Why Nations Trade

17-1 Why Nations TradeHow 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?

Specialization and Comparative AdvantageWhy 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.

Resource Distribution and TradeEach 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.

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). Absolute and Comparative AdvantageA 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.

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. SpecializationTradeNet EffectCarlKateSpecializationTradeNet EffectCarlKateCarlKateCarl 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 KateBenefits of TradeThe United States is the worlds largest exporter.The United States main trading partners are Canada, Mexico and Japan.The United States is also the worlds largest importer.Imports and Exports of the United StatesDue to new technology in 1970s, Japan gained a comparative advantage in producing automobiles. Many Americans lost jobs in Detroit, etc. as people began purchasing Japanese automobiles.Trade and EmploymentSpecialization, 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 jobRelocation: Moving to where current skills meet current jobsRetraining: Gaining new human capital to meet the demands of specialized labor markets Outsourcing vs. OffshoringWhen 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

Section 1 Assessment1. 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 countrys greatest advantage is in the import of goods that it cannot produceSection 1 Assessment1. 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 countrys greatest advantage is in the import of goods that it cannot produce17-2 Trade Barriers and AgreementsWhat are trade barriers?What are the effects of trade barriers?What is protectionism?What organizations promote international cooperation on matters of trade?

A trade barrier is a means of preventing a foreign product or service from freely entering a nations territory.What Are Trade Barriers?Import QuotasAn import quota is a limit on the amount of a good that can be imported (621,780 kilograms of cotton from China).

TariffsA tariff is a tax on imported goods.

The Effects of Trade RestrictionsIncreased Prices for Foreign GoodsTariffs 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 WarsWhen one country restricts imports, its trading partner may impose its own retaliatory restrictions. This can decrease world trade.Increased Prices for Foreign GoodsPrice $68,900. With a $2000 tariff, this car would be $70,900As 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 RS5Trade WarsThe 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.

Trade WarsBeef 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.

Protectionism is the use of trade barriers to protect a nations industries from foreign competition.Arguments for ProtectionismProtecting JobsProtectionism shelters workers in industries that would be hurt by specialization and trade.Protecting Infant IndustriesProtectionist policies protect new industries in the early stages of development.Safeguarding National SecurityCertain 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.

International AgreementsRecent 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.International AgreementsEuropean Union: 1993 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.

Other Regional Trade AgreementsAPEC 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.

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. (d) safeguard national security.

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. (d) safeguard national security.

17-3 Measuring TradeHow do exchange rates affect international markets?How do exchange rate systems vary?

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

The following table shows an example of exchange rates. Foreign Exchange RatesU.S. $U.S. $Australian $U.K. Canadian $enEuroMexican nuevo pesoChinese renminbi11.5410.62521.478114.30.95169.338.28Aust $U.K. Canadian $enEuroMexican NPChinese renminbi0.648910.40570.959374.190.61756.065.371.5992.46512.365182.91.5226.313.250.67641.0420.4229177.340.64366.35.60.010.010.010.0129310.010.080.071.0511.620.6571.554120.219.818.70.110.170.070.1612.240.119.80.120.190.080.1813.810.111.131Reading an Exchange Rate TableStrong and Weak CurrenciesAn 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.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 currencyInflation The Fed orders the printing of too much moneyReputation large deficits look bad to investors.

Todays Exchange RateAs of today, $1 equals 0.74 Euro

Go to http://www.xe.com/currencyconverter/

Pick 5 different countries and find out how the U.S. dollar stacks up