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

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Presentation on theme: "Chapter 17 International Trade. Why Do Nations Trade? There is an unequal distribution of resources There is an unequal distribution of resources High."— Presentation transcript:

1 Chapter 17 International Trade

2 Why Do Nations Trade? There is an unequal distribution of resources There is an unequal distribution of resources High school terms – other countries have stuff that we dont High school terms – other countries have stuff that we dont All nations need goods and services, but may not have the factors of production required 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 Natural Resources – Farm land, mineral deposits, oil, natural gas, water, woodlands U.S. Strengths – farm land U.S. Strengths – farm land U.S. Weaknesses – none (though oil consumption far exceeds supply) U.S. Weaknesses – none (though oil consumption far exceeds supply)

4 Resource Distribution Human Capital – knowledge and skills of workers, overall education level 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 Physical Capital – manmade objects used to produce other goods and services U.S. Strengths – extensive communications network, roads and transportation U.S. Strengths – extensive communications network, roads and transportation U.S. Weaknesses – none U.S. Weaknesses – none

6 Resource Distribution

7 How Do Nations Decide What to Produce and Trade? Determine your countrys absolute and comparative advantages Determine your countrys absolute and comparative advantages Absolute Advantage – you can produce it at a lower cost than other countries 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 Comparative Advantage – your opportunity cost is lower than other countries for producing that good The best option is to trade based on comparative advantage The best option is to trade based on comparative advantage

8 Lets take a look Grab a text book and open to page 443 Grab a text book and open to page 443 Lets read an example about Absolute and Comparative Advantage 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 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 Mexico can make 2 barrel of oil, or 2 bale of wheat Who has the absolute advantage for oil? Who has the absolute advantage for oil? For wheat? For wheat?

11 Huh? What is the U.S. opportunity cost for each barrel of oil? What is the U.S. opportunity cost for each barrel of oil? What is Mexicos opportunity cost for each barrel of oil? What is Mexicos opportunity cost for each barrel of oil? Who has the comparative advantage for oil? Who has the comparative advantage for oil? For wheat? For wheat?

12 Comparative/Absolute Review Jim can produce 6 IPODs or 18 pairs of shoes in 1 hour Jim can produce 6 IPODs or 18 pairs of shoes in 1 hour John can produce 3 IPOD or 3 pair of shoes in an hour John can produce 3 IPOD or 3 pair of shoes in an hour Who has the absolute advantage for IPODs ? Who has the absolute advantage for IPODs ? For Shoes? For Shoes?

13 Comparative/Absolute Review What is the Jims opportunity cost for each IPOD? What is the Jims opportunity cost for each IPOD? What is Johns opportunity cost for each IPOD? What is Johns opportunity cost for each IPOD? Who has the comparative advantage for IPODs? Who has the comparative advantage for IPODs? For shoes? For shoes?

14 Benefit of Trading Based on Comparative Advantage Each side will bargain to make the best deal possible 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 John can produce his own IPOD, or send shoes to Jim in exchange for IPOD By trading both sides can profit 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 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 Specialization can cause unemployment, but it also makes goods cheaper, overall

16 Lets Review

17

18 Trade Barriers U.S. is the worlds largest exporter and importer U.S. is the worlds largest exporter and importer Trade Barrier – restriction on trade of goods to or from foreign countries Trade Barrier – restriction on trade of goods to or from foreign countries Trade Barriers can take many forms Trade Barriers can take many forms

19 Trade Barriers Import Quota – limit on number of goods that can be imported 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 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 Tariff – tax on imported goods, discourages consumers from buying those goods Embargo – total ban on trading Embargo – total ban on trading

21 What is the Goal of Trade Barriers? Protectionism - Preserve jobs and industries in your country Protectionism - Preserve jobs and industries in your country

22 What is the Goal of Trade Barriers? Reasons for protectionism: Reasons for protectionism: Save jobs that would go to countries with cheap labor Save jobs that would go to countries with cheap labor

23 What is the Goal of Trade Barriers? Reasons for protectionism: Reasons for protectionism: Protect an infant industry that needs time to develop Protect an infant industry that needs time to develop

24 What is the Goal of Trade Barriers? Reasons for protectionism: Reasons for protectionism: Protect national security for critical industries needed in a war 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 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 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) 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) European Union (EU) Unified economy of 12 European countries Same currency, free trade

30 Current Free Trade Agreements North American Free Trade Agreement (NAFTA) 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 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 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 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 Exchange Rate – amount of another currency you can trade your currency for Ex. Trading a dollar for 10 pesos Ex. Trading a dollar for 10 pesos Exchange Rates change daily, based on supply and demand Exchange Rates change daily, based on supply and demand

35 Exchange Rates Strong Currency vs. Weak Currency Strong Currency vs. Weak Currency A strong currency is appreciating – growing in value compared to other currencies A strong currency is appreciating – growing in value compared to other currencies A weak currency is depreciating – decreasing in value A weak currency is depreciating – decreasing in value

36 Exchange Rates Effects of strong and weak currencies Effects of strong and weak currencies A strong dollar discourages other countries from buying American goods (decreases exports) A strong dollar discourages other countries from buying American goods (decreases exports) A weak dollar makes American goods cheaper for other countries (increases exports) A weak dollar makes American goods cheaper for other countries (increases exports)


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