Ch. 26
Section 1
International Trade and Its Benefits
Why Nations Trade
 In 2005, about 10% of all the goods
produced in the U.S. were exported, or
sold to other countries.
 A larger amount of goods were imported,
or purchased from abroad
 Importing goods gives Americans products
they might not otherwise be able to enjoy.
Why Nations Trade (cont.)
 Trade is one way that nations solve the
problem of scarcity
 Nations trade for goods/services because
they could not have them or have them
cheaply.
 We buy bananas from Central America
because we do not have the soil or climate
to grow them; Commercial aircraft are sold
to other countries because they do not
have the factories or skilled workers.
Comparative Advantage
 Comparative Advantage is the ability of a
country to produce a good at a lower opportunity
cost than another country can.
 The U.S. could manufacture electronics but other
countries can make them at a lower cost, so we
buy them from other countries that make them
abroad
 Comparative Advantage leads nations to specialize
Comparative Advantage (cont.)
 Specialization allows countries to use their scarce
resources to produce those things that they produce
better than any other country
 When a country produces more than their people can
actually use, they sell the extra amount abroad.
 Countries can have comparative advantage in
particular resources such as Saudi Arabia (oil
deposits), or the U.S. (skilled workers, advanced
technology)
Comparative Advantage (cont.)
 International trade does accomplish
two things:
1. Creates jobs
2. Creates new markets
Barriers to International Trade
 Foreign countries with a comparative advantage
can sell their product more cheaply than companies
making the product in their own country.
 As a consumer you would likely buy the cheaper
product (foreign)
 Workers who make the product domestically may
lose their jobs when sales drop
 When this happens, government may step in to
impose trade barriers to protect domestic workers
and industry
Barriers to International Trade
(cont.)
 Two most common trade barriers are tariffs and
quotas
 A tariff is a tax on an imported good; 20% tariff
means 20% addition to the final price of a foreign
good
 The goal is to make the price of an imported good
higher than the price of the same good produced
domestically
 As a result, consumers would be more likely to buy
the domestic product.
Barriers to International Trade
(cont.)
 However, when people want the foreign product so
badly that higher prices have little effect on demand,
countries have to set quotas.
 Quotas set limits on the amount of foreign goods
allowed into a country (imported)
 During the 1980’s, Japanese cars were so popular that
American autoworker jobs were threatened.
 President Ronald Reagan placed quotas on Japanesemade automobiles
Trade Agreements
 In general, trade barriers cost more than the
benefits gained
 Most countries try to achieve free trade with other
nations
 Convince countries to not pass laws that block or
limit trade
 A trend the world has been seeing lately is the
formation of free trade zones among key trading
partners
Trade Agreements (cont.)
 The European Union (EU) is an organization
of independent European nations, which
form a huge market
 Goods, services, and even workers flow
freely among these nations because the EU
has no trade barriers
 Since 2002, these countries have been
linked even closer due to the adoption of a
common currency, the euro.
Trade Agreements (cont.)
 In the 1990’s, the U.S., Canada, and Mexico signed
their own free trade agreement: North American
Free Trade Agreement (NAFTA).
 Elimination of all trade barriers among these
countries.
 Since its implementation, trade among the three
countries has grown twice as fast as the separate
economies themselves have grown
Trade Agreements (cont.)
 Opponents of NAFTA claimed that American
workers would lose their jobs because U.S.
plants would move to Mexico (cheaper
labor, less regulation, environmental and
workers’ rights laws ignored)
 Supporters of NAFTA argue that increased
trade would stimulate growth and put more
low cost products on the market.
Financing Trade
 Different nations use different currencies as a
medium of exchange:
U.S. = dollar
Mexico = peso
Japan = yen
 To buy something in Mexico, an American would
have to exchange your dollars for pesos by using
the exchange rate, or the price of one nation’s
currency in terms of another country’s currency
Financing Trade (cont.)
 Most nation’s use an adjustable exchange rate
system which allows supply and demand to set the
price of various currencies; currency prices change
each day
 Exchange rates have an important effect on a
nation’s balance of trade.
 Balance of Trade is the difference between the
value of a nations exports and its imports.
Financing Trade (cont.)
 If a nation’s currency depreciates, or
becomes weak, the nation will likely export
more goods because its products will
become cheaper for other nations to buy.
 If a countries currency appreciates, or
becomes stronger, exports will decline
Positive vs. Negative Balance of
Trade
 When a countries value of exports exceeds
the value of imports, the country has a
positive balance of trade or trade surplus.
 A country is selling more than it is actually
buying
Positive vs. Negative Balance of
Trade (cont.)
 When a countries value of imports exceeds
the value of exports, the country has a
negative balance of trade or trade deficit.
 A country is buying more than it is actually
selling