost for each barrel of oil?
What is Mexico’s opportunity cost for each barrel of oil?
Who has the comparative advantage for oil?
For wheat?

12. Comparative/Absolute Review
Jim can produce 6 IPOD’s or 18 pairs of shoes in 1 hour
John can produce 3 IPOD or 3 pair of shoes in an hour
Who has the absolute advantage for IPOD’s ?
For Shoes?

13. Comparative/Absolute Review
What is the Jim’s opportunity cost for each IPOD?
What is John’s opportunity cost for each IPOD?
Who has the comparative advantage for IPOD’s?
For shoes?

14. Benefit of Trading Based on Comparative Advantage
Each side will bargain to make the best deal possible
John can produce his own IPOD, or send shoes to Jim in exchange for IPOD
By trading both sides can profit

15. Trade and Employment
Trading based on comparative advantage creates specialization – produce only some goods/services rather than everything they need and want
Specialization can cause unemployment, but it also makes goods cheaper, overall

16. Lets Review

18. Trade Barriers U.S. is the world’s largest exporter and importer
Trade Barrier – restriction on trade of goods to or from foreign countries
Trade Barriers can take many forms

19. Trade Barriers
Import Quota – limit on number of goods that can be imported
Voluntary Export Restraint (VER) – reduction in exports, done to encourage another country to reduce trade barriers

20. Trade Barriers
Tariff – tax on imported goods, discourages consumers from buying those goods
Embargo – total ban on trading

21. What is the Goal of Trade Barriers?
Protectionism - Preserve jobs and industries in your country

22. What is the Goal of Trade Barriers?
Reasons for protectionism:
Save jobs that would go to countries with cheap labor

23. What is the Goal of Trade Barriers?
Reasons for protectionism:
Protect an infant industry that needs time to develop

24. What is the Goal of Trade Barriers?
Reasons for protectionism:
Protect national security for critical industries needed in a war

25. TRADE ORGANIZATIONS
Make a web on a piece of paper and in each circle list a type of trade organization and describe it

26. Trade Organizations

27. Current Free Trade Agreements
Reciprocal Trade Agreement Act
Passed by Congress to allow the President to reduce tariffs
U.S. grants “normal trade relations” status to trade partners

28. Current Free Trade Agreements
World Trade Organization (WTO)
Acts as a referee in trade to reduce tariffs and restrictions
149 Members

29. Current Free Trade Agreements
European Union (EU)
Unified economy of 12 European countries
Same currency, free trade

30. Current Free Trade Agreements
North American Free Trade Agreement (NAFTA)
Eliminates all trade barriers between Canada, the U.S., and Mexico by 2009

31. Current Free Trade Agreements
Asian Pacific Economic Cooperation
Countries along the Pacific (U.S. China, Russia etc.) agree to reduce barriers

32. Multinational Corporations and Trade
Integrate a variety of countries into production of a good

33. Multinational Corporations and Trade
Some fears that corporations take advantage of under-developed countries, and destroy local cultures

34. Exchange Rates
Exchange Rate – amount of another currency you can trade your currency for
Ex. Trading a dollar for 10 pesos
Exchange Rates change daily, based on supply and demand

35. Exchange Rates Strong Currency vs. Weak Currency
A strong currency is appreciating – growing in value compared to other currencies
A weak currency is depreciating – decreasing in value

36. Exchange Rates Effects of strong and weak currencies
A strong dollar discourages other countries from buying American goods (decreases exports)
A weak dollar makes American goods cheaper for other countries (increases exports)