International Trade 1

Why Nations Trade  Believe products received worth more than what they give up  Increases variety of goods available  Sometimes countries lack goods 2

Specialization  Some places better at producing certain goods than other places  Exports are what a country sells  Imports are what a country buys 3

Extent of Trade  Usually for goods  Sometimes for services – Banking & Insurance  Large countries like U.S. also import goods 4

Basis for Trade  Absolute Advantage  Can produce more than other countries  2 countries produce only coffee: A makes 40#, B makes 6# - A has absolute advantage  2 countries produce only cashews: A makes 8#, B makes 6# - A has absolute advantage 5

 Comparative Advantage  Produce product more efficiently or at lower opportunity cost  A makes 40# coffee or 8# cashews; Opportunity cost of 1# cashews is 5# coffee  B makes 6# coffee or 6# cashews; Opportunity cost of 1# cashews is 1# coffee  B has comparative advantage in cashews  A has comparative advantage in coffee Basis for Trade 6

Gains from Trade  Greater World Output  A produces coffee & B produces cashews; Increased global output  Without trade total was 25# coffee, 5# cashews  With trade total was 40# coffee, 6# cashews 7

 Increased Political Stability  U.S. was enemies with Germany & Japan in WWII  Now allies with both because of trade  Economists say cooperation in international trade precedes political cooperation Gains from Trade 8

 Faster Economic Growth  Creates bigger markets for produced goods, & ability to secure needed inputs for production  Bigger market allows for specialization  Allows people & firms to produce more Gains from Trade 9