Chapter 17
International Trade
Why Do Nations Trade?
 There
is an unequal distribution of
resources
 High school terms – other
countries have stuff that we don’t
 All nations need goods and
services, but may not have the
factors of production required
Resource Distribution

Natural Resources – Farm land, mineral
deposits, oil, natural gas, water,
woodlands
 U.S. Strengths – farm land
 U.S. Weaknesses – none (though oil
consumption far exceeds supply)
Resource Distribution

Human Capital – knowledge and skills of
workers, overall education level
 U.S. Strengths – very high literacy rate,
largest network of universities
 U.S. Weaknesses – none
Resource Distribution

Physical Capital – manmade objects used
to produce other goods and services
 U.S. Strengths – extensive
communications network, roads and
transportation
 U.S. Weaknesses – none
How Do Nations Decide What to
Produce and Trade?

David Ricardo’s Law of Comparative
Advantage
 Absolute

Advantage – you can
produce it at a lower cost than other
countries (effectively meaningless)
 Comparative Advantage – your
opportunity cost is lower than other
countries for producing that good
The best results come from trading
based on comparative advantage
Huh?
 U.S.
can make 2 barrels of oil, or
6 bales of wheat
 Mexico can make 1 barrel of oil,
or 1 bale of wheat
 Who has the absolute advantage
for oil?
 For wheat?
Huh?
 What
is the U.S. opportunity cost
for each barrel of oil?
 What is Mexico’s opportunity cost
for each barrel of oil?
 Who has the comparative
advantage for oil?
 For wheat?
Benefit of Trading Based on
Comparative Advantage
 Each
side will bargain to make the
best deal possible
 The U.S. can produce its own oil,
or send wheat to Mexico in
exchange for oil
 If Mexico accepts 2 wheat for 1
oil, both side profit
Trade and Employment


Trading based on comparative advantage
creates specialization – countries only
produce what they can produce at lower
opportunity costs than others
Specialization can cause unemployment in
an individual sector, but it also makes
goods cheaper, overall
U.S. Exports and Imports



U.S. is the world’s largest exporter and importer
Imports:
 1. Industrial supplies and materials
 2. Consumer goods
 3. Capital goods
Exports:
 1. Capital goods
 2. Industrial supplies and materials
 3. Consumer goods
U.S. Exports and Imports


Trade Surplus – when a country exports more
than it imports (more money coming in to the
country than going out)
Trade Deficit – when a country imports more
than it exports (more money going out than
coming in)
 U.S. Balance of Trade for 2007 - $708.5 Billion
Trade Deficit ($1.6 trill. in exports - $2.3 trill.
in imports)
Trade Barriers
 Definition
– restriction on trade of
goods to or from foreign countries
Trade Barriers
 Import
Quota – limit on number
of goods that can be imported
 Voluntary Export Restraint (VER)
– reduction in exports, done to
encourage another country to
reduce trade barriers
 Often
NOT really voluntary… done
at another country’s request
Trade Barriers
 Tariff
– tax on imported goods,
discourages consumers from
buying those goods
 Embargo – total ban on trade
 U.S. currently has 4 embargos –
Cuba, North Korea, Iran, Syria
What is the Goal of Trade Barriers?

Protectionism -
Preserve jobs
and industries
in your country
What is the Goal of Trade Barriers?
 Reasons
for
protectionism:
 Save jobs
that would go
to countries
with cheap
labor
What is the Goal of Trade Barriers?
 Reasons
for
protectionism:
 Protect an
infant
industry that
needs time to
develop
What is the Goal of Trade Barriers?
 Reasons
for
protectionism:
 Protect national
security for
critical
industries
needed in a
war
Current Free Trade Agreements

World Trade
Organization
(WTO)
Acts as a referee
in trade to
reduce tariffs
and restrictions
 150 Members

Current Free Trade Agreements
 European
Union (EU)
 Unified
economy of 27
European
countries
 Same currency,
free trade
Current Free Trade Agreements

North American
Free Trade
Agreement
(NAFTA)

Eliminates all
trade barriers
between
Canada, the
U.S., and Mexico
by 2009
Current Free Trade Agreements
 Asian
Pacific
Economic
Cooperation
 Countries
along
the Pacific (U.S.
China, Russia
etc.) agree to
reduce barriers
Multinational Corporations and
Trade
Integrate a variety
of countries into
production of a
good
 Reduce distinction
between foreign
and domestic
goods

Multinational Corporations and
Trade

Some fears that
corporations take
advantage of underdeveloped countries,
and destroy local
cultures

This is often referred
to as cultural
imperialism
Exchange Rates
 Exchange
Rate – amount of
another currency you can trade
your currency for
 Ex.
Trading a dollar for 10 pesos
 Exchange Rates change daily, based
on supply and demand
Exchange Rates
 Strong
Currency vs. Weak
Currency
 A strong currency is appreciating –
growing in value compared to other
currencies
 A weak currency is depreciating –
decreasing in value
Exchange Rates
 Effects
of strong and weak
currencies
A
strong dollar discourages other
countries from buying American
goods (decreases exports)
 A weak dollar makes American
goods cheaper for other countries
(increases exports)