2 Resource 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. Open competition benefits everyone
4 How do nations benefit from trade? Absolute and Comparative Advantage A person or nation has an absolute advantage when it can produce a particular good at a lower cost 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.
5 Kate has an absolute advantage because she produces more of both items T-shirtsBirdhousesKate62Carl1For Kate 1 birdhouse = 3 T-shirtsFor Carl 1 birdhouse = 1 T-shirtCarl should give up making T-shirts
6 Carl has a comparative advantage in birdhouses Opportunity cost for T-shirtsOpportunity cost for BirdhousesKate1/3 Birdhouses3 T-shirtsCarl1For Kate 1 T-shirt = 1/3 Birdhouse For Carl 1 T-shirt = 1 Birdhouse
7 T-shirtsBirdhousesKate62Carl1Opportunity cost for T-shirtsOpportunity cost for BirdhousesKate1/3 Birdhouses3 T-shirtsCarl1
8 Imports and Exports of the United States America is the world’s richest country and largest importer. In 2012, the US bought US$2.334 trillion worth of imported products. That total is up by 7.8% since 2008.World’s richest country the USA placed second in exporting during America shipped US$1.55 trillion worth of goods around the globe, up by 18.9% since 2008.The United States’ main trading partners are Canada and Mexico (NAFTA)
9 Goods and Services Deficit Increased in January 2014
11 Planes, Helicopters, and/or Spacecraft $30,570,688,728.76 2.2% WHAT DOES UNITED STATES EXPORT?1 Refined Petroleum$82,435,395,393.786.0%2 Cars$45,942,140,263.173.3%3 Integrated Circuits$38,076,490,687.792.8%4 Packaged Medicaments$33,799,228,734.322.5%5 Vehicle Parts$32,383,388,802.492.4%6 Gas Turbines$31,237,354,054.652.3%7 Planes, Helicopters, and/or Spacecraft$30,570,688,728.762.2%8 Gold$24,386,901,730.261.8%9 Medical Instruments$22,582,804,575.531.6%
12 1 Crude Petroleum$316,662,798,759.6815%2 Refined Petroleum$157,852,991,937.777.4%3 Digital Disk Drives$63,389,526,637.833.0%4 Integrated Circuits$55,700,511,530.662.6%5 Cars$46,784,971,542.742.2%6 Packaged Medicaments$34,320,314,631.011.6%7 Vehicle Parts$33,298,328,830.088 Gas Turbines$31,575,835,632.491.5%9 Planes, Helicopters, and/or Spacecraft$30,171,487,686.301.4%
13 Trade 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.
14 What Are Trade Barriers? A trade barrier is a means of preventing a foreign product or service from freely entering a nation’s territory.Import QuotasAn import quota is a limit on the amount of a good that can be imported.Voluntary Export RestraintsA voluntary export restraint (VER) is a self-imposed limitation on the number of products shipped to a certain country.TariffsA tariff is a tax on imported goods, such as a customs duty.Other Barriers to TradeOther barriers to trade include high government licensing fees and costly product standards.Subsidies – lowers the cost of production
15 Closed v. Open Economies Closed economy- does not engage in trade or other economic interaction with other countries. Very rare.Open economy- free and unfettered trade. Also rare.Most economies give protection to certain domestic industries.Interdependence- All nations need to trade with other nations to get natural resources.The Effects of Trade RestrictionsIncreased Prices for Foreign GoodsTariffs and other trade barriers increase the cost of imported products, making domestic products more competitive.Although manufacturers of many products may benefit from trade barriers, consumers can lose out.Trade WarsWhen one country restricts imports, its trading partner may impose its own retaliatory restrictions.
16 Arguments for Protectionism Protectionism is the use of trade barriers to protect a nation’s industries from foreign competition.Protecting JobsProtectionism shelters workers in industries that would be hurt by specialization and trade.Protecting Infant IndustriesProtectionist policies protect new industries in the early stages of development.Safeguarding National SecurityCertain industries may require protection from foreign competition because their products are essential to the defense of the United States.
17 Balance of Trade The United States Trade Deficit When a nation exports more than it imports, it has a trade surplus.When a nation imports more than it exports, it creates a trade deficit.The relationship between a nation’s imports and its exports is called its balance of trade.The United States Trade DeficitThe Trade DeficitThe United States has run a trade deficit since the early 1970s.Why the Trade Deficit?Imports of foreign oil as well as Americans’ enjoyment of imported goods account in part for the large American trade deficit.Reducing the Trade DeficitQuotas and other trade barriers can be used to raise prices of foreign-made goods and urge consumers to buy domestic goods.
18 International Cooperation Recent trends have been toward lowering trade barriers and increasing trade through international trade agreements.In 1948, the General Agreement on Tariffs and Trade (GATT) was established to reduce tariffs and expand world trade.In 1995, the World Trade Organization (WTO) was founded to ensure compliance with GATT, to negotiate new trade agreements, and to resolve trade disputes.
21 Global Trade Agreements Many nations have formed regional trade organizations. These trade organizations establish free-trade zones, or regions where a group of countries has agreed to reduce trade barriers among themselves.Major Trade Organization MembersEU CARICOMMERCOSURAPECNAFTA & APECPACIFIC OCEANATLANTIC OCEANINDIAN OCEAN
26 Balance of payments- the value of all money coming into a country minus all of the money going out. 2 Parts of balance of paymentsCurrent account- includes all trading of goods and services and any money or aid that the US gives to foreign countriesCapital account- investments by foreigners in the US and US investments abroad.
27 Exchange Rates and International Markets An increase in the value of a currency is called appreciation.A decrease in the value of a currency is called depreciation.Multinational firms convert currencies on the foreign exchange market, a network of about 2,000 banks and other financial institutions.The value of a foreign nation’s currency in relation to your own currency is called the exchange rate.
28 Types of Exchange Rate Systems Fixed Exchange-Rate SystemsA currency system in which governments try to keep the values of their currencies constant against one another is called a fixed exchange-rate system.Flexible Exchange-Rate SystemsFlexible exchange-rate systems allow the exchange rate to be determined by supply and demand.
29 Exchange RatesExchange rates move up and down as a reflection of the worth of a nation’s currency in comparison to another.What will happen if the demand for U.S. products increases?More U.S. dollars needed to buy goods. Increase in demand causes the dollar to appreciate or strengthen.What would be the effect on prices?US goods would be relatively more expensive for others.US consumers could purchase goods from other countries more cheaply.
31 Currency appreciation- a country’s currency is able to buy more units of another nation’s currency. ConsequencesConsumers of foreign goods will benefit because they can buy more foreign goods with the same amount of currency.Producers who sell a lot to foreign buyers will have trouble because their products will be relatively more expensive for foreign customers.Therefore it is not good for a nation to have too much currency appreciation because this will reduce the country’s exports. If a country were experiencing a deficit they might activate devaluation or depreciation of currency on purpose.
32 Currency depreciation- if a currency depreciates it is able to buy fewer units of foreign currency than previously.ConsequencesThe effects are opposite of appreciation. Exporters will be better off because more foreign buyers will purchase their products. However, consumers cannot buy as much of a foreign product as before.If the US wanted to increase net exports or decrease the trade deficit they could depreciate the U.S. dollar, this would encourage foreign consumers to purchase more US products and US consumers will purchase fewer foreign goods.