1. Resources for Global Trade
Chapter 17

2. Section 1: Absolute and Comparative Advantage

3. How does trade benefit all participating parties
1) What is a multinational corporation?
Largest businesses in the world that operate in different countries and employ hundreds and thousands of people.
2) Some multinational corporations have bigger economies than small countries

4. Why nations trade 3) Why do nations trade?
They trade for the same reasons that individuals do- because they believe the products they receive are worth more than the products they give up.
4) How do you as an individual benefit from trade?

5. Why nations trade – specialization
5) Why does specialization play a role in global trade?
When countries specialize they produce things that they do best and exchange those products for things that other people do best
6) What are some examples of U.S. states specialized?
TX: oil and cattle CA and FL:citrus
MI: cars NY: stocks and bonds

6. Why nations trade – specialization
7) exports-
Goods and services that a nation produces and then sells to other nations
8) imports-
The goods and services that a nation buys from other nations
9) If you wanted to find out what different countries specialize in you would look at exports.
10) International trade is important to all countries.

7. The Basis of Trade- Absolute Advantage
11) In 1776, Adam Smith was the first to write that a country should import products if they are made more cheaply abroad than at home.
He is also the first writer to discuss absolute advantage

8. The Basis of Trade- Absolute Advantage
Country’s ability to produce more of a given product than can another country
13) possibilities curve
Diagram representing the maximum combinations of goods and/or services an economy can produce when all productive resources are fully employed

9. The Basis of Trade- Comparative Advantage
14) Even if nation “A” has absolute advantage in producing all products when compared to nation “B,” these two nations would benefit from trade with each other.
15) Comparative advantage
Country’s ability to produce a given product relatively more efficiently than another country; production at a lower opportunity cost

10. The Basis of Trade- Comparative Advantage
16) opportunity cost
Cost of the next best alternative use of money, time, or resources when one choice is made rather than another
How does it apply to the comparative advantage?
Country can produce 40 lbs. coffee or 8 lb. cashews
The O.C. of producing 1 lb. of cashews is 5 lb. coffee
At the same time another country might have the same goods but different opportunity cost.

11. 17) Paul Krugman’s Economic Theory
CONSUMERS are the reason why we have different production and trade patterns. We want more choices, better quality.

12. Gains from Trade- Greater World Output
18) The concept of the comparative advantage is based on the assumption that everyone will be better off by specializing in the products they produces best
19) Specialization and trade increase the total world output.

13. The Gains of Trade- Increased Political Stability
20) Political stability increase as countries trade
Ex: U.S. and United Kingdom were enemies of Germany and Japan prior to WWII
Post WWII, UK and U.S. have been strong economic & political allies
UK and Germany are closer in trade today then ever – Why?

14. The Gains of Trade- Faster Economic Growth
21)Nations that trade with one another are less likely to go to war with each other
22) The economic growth from trade comes from: a bigger market for the country’s manufactured goods and services, & the ability to secure needed inputs for production.
23) Specialization is good for an economy because it allows people & firms to produce more output- output can be used to trade w/ other countries
All of this increase economic growth, which creates more jobs, & produces more income

15. Ch. 17 Section 2: Barriers to International Trade

16. 1) Why do some people reject to free trade between nations?
Because trade can displace selected industries and groups of workers.
2) What is a tariff?
A tax placed on an imported product.
3) What is a quota?
Limit on the amount of a good that is allowed into a country

17. 4a) What is a protective tariff?
A tax on an imported product designed to protect less efficient domestic producers.
4b) Who benefits? 4c) Who gets hurt?
The domestic producers benefit; the producers abroad get hurt.
5) What is a revenue tariff?
Tax placed on imported goods to raise revenue

18. 7) What is another name for a tariff?
6) Historically tariffs were used for to generate government revenues than to protect domestic producers
7) What is another name for a tariff?
Customs duties
8) Today, tariffs make up an increasing percentage of our government’s revenue (T/F).
False; a small percentage

19. 9) Give two example of when “protecting” U. S
9) Give two example of when “protecting” U.S. jobs with a tariff has hurt U.S. consumers during the Bush and Obama Administrations.
2002, Bush imposed a 30% tariff on foreign steel imports. It saved jobs but it raised the price of steel between 20-30%
2009 Obama imposed a 35% tariff on Chinese tires to protect union jobs – he raised the price of tires for U.S. consumers.

20. 10)What usually happens when a quota is established?
Quotas are used to reduce the total supply of a product to keep prices high for domestic producers.
11) What happened in 1981 (with respect to cars)?
Domestic automobile producers faced competition with (cheaper) Japanese cars. Automakers lobbied Reagan to put quotas in place on Japanese cars; he did, the cost of all cars increase significantly, and Americans had less cars to choose from.

21. 12) What is an embargo? Example.
Government order prohibiting the movement of goods to a country; Ex: U.S. prohibited goods going to Cuba in 1962.
13) How do inspections serve as a barrier to trade? Example.
The inspections on foreign food is much more rigorous than on domestic food.

22. 14) What are licenses and how are they potential barriers?
They require a license to import.
The government can be too slow to license or they can be too high for the country to pay.
15) What health concerns do some nations use to justify trade barriers?
Sometimes they use issues like genetically altered crops to prohibit trade with countries like the (U.S.).

23. 16) How can nationalism and culture play a role in creating barriers?
A lot of European countries claim that they prefer regional and traditional foods to foods grown elsewhere.

24. 17) Who are protectionists?
People who want to protect domestic producers against foreign competition with tariffs, quotas, and other trade barriers
18) Who are the free traders?
People who favor fewer or no trade restrictions

25. 19) List the 6 main argument FOR protectionism below
Aiding national defense
Promoting infant industries
Promoting domestic jobs
Keeping the money at home
Helping the balance of payments
National pride

26. 21) What do free traders say about free trade and national defense?
20) Why do protectionists feel that trade barriers will help with our national defense?
They believe a lack of barriers will cause us to become so specialized that we’re dependent on another country
Also, during war time free traders worry that they won’t be able to get essential supplies
21) What do free traders say about free trade and national defense?
They think it’s an issue for national defense BUT they the advantages to having a domestic supply must be weighed against the disadvantages that the supply will be smaller and possibly less efficient than it would be with free trade

27. 22) What is the infant industries argument?
Argument that new and emerging industries should be protected from foreign competition until they are strong enough to compete.
23) Why do we need trade barriers in order to help with infant industries (according to protectionists)?
Some industries need to gain strength and experience before they can compete against established industries in other countries

28. 24) What do free traders say when it comes to the infant industries argument?
They are willing to accept the arugment but only if protection will eventually be removed so that the industry is forced to compete on its own.
They believe that it creates the possibility for industry to become accustomed to having the protections.

29. 25) How do trade barriers protect domestic jobs?
When tariffs are used it protects against cheap foreign labor.
26) When it comes to domestic business, why to free traders feel that we’re better off if we eliminate trade barriers?
In the long run these barriers hurt industries because they’ll find it difficult to compete unless they change how they operate.
IF they keep pressure on these industries they will have to change how they operate to survive

30. 27) How do barriers keep money at home? (protectionist argument)
They believe that Americans will spend money on American goods instead of goods from another country.
28) What do free traders say about the money spent on other products?
American dollars that are used to purchase foreign goods go back into the American economy.
U.S. buys Japanese cars and then Japan buys cotton, soybeans, and airplanes from the U.S.

31. 29) What is a nation’s balance of payment
Difference between money pained to an money received from other nations in trade; balance on current accounts includes goods and services, but merchandise trade balance counts only goods.
30) Why are trade barriers good with respect to our balance of payments (protectionists)?
They argue that restrictions on imports reduce trade deficits and thus help the balance of payment

32. 31)What are protectionist overlooking when they make this argument (according to the free traders POV)?
Protectionists overlook the fact that dollars returned to the U.S. stimulate employment in other industries.

33. 32) How can national pride play a role in the argument between free traders and protectionists?
France is very proud of its wines and cheeses and protects these industries for nationalistic reasons.
33) If we establish trade barriers to protect our domestic business, and other countries retaliate, who wins?
All countries suffer

34. 35) What did we pass in 1934 and what did it allow us to do?
34)What happened in the 1930s as a result of the Smoot-Hawley Tariff Act?
It was one of the most restrictive tariffs in history. It set duties so high that the prices of imports rise to 70% and other countries did the same (almost halting international trade)
35) What did we pass in 1934 and what did it allow us to do?
The Reciprocal Trade Agreement Act, which allowed it to reduce tariffs up to 50% if the other countries agreed to do the same.

35. 36) What was the most favored nation clause? How does it apply?
Trade law allowing a third country to enjoy the same tariff reductions the U.S. negotiates with another country
IF the U.S. and China have a trade deal the U.S. can negotiate tariff reductions with Canada but those would also have to apply to China.
37) What was the General Agreement on Tariffs and Trade?
An international agreement signed in 1947 between 23 countries to extend tariff concessions and reduce import quotas.

36. 38) What is the World Trade Organization?
International agency that administers trade agreements, settles trade disputes between governments, organizes trade negotiations, and provides technical assistance and training for developing countries
39) In general, what has been happening to tariff levels?
Many countries have been willing to reduce tariffs and quotas.

37. 40) What is NAFTA?
North American Free Trade Agreement is an agreement signed in 1993 to reduce tariffs among the U.S., Canada, and Mexico
41) As a result of NAFTA, what has happened to tariff levels between the U.S., Canada, and Mexico?
The three countries agreed to a phase-out (completed in 2008) of tariffs and quotas over a 15 year period.

38. What have been some of the negative consequence of NAFTA?
Some workers would be displaced when barriers were lowered.
Some high paying jobs would be lost to Mexico.
43) What have been some of the positive consequences of NAFTA?
Trade among the 3 countries has grown steadily since NAFTA was created which has stimulated growth and brought lower cost of goods