1. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 15 1 International Trade Why Nations Trade 15-1 Barriers to Free Trade 15-2 Measures of Trade 15-3

2. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 15 2 L earning O bjectives 15-1 Why Nations Trade Understand why nations specialize in trade.LO1-1 Explain the concepts of comparative advantages and absolute advantage. LO1-2

3. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 15 3 Vocabulary 15-1 Why Nations Trade export import Absolute and Comparative Advantage absolute advantage comparative advantage

4. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 15 4 Why Nations Trade An export is a good produced in one country and sold to another country. 15-1 Why Nations Trade An import is a good produced in one country and purchased by another country.

5. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 15 5 Vocabulary CHECKPOINT Why Nations Trade 15-1 Why Nations Trade export import What nations are major trading partners of the United States? Canada, China, Mexico and Japan are the largest trading partners.

6. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 15 6 Absolute and Comparative Advantage Absolute advantage is the ability of a country to produce more of a good using the same or fewer resources as another country. 15-1 Why Nations Trade Comparative advantage is the ability of a country to produce a good at a lower opportunity cost than another country.

7. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 15 7 Vocabulary CHECKPOINT Absolute and Comparative Advantage 15-1 Why Nations Trade absolute advantage comparative advantage How are nations able to increase the quality of goods and services from which they may choose by following the theories of absolute and comparative advantage? Nations might not produce products they cannot make efficiently. But, if they can trade for these products with a nation that does produce them efficiently, then their consumers will have a wider variety of products from which to choose.

8. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 15 8 L earning O bjectives 15-2 Barriers to Free Trade Identify different types of trade barriers.LO2-1 Understand arguments for and against protectionism. LO2-2

9. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 15 9 Vocabulary 15-2 Barriers to Free Trade Free Trade Versus Protectionism free trade protectionism embargo tariff World Trade Organization (WTO) quota Arguments For and Against Protection

10. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 15 10 Free Trade Versus Protectionism Free trade is the flow of goods between countries without restrictions or special taxes. 15-2 Barriers to Free Trade Protectionism is the government’s use of trade barriers to protect domestic producers. An embargo is a law that bars trade with another country. A tariff is a tax on an import; also called customs duties.

11. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 15 11 Free Trade Versus Protectionism 15-2 Barriers to Free Trade The World Trade Organization (WTO) is a worldwide organization that enforces rulings on global trade issues. The WTO has 150 members and a standing appellate body to make final decisions regarding disputes between WTO members. A quota is a limit on the quantity of a good that can be imported in a given time period.

12. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 15 12 Vocabulary CHECKPOINT Free Trade Versus Protectionism 15-2 Barriers to Free Trade free trade protectionism embargo tariff World Trade Organization (WTO) quota What advantage might a government gain from using a tariff rather than a quota to restrict imports? A tariff has the advantage of raising revenue for the government and a quota does not.

13. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 15 13 Arguments For and Against Protection 15-2 Barriers to Free Trade Free trade provides consumers with lower prices and larger quantities of goods from which to choose. Removing trade barriers might save families hundreds dollars a year. However, this action would cost some workers their jobs and thousands from lost income.

14. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 15 14 Arguments For and Against Protection 15-2 Barriers to Free Trade The most popular arguments for protection have strong political and emotional support, but weak support from economists. The infant industry argument is that new domestic industry needs protection because it is not yet ready to compete with older more established foreign competitors. National security argument is that defense-related industries must be protected to ensure national security.

15. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 15 15 Vocabulary CHECKPOINT Arguments For and Against Protection 15-2 Barriers to Free Trade It can be argued that protectionism saves domestic jobs, but at what cost? Consumers pay for jobs saved in higher prices. For example, steel companies protected from foreign competition charge higher prices for their steel. These higher prices are passed on to auto building and so on.

16. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 15 16 L earning O bjectives 15-3 Measures of Trade Understand exchange rates and abandonment of the gold standard. LO3-1 Explain the effect of changes in the value of the U.S. dollar on balance of trade. LO3-2

17. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 15 17 Vocabulary 15-3 Measures of Trade Exchange Rates exchange rate fixed exchange rate system flexible exchange rate system depreciation of currency appreciation of currency The Balance of Trade balance of trade trade surplus trade deficit

18. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 15 18 Exchange Rates The exchange rate is the number of units of one nation’s currency. 15-3 Measures of Trade A fixed exchange rate system is a system in which exchange rates are held constant by a country’s government. A flexible exchange rate system is a system in which exchange rates are determined by the forces of supply and demand.

19. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 15 19 Exchange Rates Depreciation of currency is a decrease in the value of a currency relative to other currencies. 15-3 Measures of Trade Appreciation of currency is an increase in the value of a currency relative to other currencies.

20. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 15 20 Vocabulary CHECKPOINT Exchange Rates 15-3 Measures of Trade exchange rate fixed exchange rate system flexible exchange rate system depreciation of currency appreciation of currency Suppose the exchange rate is $1 for €0.90. Explain how this exchange rate can be expressed in two ways. One way: express the dollar-euro exchange rate as $1 = €0.90. The price or value of the exchange rate is €0.90 per dollar. Another way: in terms of one euro; divide $1 by the number of euros it takes to obtain one dollar. Calculated as $1/€ 0.90 = $1.11; €1 = $1.11, or $1.11 per euro.

21. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 15 21 The Balance of Trade Balance of trade is the value of a nation’s imports subtracted from the value of its exports. 15-3 Measures of Trade A trade surplus arises when the value of a country’s exports is greater than the value of its imports. A trade deficit occurs when the value of the nation’s imports is greater than the value of its exports.

22. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 15 22 Vocabulary CHECKPOINT The Balance of Trade 15-3 Measures of Trade balance of trade trade surplus trade deficit What happens to a nation’s balance of trade if the nation’s currency appreciates? When the price of foreign products is less expensive to Americans, the U.S. imports more. At the same time, when American products are more expensive to foreigners, America exports less. As imports rise and exports fall, the U.S. develops a balance of trade deficit.