1. 17-1 Why Nations Trade How does resource distribution affect trade?
What are the differences between absolute and comparative advantage?
What are the major imports and exports of the United States?
How does trade affect employment?

2. Specialization and Comparative Advantage
Why Specialize?
When sports teams combine the different abilities and strengths of their players in an efficient way they are more successful. If athletes focus on the skills that they do most efficiently, they are bringing their strengths to their teams.
The same goes for trade.

3. Resource Distribution and Trade
Each country of the world possesses different types and quantities of land, labor, and capital resources.
By specializing in the production of certain goods and services, nations can use their resources more efficiently.
Specialization and trade can benefit all nations.

4. Absolute and Comparative Advantage
A person or nation has an absolute advantage when it can produce more of a given product using a given amount of resources (US many).
Comparative advantage is the ability of one person or nation to produce a good at a lower opportunity cost than that of another person or nation.
The law of comparative advantage states that nations are better off when they produce goods and services for which they have a comparative advantage in supplying (Costa Rican coffee, U.S. wheat).

5. Benefits of Trade
In this example, both Kate and Carl benefit from specialization. Kate can make 6 t-shirts or 2 birdhouses per hour. Carl can make 1 t-shirt or 1 birdhouse per hour.
Specialization
Trade
Net Effect
Carl
Kate
Carl specializes, switching 2 hours from T-shirt production to birdhouse production.
Carl trades 1 birdhouse for 2 T-shirts.
Net effect is same number of T-shirts and 1 more birdhouse.
Kate specializes, switching 1 half- hour from birdhouse production to T-shirt production.
Carl trades 2 T-shirts for 1 birdhouse.
Net effect is same number of birdhouses and 1 more T-shirt.
Benefits from Specialization and Trade for Carl and Kate

6. Imports and Exports of the United States
The United States is the world’s largest exporter.
The United States is also the world’s largest importer.
The United States’ main trading partners are Canada, Mexico and Japan.

7. Trade and Employment
Specialization, trade, and comparative advantage can lead to unemployment. If Kate hires Ben to help her make birdhouses and later realizes she should specialize in t shirts, Ben may be laid-off. Workers who lose their jobs due to specialization face three options:
Unemployment: Inability to adapt and find a new job
Relocation: Moving to where current skills meet current jobs
Retraining: Gaining new human capital to meet the demands of specialized labor markets
Due to new technology in 1970’s, Japan gained a comparative advantage in producing automobiles. Many American’s lost jobs in Detroit, etc. as people began purchasing Japanese automobiles.

8. Outsourcing vs. Offshoring
When a company outsources, it buys from a third party a part or service it used to produce itself. Ex. General Motors contracts a company in China to make a certain product to be used on cars.
When a company offshores, it shifts the location of a service or production of a part to a location abroad. Ex. GM opens a factory in China, and shifts production of a car part to the factory in China

9. Section 1 Assessment
1. Trade benefits both wealthy and poor countries because
(a) self-sufficiency is too costly.
(b) both wealthy and poor countries increase their wealth if they specialize.
(c) both wealthy and poor countries lack human resources.
(d) without trade neither wealthy nor poor countries could survive.
2. What is the law of comparative advantage?
(a) a country is better off producing goods for which they have a comparative advantage in supplying
(b) a country that supplies things for others has a comparative advantage in trade
(c) a country has a comparative advantage if it produces goods for export
(d) a country’s greatest advantage is in the import of goods that it cannot produce

10. Section 1 Assessment
1. Trade benefits both wealthy and poor countries because
(a) self-sufficiency is too costly.
(b) both wealthy and poor countries increase their wealth if they specialize.
(c) both wealthy and poor countries lack human resources.
(d) without trade neither wealthy nor poor countries could survive.
2. What is the law of comparative advantage?
(a) a country is better off producing goods for which they have a comparative advantage in supplying
(b) a country that supplies things for others has a comparative advantage in trade
(c) a country has a comparative advantage if it produces goods for export
(d) a country’s greatest advantage is in the import of goods that it cannot produce

11. 17-2 Trade Barriers and Agreements
What are trade barriers?
What are the effects of trade barriers?
What is protectionism?
What organizations promote international cooperation on matters of trade?

12. What Are Trade Barriers?
A trade barrier is a means of preventing a foreign product or service from freely entering a nation’s territory.
Import Quotas
An import quota is a limit on the amount of a good that can be imported (621,780 kilograms of cotton from China).
Tariffs
A tariff is a tax on imported goods.

13. The Effects of Trade Restrictions
Increased Prices for Foreign Goods
Tariffs and other trade barriers increase the cost of imported products, making domestic products more competitive.
Although manufacturers of many products may benefit from trade barriers, consumers and American companies that use imports can lose out.
Trade Wars
When one country restricts imports, its trading partner may impose its own retaliatory restrictions. This can decrease world trade.

14. Increased Prices for Foreign Goods
With a $2000 tariff, this car would be $70,900
As a result, American car makers can compete more easily in the market. However, consumers must pay more and American manufacturers may lose the incentive to become more efficient and produce their cars less expensively.
2013 Audi RS5

15. Trade Wars
The largest and most dangerous trade war in U.S. history was launched by the Smoot-Hawley tariff in 1930.
This tariff raised the average tariff on all products to 50%.
The Federal Government passed the law the economy was sinking into the Great Depression.
Congress hoped the tariff would protect American workers from foreign competition.
Other countries responded by raising tariffs on the U.S.
The resulting trade war resulted in decreased international trade and deepened the world wide depression.

16. Trade Wars
Beef war – in 1999 European countries banned the import of American beef from cows raised with hormones. The U.S. responded by imposing tariffs on European clothing, cheeses, meats, and mustards.

17. Arguments for Protectionism
Protectionism is the use of trade barriers to protect a nation’s industries from foreign competition.
Protecting Jobs
Protectionism shelters workers in industries that would be hurt by specialization and trade.
Protecting Infant Industries
Protectionist policies protect new industries in the early stages of development.
Safeguarding National Security
Certain industries may require protection from foreign competition because their products are essential to the defense of the United States (steel, high tech industries). Even supporters of free trade agree that some industries need to be protected.

18. International Agreements
Recent trends have gone toward lowering trade barriers and increasing trade through international trade agreements.
North American Free Trade Agreement (NAFTA): Eliminated all tariffs and other trade barriers between the U.S., Mexico, and Canada by 2009.
NAFTA is highly controversial, especially with American workers. Studies have shown that while jobs have been lost, an almost equal number of jobs have been gained. This does not mean these were high paying jobs.

19. International Agreements
European Union: agreement between several European countries that abolished trade restrictions. Today it allows free travel, and most have adopted a single currency called the euro.
Today, there are 28 member nations.
18 nations use the euro – as legal tender.

21. Other Regional Trade Agreements
APEC The Asian-Pacific European Cooperation includes countries that lie along the Pacific Rim, including the United States, Mexico and Canada. These nations have signed agreements to reduce trade barriers.
MERCOSUR The Southern Common Market is similar to the EU in its goals. Its members are Brazil, Argentina, Paraguay and Uruguay.
CARICOM The Caribbean Community and Common Market includes countries from South America and the Caribbean.

22. Section 2 Assessment 1. Protectionism does not
(a) protect immigrant labor.
(b) protect domestic jobs.
(c) protect infant industries.
(d) safeguard national security.
2. The purpose of NAFTA was to
(a) Promote trade restrictions between U.S., Canada, and Mexico
(b) Eliminate trade barriers between U.S. Canada, and Mexico
(c) Increase tariffs on Mexican imports.

23. Section 2 Assessment 1. Protectionism does not
(a) protect immigrant labor.
(b) protect domestic jobs.
(c) protect infant industries.
(d) safeguard national security.
2. The purpose of NAFTA was to
(a) Promote trade restrictions between U.S., Canada, and Mexico
(b) Eliminate trade barriers between U.S. Canada, and Mexico
(c) Increase tariffs on Mexican imports.

24. 17-3 Measuring Trade
How do exchange rates affect international markets?
How do exchange rate systems vary?

25. Exchange Rates and International Markets
Trade between countries is more complex than just buying and selling because of the world’s many currencies and their changing values
The value of a foreign nation’s currency in relation to your own currency is called the exchange rate.
Exchange rates go up and down daily.

26. Reading an Exchange Rate Table
The following table shows an example of exchange rates.
Foreign Exchange Rates
U.S. $
Australian $
U.K. £
Canadian $
¥en
Euro
Mexican nuevo peso
Chinese renminbi 1
1.541
0.6252
1.478
114.3
0.9516
9.33
8.28
Aust $
U.K. £
Canadian $
¥en
Euro
Mexican NP
Chinese renminbi
0.6489 1
0.4057
0.9593
74.19
0.6175
6.06
5.37
1.599
2.465
2.365
182.9
1.522
6.3
13.25
0.6764
1.042
0.4229
77.34
0.6436
5.6
0.01
0.08
0.07
1.051
1.62
0.657
1.554
120.2
9.81
8.7
0.11
0.17
0.16
12.24
0.1
9.8
0.12
0.19
0.18
13.81
1.13

27. Strong and Weak Currencies
An increase in the value of a currency is called appreciation.
If the dollar appreciates, our goods become more expensive in other countries. This makes our exports decline. Other countries good become cheaper so imports increase.
A decrease in the value of a currency is called depreciation.
If the dollar depreciates, our good become less expensive in other countries. Exports increase and imports decrease.

28. What Causes Values of Currency to Change?
Values of currencies change for several reasons. Below are a few common reasons:
Demand for exports can strengthen or weaken currency
Inflation – The Fed orders the printing of too much money
Reputation – large deficits look bad to investors.

29. Today’s Exchange Rate As of today, $1 equals 0.74 Euro
Go to
Pick 5 different countries and find out how the U.S. dollar stacks up