Chapter Introduction 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

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.

Countries are affected by their relationships with each other.

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

Content Vocabulary • exports • imports • absolute advantage • production • opportunity cost possibilities curve (frontier) Academic Vocabulary • volume • comparative advantage • enabled

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. A B C D

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

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

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

The United States imports goods that amount to approximately how much per capita? A. $8, 400 B. $6, 400 C. $5, 400 D. $2, 400 A. B. C. D. A B C D

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

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.

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

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.

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. A B C D

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.

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

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. A B. B C. C

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

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

Restricting International Trade (cont. ) • Restrictions to trade – Requiring a license to import – Culture and nationalism

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

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

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

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. A B. B C. C

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.

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

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

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

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

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 nationclause D. None of the above A. B. C. D. A B C D

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.

Content Vocabulary • foreign exchange • fixed exchange • trade deficit rates • trade surplus • foreign • flexible exchange rates • trade-weighted value of the • floating dollar exchange rates Academic Vocabulary • secure • persistent

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

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

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

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

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

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 A. A undervalued against the dollar. B. B C. Yes, price would be the same. C. C D. D

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

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

Trade Deficits and Surpluses (cont. ) • Federal Reserve System tracks the tradeweighted 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

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

What is the effect on U. S. trade 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. A B C D

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.

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.

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

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

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

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

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

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

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

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

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

volume amount; quantity

enabled made possible

tariff tax placed on an imported product

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

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

revenue tariff tax placed on imported goods to raise revenue

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

free trader person who favors fewer or even no trade restrictions

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

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

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

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

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

imposed established; applied

justify to defend as warranted or necessary

foreign exchange various currencies used to conduct international trade

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

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

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

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

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

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

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

secure obtain

persistent continuous, without signs of weakening

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