2Why Do Nations Trade? There is an unequal distribution of resources High school terms – other countries have stuff that we don’tAll nations need goods and services, but may not have the factors of production required
3Resource Distribution Natural Resources – Farm land, mineral deposits, oil, natural gas, water, woodlandsU.S. Strengths – farm landU.S. Weaknesses – none (though oil consumption far exceeds supply)
4Resource Distribution Human Capital – knowledge and skills of workers, overall education levelU.S. Strengths – very high literacy rate 97%, largest network of universitiesU.S. Weaknesses – none
5Resource Distribution Physical Capital – manmade objects used to produce other goods and servicesU.S. Strengths – extensive communications network, roads and transportationU.S. Weaknesses – none
7How Do Nations Decide What to Produce and Trade? Determine your country’s absolute and comparative advantagesAbsolute Advantage – you can produce it at a lower cost than other countriesComparative Advantage – your opportunity cost is lower than other countries for producing that goodThe best option is to trade based on comparative advantage
8Lets take a lookGrab a text book and open to page 443Lets read an example about Absolute and Comparative Advantage
10Huh? U.S. can make 4 barrels of oil, or 12 bales of wheat Mexico can make 2 barrel of oil, or 2 bale of wheatWho has the absolute advantage for oil?For wheat?
11Huh? 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?
12Comparative/Absolute Review Jim can produce 6 IPOD’s or 18 pairs of shoes in 1 hourJohn can produce 3 IPOD or 3 pair of shoes in an hourWho has the absolute advantage for IPOD’s ?For Shoes?
13Comparative/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?
14Benefit of Trading Based on Comparative Advantage Each side will bargain to make the best deal possibleJohn can produce his own IPOD, or send shoes to Jim in exchange for IPODBy trading both sides can profit
15Trade and EmploymentTrading based on comparative advantage creates specialization – produce only some goods/services rather than everything they need and wantSpecialization can cause unemployment, but it also makes goods cheaper, overall
27Current Free Trade Agreements Reciprocal Trade Agreement ActPassed by Congress to allow the President to reduce tariffsU.S. grants “normal trade relations” status to trade partners
28Current Free Trade Agreements World Trade Organization (WTO)Acts as a referee in trade to reduce tariffs and restrictions149 Members
29Current Free Trade Agreements European Union (EU)Unified economy of 12 European countriesSame currency, free trade
30Current Free Trade Agreements North American Free Trade Agreement (NAFTA)Eliminates all trade barriers between Canada, the U.S., and Mexico by 2009
31Current Free Trade Agreements Asian Pacific Economic CooperationCountries along the Pacific (U.S. China, Russia etc.) agree to reduce barriers
32Multinational Corporations and Trade Integrate a variety of countries into production of a good
33Multinational Corporations and Trade Some fears that corporations take advantage of under-developed countries, and destroy local cultures
34Exchange RatesExchange Rate – amount of another currency you can trade your currency forEx. Trading a dollar for 10 pesosExchange Rates change daily, based on supply and demand
35Exchange Rates Strong Currency vs. Weak Currency A strong currency is appreciating – growing in value compared to other currenciesA weak currency is depreciating – decreasing in value
36Exchange 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)