2Why do nations trade? Because they have something to gain. Because they have different terrains, climates, and resources – means that some countries can produce some goods that others can not or that they can only produce at a very high cost.
3Resource Distribution and Trade Each country of the world possesses different types and quantities of land, labor, and capital resources.By specializing in the production of certain goods and services, nations can use their resources more efficiently.Specialization and trade can benefit all nations.Specialization is determined by a nation’s natural resources and by its human and physical capital
4Why Nations TradeHow do the nation’s factors of production determine the nation’s specialization?Natural resources – help determine what goods and services an economy producesHuman capital – Measure literacy. A country with a high literacy rate is likely to have an education, skilled work forcePhysical Capital – also includes public infrastructure (roads)Economic Activity PatternsProducingExchangingConsumingSavingInvestingGeographic and human factors influence patterns of economic activity
5Resource Distribution The Need for Trade:Specialization occurs when producers- either individuals or nations – decide to produce only certain goods and services, rather than producing all the goods and services they needSpecialization is determined by a nation’s natural resources and by its human and physical capitalExamples: US produces wheat, soybeans, etc. We do not produce diamonds or coffee
6Absolute and Comparative Advantage Absolute AdvantageDefine:Example:Comparative AdvantageDefine:Example:Law of Comparative Advantage
7Absolute AdvantageWhen a country has an absolute advantage over another country, it simply means that country can produce more of a good than another country.For example, Brazil has an absolute advantage over the United States in the production of sugar, while the United States has an absolute advantage over Brazil in the production of cars.
8Comparative Advantage While large countries will probably have an absolute advantage in production over smaller countries, when any two countries are producing two goods (like cars and sugar), one country will always have a comparative advantage over the other in the production of one of the two goods.The key to determining which country should produce which good is opportunity costPut another way, given two countries that can both produce sugar and cars, one country should specialize in producing cars and one country should specialize in producing sugar so that they can trade.
9Absolute and Comparative Advantage A person or nation has an absolute advantage when it can produce more of a particular good than another person or nation.Comparative advantage is the ability of one person or nation to produce a good at a lower opportunity cost than that of another person or nation.The law of comparative advantage states that nations are better off when they produce goods and services for which they have a comparative advantage in supplying.
10In this example, both Kate and Carlos benefit from specialization. Benefits of TradeIn this example, both Kate and Carlos benefit from specialization.SpecializationTradeNet EffectCarlKateCarl specializes, switching 2 hours from T-shirt production to birdhouse production.Carl trades 1 birdhouse for 2 T-shirts.Net effect is same number of T-shirts and 1 more birdhouse.Kate specializes, switching 1 half- hour from birdhouse production to T-shirt production.Carl trades 2 T-shirts for 1 birdhouse.Net effect is same number of birdhouses and 1 more T-shirt.Benefits from Specialization and Trade for Carl and Kate
11Benefits for Trade Both sides agree on a price that benefits both The nation that has the lower opportunity cost in producing a good has a comparative advantage in producing that goodIt is the nation with the comparative advantage- not necessarily the absolute advantage – that should specialize in producing that good
12Imports and Exports of the United States The United States is the world’s largest exporter.The United States is also the world’s largest importer.The United States’ main trading partners are Canada, Mexico and Japan.
13TOP US TRADING PARTNERS JUNE 2011 CanadaChinaMexicoJapanGermanyUnited KingdomSouth KoreaBrazilNetherlandsTaiwan
14EXPORTSGoods produced within a country and sold to residents of a foreign country.Major U.S. exports:Automobiles, computers, aircraft, corn, wheat, soybeans, scientific instruments, coal, machinery, and plastic materials.
15TOP US EXPORTS – JUNE 2011 Civilian aircraft Semiconductors Passenger carsPharmaceutical preparationsAuto accessoriesOther industrial machinesFuel oilOrganic chemicalsTelecommunicationsPlastic materials
16IMPORTSGoods produced in a foreign country and purchased by the residents of a domestic country.Major U.S. imports:Petroleum, clothing, iron, steel, office machines, footwear, fish, coffee, and diamonds.
18TRADE DEFICITU.S. buys more from the world than the world buys from it.
19Trade and EmploymentWorkers who lose their jobs due to specialization face three options:Unemployment: Inability to adapt and find a new jobRelocation: Moving to where current skills meet current jobsRetraining: Gaining new human capital to meet the demands of specialized labor marketsAs nations begin to specialize in certain goods, dramatic changes in the nation’s employment patterns also occur.