Chapter 17

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)