Resource Distribution and International Trade

1. El Dorado High School Spring 2015 Mr. Ruiz Chapter 17 International Trade

2. Objectives • Analyze resource distribution locations and evaluate their significance. • Describe absolute and comparative advantage and explain how comparative advantage contributes to trade amongst nations. • Analyze the impact of U.S. imports/ exports on the U.S. and its trading partners. • Describe the effects of trade on employment.

3. Resource Distribution • The U.S. produces many products, but many of the products our citizens use are manufactured somewhere else. • Unequal distribution of resources prevents countries from producing everything their citizens need or want. • Resource distribution is at the center of how and why countries trade.

4. Resource Distribution • Recall at the beginning of this semester we discussed the Factors of Production, these are the components needed to make the goods and services: • Natural Resources • Materials found in nature, including: arable land, water ,oil/ gas deposits, timber, and mineral deposits. • The location of these natural resources can help determine what products may be produced in certain regions. • Human Capital • The knowledge and skills gained by a worker through experience and education • Can be measure in a country through literacy rate or percentage of people who can read. • Physical Capital • Includes the objects made by men and women that are used to produce goods and services. • Examples: Machinery, factories, computers, infrastructure (roads & bridges)

5. Resource Distribution • Economic Activity Patterns • Five (5) major economic activities include: 1) Producing, 2) Exchanging, 3) Consuming, 4) Saving, 5) Investing • Production, distribution, and other economic activities are largely influenced by geographic and human factors (You ski where there are mountains and you mine where there is ore deposits) • Unequal Resource Distribution • Each nations possess different quantities of land, labor & capital; this is many times determined by nature and sometimes by culture and history. • Because nations differ in resources, they also differ in their capacities to produce different goods and services. • The Need for Trade • Nations essentially specialize to maximize their consumption of goods and services • Specialization occurs when individuals or nations decide to produce the goods and service they are best suited for rather than trying to be fully self-sufficient. • When nations specialize they are able to obtain thru trade goods/services that they cannot produce or produce poorly

6. Unequal Resource Distribution • Every nation on Earth possesses different types of quantities of land, labor, and capital resources. Many of these are, of course, determined by nature and geography. • Additionally, a nation’s culture and history also affect the human and physical resources • Think in terms of educational levels, wars, religious beliefs coupled with customs. • Examples of differences: • The United States population averages 97 % literacy rate while India’s rate is slightly more than half of that at 52%. The United States population tops 320 million while India’s population is almost four times that at just over 1 billion. • Based on the above numbers (using your common sense), where would a company likely find the cheapest and most abundant labor force?

7. Absolute and Comparative Advantage • Trading is meant to benefit both countries with abundant resources and those with few resources. Let’s observe two (2) trading production/ trade concepts that can help explain the benefits of trade: • Absolute advantage • Comparative advantage

8. Absolute Advantage • A person or a nation is considered to have absolute advantage when it can produce more of a given product using a given amount of resources Example: • Country A can produce 1000 parts per hour with 200 workers. • Country B can produce 2500 parts per hour with 200 workers. • Country C can produce 10000 parts per hour with 200 workers.Considering that labor and material costs are all equivalent, Country C has the absolute advantage over both Country B and Country A because it can produce the most parts per hour at the same cost as other nations. Country B has an absolute advantage over Country A because it can produce more parts per hour with the same number of employees. Country A has no absolute advantage because it can't produce more goods than either Country B or Country C given the same input.

9. Comparative Advantage Tom’s Production Possibilities Hank’s Production Possibilities

10. Comparative Advantage • An individual or nation has a comparative advantage in producing a good or service if the opportunity cost of producing the good is lower for that individual or nation than for other nations or people.

11. Comparative Advantage • Specialize and Trade • Both castaways are better off when they each specialize in what they are good at and trade. • It’s a good idea for Tom to catch the fish for both of them, because his opportunity cost of a fish in terms of coconuts not gathered is only 3⁄4 of a coconut, versus 2 coconuts for Hank. • Correspondingly, it’s a good idea for Hank to gather coconuts for the both of them.

12. Comparative Advantage • How the Castaways Gain from Trade Both Tom and Hank experience gains from trade: • Tom’s consumption of fish increases by two, and his consumption of coconuts increases by one. • Hank’s consumption of fish increases by four, and his consumption of coconuts increases by two.

13. Tom vs. Hank: Absolute vs. Comparative • Tom has an absolute advantage in both activities: he can produce more output with a given amount of input (in this case, his time) than Hank. • But we’ve just seen that Tom can indeed benefit from a deal with Hank because comparative, not absolute, advantage is the basis for mutual gain. • So Hank, despite his absolute disadvantage, even in coconuts, has a comparative advantage in coconut gathering. • Meanwhile Tom, who can use his time better by catching fish, has a comparative disadvantage in coconut-gathering.

14. Comparative Advantage vs. Absolute Advantage • Summary: Comparative vs. Absolute Advantage • An individual has a comparative advantage in producing a good or service if the opportunity cost of producing the good is lower for that individual than for other people. • An individual has an absolute advantage in an activity if he or she can do it better than other people. Having an absolute advantage is not the same thing as having a comparative advantage.

15. Comparative Advantage • Reminder: A person or a nation is considered to have the comparative advantage if it has the lower opportunity cost in the production of certain goods and services.

16. Comparative Advantage

17. Comparative Advantage

18. Comparative Advantage

19. The U.S. enjoys a comparative advantage in producing many goods and services. It exports a variety of goods/services due to an abundance of factor resources. What is the role of the United States as an importer and exporter in the world market? Terms: Import: A good that is brought in from another country for sale Export: A good that is sent to another country for sale As both an importer and exporter, the U.S. is in a good position to benefit from increased trade in goods and services in the world market The U.S. is a top five world trade leader in both exportation and importation The United States and Trade

20. The Effects of Trade on Employment • Trade allows nations to specialize in the production of a goods and services • Specialization and employment • Specialization can also change a nation’s employment patterns • Three (3) concerns that may arise due to changes in specialization: • Unemployment • Retraining • Relocation • Specialization and employment in the United States • Shifts in employment in the United States have taken place in the last few decades as a result of world trade and other factors. • Example: Advances in robotics and productivity gave Japan the comparative advantage in automobile production in the mid 1970s.

21. Section Two Trade Barriers and Agreements

22. Define various types of trade barriers Compare the effects of free trade and trade barriers on economic activities Understand arguments in favor of protectionism Evaluate the benefits and costs of participation in international trade agreements Objectives

23. Trade Barriers • Trade barriers are means for preventing a foreign product or service from freely entering a nation’s territory. • We’ll take a look at three(3) common forms of trade barriers: • Import Quotas • Limit on the amount of a good that can be imported. • Voluntary Export Restraints • A self-imposed limitation on the number of products shipped to a particular country. • Tariffs • A tax on imported goods. • Customs duty: A form of tariff on certain items purchase abroad

24. Effects of Trade Barriers • Trade barriers are simply governmental actions to limit supply. Both negative and positive effects can be attributed to the implementation of trade barriers. • Example: The U.S. wishes for its cotton growers to have an opportunity to sell their goods domestically, so it establishes quotas on importers of cotton. The quota may have the effect of compelling clothing manufacturers to by cotton here in the United States. • Increased Prices for Foreign Goods • Producers may benefit from trade barriers here in the U.S.; however, consumers tend to lose out because trade barriers also tend to result in higher market prices. • Trade Wars • As a result of trade barriers, economic conflicts may arise. When one nation restricts imports the partner nation may respond with restrictions of their own. This cycle eventually results in trade wars between trading nations that ultimately lead to the substantial decrease in trade.

25. Arguments for Protectionism • Why does a country impose trade barriers? • Answer: To protect domestic industry from foreign competition • Three (3) main arguments stand in support of Protectionism Protecting Jobs: Sheltering domestic labor in industries that would be hurt by foreign competition. The argument is that layoffs would result if foreign competition wasn’t stymied in industries where domestic labor could not feasibly compete with a cheaper product of labor force. Protecting infant Industries: Protecting new domestic industries in the early stages of their development The argument is that new industries need time and practice to become more efficient producers, therefore, tariffs and other protectionist policies shield these industries from more establishes foreign rivals. Safeguarding National Security: Certain industries may require protection from foreign competition because their products are essential to defending the United States. The argument is that in the event of war the United States would need industries that provide energy and advanced technologies; not depending on other nations for these crucial resources during a crisis is key.

26. International Cooperation and Agreements • In efforts to increase free trade, several nations have developed international free trade agreements to reduce trade barriers and tariffs between certain select nations. • These trading blocks essentially try to secure trade benefits between trade partners that other nations outside this trading block may not be able to access and benefit from. • The World Trade Organization (WTO) • Founded in 1995, this organization was created to ensure compliance with the General Agreement on Tariffs and Trade (GATT, 1948) and to negotiate new trade agreements and resolve trade disputes. • Major world trade organizations: • The European Union (EU) • North American Free Trade Agreement (NAFTA) • Asia-Pacific Economic Cooperation (APEC) • The Southern Common Market (MERCOSUR) • The Caribbean Community and Common Market (CARICOM)

27. Section Three Measuring Trade

28. Exchange Rates • Because there are numerous nations on earth there are also a multitude of different type of currencies with different comparative values. These values may and do change daily in the foreign exchange market. • Examples: • 1 Euro = 1.078 (1.08) USD • 1 British Pound = 1.498 (1.5) USD • 1 USD = 118.839 (118.89) Japanese Yen (Note: These figures represent the exchange values as of 2:10 p.m., April 17th, 2015) Since nations’ possess their own currency, for trade to take place, an exchange rate had to be established to determine the comparable value of one currency to another. Strong vs. Weak Currencies Appreciation: An increase in the value of currency is called appreciation. When a nation’s currency appreciates, that nation’s products become more expensive in other countries, resulting in some nations consuming less of the products from a nation who’s currency has appreciated. On the other hand, that same appreciation allows the citizens of that nation to consume foreign products as less cost. Depreciation: A decrease in the value of currency is called depreciation. When a nation’s currency depreciates, its products become cheaper to other nations. At the same time, foreign products become more expensive for that nation; therefore, imports will likely decrease.

29. Exchange Rate System • Fixed Exchange Rate System • A currency system in which governments try to keep the values of their currencies constant against one another. • Flexible Exchange Rate System • A currency system that allows the exchange rate to be determined by supply and demand. • By 1973, numerous countries, including the U.S., dropped the fixed exchange structure for the flexible exchange rate system. • This system accounts for the day-to-day changes in currency values. • Note: Today, most countries make use of a mixture of these two systems, with the U.S. and other major currencies employing a dominate flexible exchange rate.