Chapter 17 International Trade. Why Do Nations Trade? There is an unequal distribution of resources...

Chapter 17Chapter 17International TradeInternational Trade

Why Do Nations Trade?Why Do Nations Trade?

There is an unequal distribution There is an unequal distribution of resources of resources

High school terms – other High school terms – other countries have stuff that we countries have stuff that we don’tdon’t

All nations need goods and All nations need goods and services, but may not have the services, but may not have the factors of production factors of production requiredrequired

Resource DistributionResource Distribution Natural Resources – Farm land, Natural Resources – Farm land,

mineral deposits, oil, natural gas, mineral deposits, oil, natural gas, water, woodlandswater, woodlands U.S. Strengths – farm landU.S. Strengths – farm land U.S. Weaknesses – none (though oil U.S. Weaknesses – none (though oil

consumption far exceeds supply)consumption far exceeds supply)

Resource DistributionResource Distribution

Human Capital – knowledge and skills of Human Capital – knowledge and skills of workers, overall education levelworkers, overall education level U.S. Strengths – very high literacy rate U.S. Strengths – very high literacy rate

97%, largest network of universities97%, largest network of universities U.S. Weaknesses – noneU.S. Weaknesses – none

Resource DistributionResource Distribution Physical Capital – manmade objects Physical Capital – manmade objects

used to produce other goods and used to produce other goods and servicesservices U.S. Strengths – extensive U.S. Strengths – extensive

communications network, roads and communications network, roads and transportationtransportation

U.S. Weaknesses – noneU.S. Weaknesses – none

Resource DistributionResource Distribution

How Do Nations Decide What How Do Nations Decide What to Produce and Trade?to Produce and Trade?

Determine your country’s Determine your country’s absolute absolute and comparative advantagesand comparative advantages Absolute Advantage – you can Absolute Advantage – you can

produce it at a lower cost than produce it at a lower cost than other countriesother countries

Comparative Advantage – your Comparative Advantage – your opportunity cost is lower than other opportunity cost is lower than other countries for producing that goodcountries for producing that good

The best option is to trade based on The best option is to trade based on comparative advantagecomparative advantage

Lets take a lookLets take a look

Grab a text book and open Grab a text book and open to page 443to page 443

Lets read an example Lets read an example about Absolute and about Absolute and Comparative AdvantageComparative Advantage

Benefits of SpecializationBenefits of Specialization

Huh?Huh?

U.S. can make 4 barrels of oil, U.S. can make 4 barrels of oil, or 12 bales of wheator 12 bales of wheat

Mexico can make 2 barrel of Mexico can make 2 barrel of oil, or 2 bale of wheatoil, or 2 bale of wheat

Who has the absolute Who has the absolute advantage for oil?advantage for oil?

For wheat?For wheat?

Huh?Huh?

What is the U.S. opportunity What is the U.S. opportunity cost for each barrel of oil?cost for each barrel of oil?

What is Mexico’s opportunity What is Mexico’s opportunity cost for each barrel of oil?cost for each barrel of oil?

Who has the comparative Who has the comparative advantage for oil?advantage for oil?

For wheat?For wheat?

Comparative/Absolute Comparative/Absolute ReviewReview

Jim can produce 6 IPOD’s or 18 Jim can produce 6 IPOD’s or 18 pairs of shoes in 1 hourpairs of shoes in 1 hour

John can produce 3 IPOD or 3 John can produce 3 IPOD or 3 pair of shoes in an hour pair of shoes in an hour

Who has the absolute advantage Who has the absolute advantage for IPOD’s ?for IPOD’s ?

For Shoes?For Shoes?

Comparative/Absolute Comparative/Absolute ReviewReview

What is the Jim’s opportunity What is the Jim’s opportunity cost for each IPOD?cost for each IPOD?

What is John’s opportunity cost What is John’s opportunity cost for each IPOD?for each IPOD?

Who has the comparative Who has the comparative advantage for IPOD’s?advantage for IPOD’s?

For shoes?For shoes?

Benefit of Trading Based on Benefit of Trading Based on Comparative AdvantageComparative Advantage

Each side will bargain to Each side will bargain to make the best deal possiblemake the best deal possible

John can produce his own John can produce his own IPOD, or send shoes to Jim in IPOD, or send shoes to Jim in exchange for IPODexchange for IPOD

By trading both sides can By trading both sides can profitprofit

Trade and EmploymentTrade and Employment

Trading based on comparative Trading based on comparative advantage creates advantage creates specializationspecialization – produce only some – produce only some goods/services rather than goods/services rather than everything they need and wanteverything they need and want

Specialization can cause Specialization can cause unemployment, but it also makes unemployment, but it also makes goods cheaper, overallgoods cheaper, overall

Lets Review Lets Review

Trade BarriersTrade Barriers

U.S. is the world’s largest exporter U.S. is the world’s largest exporter and importerand importer

Trade Barrier – restriction on trade Trade Barrier – restriction on trade of goods to or from foreign countriesof goods to or from foreign countries

Trade Barriers can take many formsTrade Barriers can take many forms


Import Quota – limit on number Import Quota – limit on number of goods that can be importedof goods that can be imported

Voluntary Export Restraint (VER) Voluntary Export Restraint (VER) – reduction in exports, done to – reduction in exports, done to encourage another country to encourage another country to reduce trade barriersreduce trade barriers


Tariff – tax on imported Tariff – tax on imported goods, discourages goods, discourages consumers from buying those consumers from buying those goodsgoods

Embargo – total ban on Embargo – total ban on tradingtrading

What is the Goal of Trade What is the Goal of Trade Barriers?Barriers?

Protectionism Protectionism - - Preserve Preserve jobs and jobs and industries in industries in your countryyour country


Reasons for Reasons for protectionism:protectionism:Save jobs Save jobs that would that would go to go to countries countries with cheap with cheap laborlabor


Reasons for Reasons for protectionism:protectionism:Protect an Protect an infant infant industry industry that that needs time needs time to developto develop


Reasons for Reasons for protectionism:protectionism:Protect Protect national national security for security for critical critical industries industries needed in a needed in a warwar

TRADE TRADE ORGANIZATIONSORGANIZATIONS

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

Trade OrganizationsTrade Organizations

Current Free Trade Current Free Trade AgreementsAgreements

Reciprocal Trade Reciprocal Trade Agreement ActAgreement Act Passed by Passed by

Congress to Congress to allow the allow the President to President to reduce tariffsreduce tariffs

U.S. grants U.S. grants “normal trade “normal trade relations” status relations” status to trade partnersto trade partners


World Trade World Trade Organization Organization (WTO)(WTO) Acts as a Acts as a

referee in trade referee in trade to reduce tariffs to reduce tariffs and restrictionsand restrictions

149 Members149 Members


European European Union (EU)Union (EU) Unified Unified

economy of economy of 12 European 12 European countriescountries

Same Same currency, currency, free tradefree trade


North American North American Free Trade Free Trade Agreement Agreement (NAFTA)(NAFTA) Eliminates all Eliminates all

trade barriers trade barriers between between Canada, the Canada, the U.S., and U.S., and Mexico by 2009Mexico by 2009


Asian Pacific Asian Pacific Economic Economic CooperationCooperation Countries along Countries along

the Pacific (U.S. the Pacific (U.S. China, Russia China, Russia etc.) agree to etc.) agree to reduce barriers reduce barriers

Multinational Corporations and Multinational Corporations and TradeTrade

Integrate a Integrate a variety of variety of countries into countries into production of production of a gooda good

Multinational Corporations and Multinational Corporations and TradeTrade

Some fears that Some fears that corporations corporations take advantage take advantage of under-of under-developed developed countries, and countries, and destroy local destroy local culturescultures

Exchange RatesExchange Rates

Exchange Rate – amount of Exchange Rate – amount of another currency you can another currency you can trade your currency fortrade your currency for Ex. Trading a dollar for 10 pesosEx. Trading a dollar for 10 pesos Exchange Rates change daily, Exchange Rates change daily,

based on supply and demandbased on supply and demand


Strong Currency vs. Weak Strong Currency vs. Weak CurrencyCurrency A strong currency is A strong currency is

appreciating – appreciating – growing in value growing in value compared to other currenciescompared to other currencies

A weak currency is A weak currency is depreciating depreciating – decreasing in value– decreasing in value


Effects of strong and weak Effects of strong and weak currenciescurrencies A strong dollar discourages other A strong dollar discourages other

countries from buying American countries from buying American goods (decreases exports)goods (decreases exports)

A weak dollar makes American A weak dollar makes American goods cheaper for other goods cheaper for other countries (increases exports)countries (increases exports)

Chapter 17 International Trade. Why Do Nations Trade? There is an unequal distribution of resources...

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