1. Splash Screen

2. Section 1: Absolute and Comparative Advantage
Chapter Introduction
Section 1: Absolute and Comparative Advantage
Section 2: Barriers to International Trade
Section 3: Foreign Exchange and Trade Deficits
Visual Summary
Chapter Menu

3. You and a classmate are planning to open a lawn-service business
You and a classmate are planning to open a lawn-service business. You will each contribute $200 toward the purchase of a mower, gas can, trimmer, and other materials for the business. Now it is time to get organized. Work with a classmate and make a list of the different “jobs” associated with your lawn-service business. What criteria will you use to divide up these jobs? Why? Read Chapter 16 to find out how nations make decisions about what to produce and trade with other nations.
Chapter Intro 1

4. Trade and specialization lead to economic growth for individuals, regions, and nations.
Chapter Intro 2

5. Chapter Intro-End

6. Section Preview
In this section, you will learn that comparative advantage is the basis for international trade.
Section 1-Preview

7. Content Vocabulary Academic Vocabulary exports imports
absolute advantage
production possibilities frontier
comparative advantage
opportunity cost
Academic Vocabulary
volume
enabled
Section 1-Key Terms

8. What products do you think the state of Texas primarily trades?
A. Citrus fruits
B. Oil and cattle
C. Cattle and wine
D. Computers A B C D
Section 1

9. Why Nations Trade
Trade allows nations to specialize in some products and then trade them for goods and services that are more expensive to produce.
Section 1

10. Why Nations Trade (cont.)
Reasons to trade
Some countries lack essential raw materials.
Specialization
Exports
Imports
American Dependence on Trade
Section 1

11. Why Nations Trade (cont.)
Sheer volume of trade between nations is proof that trade is beneficial.
U.S. Merchandise Trade by Area
Section 1

12. The United States imports goods that amount to approximately how much per capita?
B. $6,500
C. $5,500
D. $2,500 A B C D
Section 1

13. The Basis for Trade
Trade works best when countries focus on those products they can produce best.
Section 1

14. The Basis for Trade (cont.)
Countries find it cheaper to import some products than to manufacturer them.
Absolute advantage—country can produce more of a product than another country.
Section 1

15. The Basis for Trade (cont.)
Production possibilities frontier—diagram illustrating the maximum combinations of goods and/or services one can produce utilizing fully employed resources.
The Gains from Trade
Section 1

16. The Basis for Trade (cont.)
Countries with an absolute advantage benefit from trade with another country whenever it has a comparative advantage because its opportunity cost is lower than another country’s.
Total world output grows when there is specialization and trade among nations.
Section 1

17. A. Growth is slow but worthwhile.
What happens to world output when there is specialization and international trade?
A. Growth is slow but worthwhile.
B. Growth is significant in concentrated areas.
C. No additional growth in output takes place.
D. There is a drop in world output. A B C D
Section 1

18. Section 1-End

19. Section Preview
In this section, you will learn that nations use tariffs and quotas to protect special interests, while the free trade movement tries to eliminate trade barriers.
Section 2-Preview

20. Content Vocabulary Academic Vocabulary tariff quota protective tariff
revenue tariff
protectionists
free traders
infant industries argument
balance of payments
most favored nation clause
World Trade Organization (WTO)
North American Free Trade Agreement (NAFTA)
Academic Vocabulary
imposed
justify
Section 2-Key Terms

21. A. Yes, saving money is my goal.
Would you purchase a cell phone imported from Japan just because the price is a few dollars less than the one manufactured here?
A. Yes, saving money is my goal.
B. No, a few extra dollars in my pocket doesn’t compare to lost American jobs.
C. It depends. A B C
Section 2

22. Restricting International Trade
Tariffs and quotas are the main ways to restrict international trade.
Section 2

23. Restricting International Trade (cont.)
Restrictions to trade
Tariff
Protective tariff
Revenue tariff
Quota
Imported foods subjected to rigorous health inspections
Section 2

24. Restricting International Trade (cont.)
Restrictions to trade
Requiring a license to import
Culture and nationalism
Section 2

25. Before the Civil War, tariffs were used largely to generate revenue for the federal government.
A. True
B. False A B
Section 2

26. Arguments for Protection
Protectionists disagree with free traders over the best way to protect a country’s independence, industries, and workers.
Section 2

27. Arguments for Protection (cont.)
Protectionists and free traders are constantly in debate.
National defense
Infant industries argument
Protecting American jobs
Keeping the money at home
Balance of payments
National pride
Section 2

28. The United States imports significantly more products from China than it exports. The balance of payments is therefore significant. With which side of the debate do you align yourself?
A. Protectionists
B. Free traders
C. Neither A B C
Section 2

29. The Free Trade Movement
Because tariffs hurt more than they helped during the Great Depression, the United States has found ways to reduce trade restrictions.
Section 2

30. The Free Trade Movement (cont.)
Smoot-Hawley Tariff Act passed in 1930
One of most restrictive tariffs in U.S. history
Import duties so high that other countries did same
International trade nearly ceased
Section 2

31. The Free Trade Movement (cont.)
Reciprocal Trade Agreements Act passed in 1934
Reduced tariffs up to 50% if other countries did the same.
Most favored nation clause
General Agreement on Tariffs and Trade (GATT) in 1947
Section 2

32. The Free Trade Movement (cont.)
World Trade Organization (WTO) replaced GATT.
Administers trade agreements signed under GATT
Settles trade disputes between nations
Organizes trade negotiations
Provides tech assistance and training to developing countries
Section 2

33. The Free Trade Movement (cont.)
North American Free Trade Agreement (NAFTA)
Has allowed NAFTA partners to capitalize on their comparative advantages
Section 2

34. C. Most favored nation clause D. None of the above A B C D
If you were in charge of trade for all businesses or government agencies in your community, which trade practices would you engage in?
A. Quotas
B. Tariffs
C. Most favored nation clause
D. None of the above A B C D
Section 2

35. Section 2-End

36. Section Preview
In this section, you will learn that a long-lasting trade deficit affects the value of a nation’s currency as well as the value and volume of its exports and imports.
Section 3-Preview

37. Content Vocabulary Academic Vocabulary foreign exchange
foreign exchange rate
fixed exchange rates
flexible exchange rates
floating exchange rates
trade deficit
trade surplus
trade-weighted value of the dollar
Academic Vocabulary
secure
persistent
Section 3-Key Terms

38. Which do you think is better for the U.S. economy? A. Strong dollar
B. Weak dollar
C. Doesn’t matter A B C
Section 3

39. Financing International Trade
International trade relies on the ability to exchange foreign currencies.
Section 3

40. Financing International Trade (cont.)
Supply and demand causes the dollar and other international currency to fluctuate daily.
Foreign exchange—different currencies are bought and sold for international trade
Foreign exchange rate—price of one country’s currency in terms of another country’s
Foreign Exchange Rates
Section 3

41. Financing International Trade (cont.)
Two major kinds of exchange rates exist:
Fixed exchange rates
Flexible exchange rates or floating exchange rates
Flexible Exchange Rates
Section 3

42. Financing International Trade (cont.)
Whenever the dollar falls—exports tend to go up and imports down. If dollar rises, the reverse is true.
The Global Economy & YOU Big Mac Index
Section 3

43. A. No, price in Russia would be overvalued against the dollar.
Would the price of a pair of Levi jeans in Russia be the same as the price here in the United States?
A. No, price in Russia would be overvalued against the dollar.
B. No, price in Russia would be undervalued against the dollar.
C. Yes, price would be the same. A B C D
Section 3

44. Trade Deficits and Surpluses
The strength of the dollar affects trade and therefore trade deficits and surpluses.
Section 3

45. Trade Deficits and Surpluses (cont.)
The international value or strength of the dollar affects trade:
Trade deficit
Trade surplus
Section 3

46. Trade Deficits and Surpluses (cont.)
Federal Reserve System tracks the trade-weighted value of the dollar.
If index falls—dollar is weak in relation to other currencies.
If index rises—dollar is strong.
International Value of the Dollar
Section 3

47. Trade Deficits and Surpluses (cont.)
A persistent trade imbalance can affect income and employment.
No net gain in having a strong or a weak dollar—one sector is helped, another hurt.
Profiles in Economics: Jerry Yang
Section 3

48. What is the result of U.S. exports when the dollar is strong?
A. U.S. imports decline.
B. Exports become cheaper for other nations.
C. U.S. imports increase.
D. U.S. trade surplus results. A B C D
Section 3

49. Section 3-End

50. Absolute and Comparative Advantage A country has absolute advantage when it can produce more of a product than can another country. It has comparative advantage when it can produce a product at a lower opportunity cost than another country. When countries focus on those products for which they have comparative advantage, world production increases.
VS 1

51. Free Trade Movement After strict tariffs severely limited world trade during the early years of the Great Depression, the United States and other countries worked to open trade.
VS 2

52. Trade Deficits and Surpluses The strength of the dollar affects the balance of trade of the United States.
VS 3

53. VS-End

54. Figure 1

55. Figure 2

56. Figure 3

57. Figure 4a

58. Figure 4b

59. Figure 5

60. Figure 6

61. Figure 7

62. Jerry Yang (1968– ) cofounder of the Internet Web portal Yahoo!
became a billionaire three years after starting the company
ranked on Forbes’s list of the world’s richest people
Profile

63. Select a transparency to view.
Economic Concepts Transparencies
Transparency 20 Absolute and Comparative Advantage
Transparency 21 Exchange Rates and Balance of Payments
Select a transparency to view.
Concept Trans Menu

64. Concepts Trans 1

65. Concepts Trans 2

66. DFS Trans 1

67. DFS Trans 2

68. DFS Trans 3

69. exports the goods and services that a nation sells to other nations
Vocab1

70. imports the goods and services that a nation buys from other nations
Vocab2

71. absolute advantage
country’s ability to produce more of a given product than another country can produce
Vocab3

72. production possibilities frontier
diagram showing the maximum combinations of goods and/or services an economy can produce when all resources are fully employed
Vocab4

73. comparative advantage
country’s ability to produce a given product relatively more efficiently than another country by doing it at a lower opportunity cost
Vocab5

74. opportunity cost
cost of the next-best alternative use of money, time, or resources when making a choice
Vocab6

75. volume
amount; quantity
Vocab7

76. enabled
made possible
Vocab8

77. tariff
tax placed on an imported product
Vocab9

78. quota limit on the amount of a good that is allowed into a country
Vocab10

79. protective tariff
tax on an imported product designed to protect less-efficient domestic producers
Vocab11

80. revenue tariff
tax placed on imported goods to raise revenue
Vocab12

81. protectionist
person who wants to protect domestic producers against foreign competition with tariffs, quotas, and other trade barriers
Vocab13

82. free trader person who favors fewer or even no trade restrictions
Vocab14

83. infant industries argument
argument that new and emerging industries should be protected from foreign competition until they are strong enough to compete
Vocab15

84. balance of payments
difference between money paid to, and received from, other nations in trade
Vocab16

85. most favored nation clause
trade law allowing another country to enjoy the same tariff reductions the United States negotiates with any third country
Vocab17

86. World Trade Organization (WTO)
international agency that administers trade agreements, settles trade disputes between governments, organizes trade negotiations, and provides technical assistance and training for developing countries
Vocab18

87. North American Free Trade Agreement (NAFTA)
agreement signed in 1993 to reduce tariffs and increase trade among the United States, Canada, and Mexico
Vocab19

88. imposed
established; applied
Vocab20

89. justify
to defend as warranted or necessary
Vocab21

90. foreign exchange
various currencies used to conduct international trade
Vocab22

91. foreign exchange rate
price of one country’s currency in terms of another country’s currency
Vocab23

92. fixed exchange rate
system under which the values of currencies are fixed in relation to one another
Vocab24

93. flexible exchange rates
system that relies on supply and demand to determine the value of one currency in terms of another
Vocab25

94. floating exchange rates
system that relies on supply and demand to determine the value of one currency in terms of another
Vocab26

95. trade deficit
balance of payments outcome when spending on imports exceeds revenues received from exports
Vocab27

96. trade surplus
balance of payments outcome when revenues received from exports exceed spending on imports
Vocab28

97. trade-weighted value of the dollar
index showing strength of the U.S. dollar against a group of major foreign currencies
Vocab29

98. secure
obtain
Vocab30

99. persistent
continuous, without signs of weakening
Vocab31

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