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Chapter 17: International Trade
Opener
Essential Question
• Should free trade be encouraged?
Chapter 17, Opener
Copyright © Pearson Education, Inc.
Slide 2
Guiding Questions
• Section 1: Absolute and Comparative
Advantage
– Why do nations trade?
• Nations trade because they are not self-sufficient.
They specialize in producing certain goods and
services based on their resources and get goods
and services that they cannot produce by trading
with other nations.
Chapter 17, Opener
Copyright © Pearson Education, Inc.
Slide 3
Guiding Questions
• Section 2: Trade Barriers and Agreements
– What are the arguments for and against trade
barriers?
• Supporters of trade barriers argue that they save
jobs, protect infant industries, and safeguarding
national security. Critics of trade barriers argue
that free trade is the best way to pursue
comparative advantage, raise living standards, and
further cooperative relationships among nations.
Chapter 17, Opener
Copyright © Pearson Education, Inc.
Slide 4
Guiding Questions
• Section 3: Measuring Trade
– How do exchange rates affect international
trade?
• As the U.S. dollar appreciates and depreciates, the
amount of goods that the country imports and
exports will fluctuate, affecting international trade.
Chapter 17, Opener
Copyright © Pearson Education, Inc.
Slide 5
Chapter 17: International Trade
Section 1
Objectives
1. Evaluate the impact of the unequal
distribution of resources.
2. Apply the concepts of specialization and
comparative advantage to explain why
countries trade.
3. Summarize the position of the United
States on world trade.
4. Describe the effects of trade on
employment.
Chapter 17, Opener
Copyright © Pearson Education, Inc.
Slide 7
Key Terms
• export: a good or service sent to another
country for sale
• import: a good or service brought in from
another country for sale
• absolute advantage: the ability to
produce more of a given product using a
given amount of resources
Chapter 17, Opener
Copyright © Pearson Education, Inc.
Slide 8
Key Terms, cont.
• comparative advantage: the ability to produce
a product most efficiently give all the other
products that could be produced
• law of comparative advantage: the principle
that a nation is better off when it produces goods
and services for which it has a comparative
advantage
• interdependence: the shared need of countries
for resources, goods, services, labor, and
knowledge supplied by other countries
Chapter 17, Opener
Copyright © Pearson Education, Inc.
Slide 9
Introduction
• Why do nations trade?
– Nations trade because they don’t have
enough natural resources or the right kind of
natural resources to provide for their entire
population.
– Different nations specialize in different
products, but can’t specialize in all products
so they need to trade with other nations to
obtain the products they can’t make
themselves.
Chapter 17, Opener
Copyright © Pearson Education, Inc.
Slide 10
Natural Resources
• Natural resources, capital (both human
and physical), and labor help determine
what goods and services an economy will
produce.
– The availability of resources varies greatly
from one country to another. A nation’s ability
to use its physical resources, is affected by
culture and history.
Chapter 17, Opener
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Slide 11
Resource Distribution
• Like all countries, the countries shown on the
table below possess different natural, human,
and physical resources.
– Which resource on this chart is most closely related to
human capital?
Chapter 17, Opener
Copyright © Pearson Education, Inc.
Slide 12
Specialization
• Checkpoint: How does specialization
create a need for trade?
– When nations specialize in certain goods,
they obtain the goods they cannot produce
through importing and exporting.
– In some cases, more than 70 percent of a
nation’s export trade depends upon a single
resource.
• Examples include Kuwait (petroleum and natural
gas), Guinea-Bissau (cashews), and the Marshall
Islands (fish).
Chapter 17, Opener
Copyright © Pearson Education, Inc.
Slide 13
Absolute Advantage
• Most nations are not self-sufficient.
• It is actually better for countries to
specialize in some products and trade for
others. This can be understood by looking
at absolute and comparative advantage.
– A person or nation has an absolute advantage
when it can produce more of a given product
than another person or nation using a given
amount of resources.
Chapter 17, Opener
Copyright © Pearson Education, Inc.
Slide 14
Productivity and Opportunity Cost
• Carlos has an
absolute advantage
over Jenny in
producing both Tshirts and birdhouses.
However, their
opportunity costs are
different.
– How many T-shirts
can Carlos make in
the time it takes Jenny
to make 5 T-shirts?
Chapter 17, Opener
Copyright © Pearson Education, Inc.
Slide 15
Comparative Advantage
• A country has a comparative advantage in the
product that it can produce most efficiently given
all the products it could choose to produce.
• A nation is better off when it produces goods
and services for which it has a comparative
advantage.
– According to the law of comparative advantage, each
person should produce the good for which he or she
has a lower opportunity cost.
– Comparative advantage also mutually benefits both
parties.
– Checkpoint: How is trade affected by opportunity
cost?
Chapter 17, Opener
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Slide 16
Comparative Advantage and Trade
• Trade allows countries to obtain could for which
they might have a high opportunity cost.
– As a result, one country can use the money it earns
from exporting to import other goods and services
that it cannot efficiently produce itself.
• The growth of international trade has led to
greater economic interdependence.
– Because countries are interdependent, changes in
one country’s economy influences other countries.
Chapter 17, Opener
Copyright © Pearson Education, Inc.
Slide 17
The United States and Trade
• The United States is the world’s second
largest exporter, close behind Germany.
– The United States has a wide range of
exports and excels in manufacturing
technologically sophisticated goods such as
software, chemicals, and medical testing
supplies.The United States is also the world’s
leading exporter of services.
• U.S. imports total nearly $1.9 trillion,
making it the world’s top importer.
Chapter 17, Opener
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Slide 18
Effects on Employment
• Trade allows nations to specialize in producing a
limited number of goods yet specialization can
also change a nation’s employment patterns.
– Once the skills of specialization are no longer needed
in a particular nation, workers have a few options:
• Gain new job skills that are more in demand
• Move to another location where their existing skills
are more in demand
• Stay where they are and take a job that requires
lesser skills
• Be unemployed
Chapter 17, Opener
Copyright © Pearson Education, Inc.
Slide 19
Effects on Employment, cont.
• In the past two decades,
international trade has led
to significant changes in
U.S. employment
patterns.
– Many jobs have gone
overseas increasing
unemployment in the
United States.
– Businesses and
government often
provide help to retrain
laid-off workers or
assist them in
relocating.
Chapter 17, Opener
Copyright © Pearson Education, Inc.
Slide 20
Effects on Employment, cont.
• Job loss is not the only possible result
of trade.
– If American exports grow, making those
products will increase demand for workers
who lost jobs because they were on the
negative end of comparative advantage but
can now try to find work in those growing
industries.
Chapter 17, Opener
Copyright © Pearson Education, Inc.
Slide 21
Review
• Now that you have learned why nations
trade, go back and answer the Chapter
Essential Question.
– Should free trade be encouraged?
Chapter 17, Opener
Copyright © Pearson Education, Inc.
Slide 22
Chapter 17: International Trade
Section 2
Objectives
1. Define various types of trade barriers.
2. Analyze the effects of trade barriers on
economic activities.
3. Summarize arguments in favor of
protectionism.
4. Evaluate the benefits and costs of
participation in international trade
agreements.
5. Explain the role of multinationals in the
global market.
Chapter 17, Opener
Copyright © Pearson Education, Inc.
Slide 24
Key Terms
• trade barrier: a means of preventing a foreign
product or service from freely entering a nation’s
territory
• tariff: a tax on imported goods
• import quota: a set limit on the amount of a
good that can be imported
• sanctions: actions a nation or group of nations
takes in order to punish or put pressure on
another nation
• embargo: a ban on trade with a particular
country
Chapter 17, Opener
Copyright © Pearson Education, Inc.
Slide 25
Key Terms, cont.
• trade war: a cycle of escalating trade barriers
• protectionism: the use of trade barriers to
shield domestic industries from foreign
competition
• infant industry: an industry in the early stages
of development
• free trade: the lowering or elimination of
protective tariffs and other trade barriers
between two or more nations
• free-trade zone: region where a group of
countries agrees to reduce or eliminate trade
barriers
Chapter 17, Opener
Copyright © Pearson Education, Inc.
Slide 26
Introduction
• What are the arguments for and against
trade barriers and agreements?
– Supporters of trade barriers and agreements
argue that they save jobs, protect infant
industries, and safeguard national security.
– Critics of trade barriers and agreements argue
that free trade is the best way to pursue
comparative advantage, raise living
standards, and further cooperative
relationships among nations.
Chapter 17, Opener
Copyright © Pearson Education, Inc.
Slide 27
Trade Barriers: Tariffs
• A trade barrier, or
trade restriction, is a
means of preventing
a foreign product or
service from freely
entering a nation’s
territory.
– Tariffs are a common
trade barrier. Tariffs
today are much lower
than in the past.
Chapter 17, Opener
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Slide 28
Import Quotas and VERs
• Checkpoint: How do voluntary export
restraints differ from import quotas?
– Another barrier is an import quota, which
places a limit on the amount of a good that
can be imported.
• Tariffs and quotas are set by the importing country.
– By contrast, a voluntary export restraint (VER)
is a voluntary limit set by the exporting
country, restricting the quantity of a product it
will sell to another country.
Chapter 17, Opener
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Slide 29
Other Barriers
• Other barriers
include:
– High licensing fees
or slow licensing
processes
– Customs duties
– Health, safety, or
environmental
regulation
– Political sanctions
Chapter 17, Opener
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Slide 30
Effects of Trade Barriers
• The effects of trade barriers include:
– Increased prices for foreign goods—trade barriers
can help domestic producers compete with foreign
firms.
• By limiting imports from those firms trade barriers help
domestic companies.
• Consumers may suffer, though, as import restrictions
result in higher prices.
• Trade wars—when one country restricts imports,
its trading partner may retaliate by placing its
own restrictions on imports.
– If the first country responds with further trade limits,
the result is a trade war.
Chapter 17, Opener
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Slide 31
Chapter 17, Opener
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Slide 32
Protectionism
• Checkpoint: What are three arguments
given for protectionism?
– Nations impose trade barriers as a form of
protectionism.
– Protectionists believe that trade barriers:
• Save jobs that may be hurt by foreign competition
• Protect infant industries and give them the time
and experience to become efficient producers
• Safeguard national security by making sure that
U.S. steel, energy, and advanced technological
industries remain active in the event of war
Chapter 17, Opener
Copyright © Pearson Education, Inc.
Slide 33
Free Trade
• In opposition to protectionism is the principle of
free trade.
• Free trade involves the lowering or elimination of
protective tariffs and other trade barriers
between two or more nations.
Chapter 17, Opener
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Slide 34
Trade Agreements
• To encourage free trade, a number of countries
in recent decades have signed international free
trade agreements.
– World Trade Organization (WTO)—founded in 1995
with the goal of making global trade more free
• Today the WTO acts as a referee, enforcing the rules
agreed upon by the member countries.
– The European Union—27 nations, almost all of
Europe, are members of the EU, which abolishes
tariffs and trade restrictions among member nations
Chapter 17, Opener
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Slide 35
NAFTA
• Ratified in 1994, the North American Free Trade
Agreement, created a a free trade zone linking the
United States, Canada, and Mexico.
– Opponents of NAFTA worried that American companies
would move factories to Mexico where wages and
lower and environmental regulations were less strict.
– The agreement remains
controversial today with critics
continuing to charge that NAFTA
has led to the loss of American
jobs and damage to the
environment.
Chapter 17, Opener
Copyright © Pearson Education, Inc.
Slide 36
Other Trade Agreements
• The DR-CAFTA created a free trade agreement
between the United States and six nations of
Central America.
• Other free trade agreements include:
– The Asia- Pacific Economic Cooperation (APEC)
– The Southern Common Market (MERCOSUR)
– The Caribbean Community and Common Market
(CARICOM)
– The Association of Southeast Asian Nations (ASEAN)
Chapter 17, Opener
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Slide 37
Chapter 17, Opener
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Slide 38
The Debate Over Free Trade
• Debate over NAFTA
became a campaign
issue in the American
presidential election of
2008.
• Meetings of the WTO
have spurred large
protests.
– At WTO meetings in
Seattle in 1999 and
Hong Kong in 2005,
thousands of protestors
gathered to oppose the
WTO.
Chapter 17, Opener
Copyright © Pearson Education, Inc.
Slide 39
The Role of Multinationals
• A multinational is a large corporation that sells
goods and services throughout the world.
• The decision to build production facilities in a
foreign country benefits both the multinational
and the host nation.
– The corporation avoids some fees and tariffs.
– The corporation may benefit from cheaper labor.
– The host nation benefits by gaining jobs and tax
revenue.
• Host nations, however, worry about MNCs
gaining political power, driving out domestic
industries and exploiting workers.
Chapter 17, Opener
Copyright © Pearson Education, Inc.
Slide 40
Review
• Now that you have learned about the
arguments for and against trade barriers
and agreements, go back and answer the
Chapter Essential Question.
– Should free trade be encouraged?
Chapter 17, Opener
Copyright © Pearson Education, Inc.
Slide 41
Chapter 17: International Trade
Section 3
Objectives
1. Explain how exchange rates of world
currencies.
2. Describe the effect of various exchange
rate systems.
3. Define balance of trade and balance of
payments.
4. Analyze the causes and effects of the
U.S. trade deficit.
Chapter 17, Opener
Copyright © Pearson Education, Inc.
Slide 43
Key Terms
• exchange rate: the value of a nation’s currency
in relation to a foreign country
• appreciation: an increase in the value of a
currency
• depreciation: a decrease in the value of a
currency
• foreign exchange market: system of financial
institutions that facilitate the buying and selling
of foreign currencies
• fixed exchange-rate system: a system in which
governments try to keep the values of their
currencies constant against one another
Chapter 17, Opener
Copyright © Pearson Education, Inc.
Slide 44
Key Terms, cont.
• flexible-exchange rate system: a system in
which the exchange rate is determined by supply
and demand
• balance of trade: the relationship between the
value of a country’s exports and the value of its
imports
• trade surplus: situation in which a nation exports
more goods and services than it imports
• trade deficit: situation in which a nation imports
more goods and services than it exports
• balance of payments: the value of all monetary
transactions between a country’s economy and
the rest of the world
Chapter 17, Opener
Copyright © Pearson Education, Inc.
Slide 45
Introduction
• How do exchange rates affect international
trade?
– Appreciating currency causes prices to rise on
goods produced in a country, which means
exports will likely decline and consumers will
purchase more imports.
– Depreciating currency causes prices to fall on
goods produced in a country, which means
exports will likely increase.
Chapter 17, Opener
Copyright © Pearson Education, Inc.
Slide 46
Foreign Exchange
• Changing money from one nation’s
currency is never easy because it is
seldom an even exchange, like one peso
for one dollar.
– The value of a nation’s currency in relation to
a foreign currency is called the exchange rate.
– Understanding how exchange rates work
enables you to convert prices in one currency
to prices in another currency.
Chapter 17, Opener
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Slide 47
Foreign Exchange Rates
• This table shows exchange rates on a single day. Read
down the first column of the chart to find out what one
U.S. dollar was worth in various foreign currencies. Read
across the top to find out how much a selected foreign
currency was worth in U.S. dollars.
– On this day, how much was a U.S. dollar worth in Chinese
yuan? In Canadian dollars?
Chapter 17, Opener
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Slide 48
Calculating Prices
• A simple formula allows you to convert the
price of an item from foreign currency to
American dollars. Simply divide the price
by the value of the currency per one dollar
according to the exchange rate.
Chapter 17, Opener
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Slide 49
Appreciation
• Checkpoint: What are the likely effects of the
dollar becoming stronger?
– An increase in the value of a currency is called
appreciation.
• When a currency appreciates, it becomes “stronger.”
– When a nation’s currency appreciates, its products
become more expensive in other countries.
– A strong dollar is therefore likely to lead consumers in
the United States to purchase more imported goods.
Chapter 17, Opener
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Slide 50
Depreciation
• A decrease in the
value of a currency is
called depreciation,
often referred to as
“weakening.”
• When a nations’
currency depreciates,
its product become
cheaper to other
nations.
Chapter 17, Opener
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Slide 51
Foreign Exchange Market
• International trade is made possible by the
foreign exchange market, which consists
of about 2,000 banks and other financial
institutions that facilitate the buying and
selling of foreign currencies.
– These banks are located in various financial
centers throughout the world and maintain
close links to one another through telephone
and computer.
Chapter 17, Opener
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Slide 52
Exchange Rate Systems
• In the United States today, all prices are in
dollars and all dollars have the same value.
• Complications exist in international trade
because exchange rates can shift.
– A system in which governments try to keep the values
of their currencies constant against one another is
called a fixed exchange-rate system. In this system,
governments intervene in order to maintain the rate.
– Checkpoint: How are exchange rates set in a fixed
exchange-rate system?
Chapter 17, Opener
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Slide 53
The Bretton Woods Conference
• As World War II was drawing to a close,
representatives from 44 countries met in Bretton
Woods, New Hampshire to make financial
arrangements for the postwar world.
– The Bretton Woods conference resulted in the
creation of a fixed-rate system for the United States
and much of western Europe.
– To make the new system work, the Bretton Woods
conference established the International Monetary
Fund (IMF). Today, the IMF promotes international
monetary cooperation, currency stability, and trade.
Chapter 17, Opener
Copyright © Pearson Education, Inc.
Slide 54
Flexible Exchange-Rate Systems
• By 1973, many countries, including the United
States, abandoned the fixed rate-exchange
system and adopted a system based on flexible
exchange rates, in
which the exchange
rate is determined by
supply and demand.
– Today, the countries of
the world use a mixture
of fixed and flexible
exchange rate and
trade has grown rapidly.
Chapter 17, Opener
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Slide 55
The Euro
• Although the flexible exchange-rate
system works well, some countries whose
economies are closely tied together want
the advantages of fixed rates.
– One way to enjoy the advantages but avoid
some of the difficulties of fixed exchange
rates is to abolish individual currencies and
establish a single currency, which is what 12
members of the European Union did by
adopting the euro.
• The euro helps simplify trade in member nations.
Chapter 17, Opener
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Slide 56
Balance of Trade
• Exchange rates can affect a nation’s balance of
trade.
• Nations seek to maintain a balance of trade by
avoiding trade surpluses and trade deficits.
• By balancing trade, a nation can protect the
value of its currency on the international market.
– When a country continually imports more than it
exports, the value of its currency falls.
– This can be corrected either by limiting imports or by
increasing the number or value of exports.
Chapter 17, Opener
Copyright © Pearson Education, Inc.
Slide 57
Balance of Payments
• Economists get a more complex picture of
international trade by looking at balance of
payments, or the value of all monetary
transactions between all sectors of a
country’s economy and the rest of the
world.
– Income from foreign companies, government
aid to foreign banks, and exchange rates
must all be factored into the balance of
payments
Chapter 17, Opener
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Slide 58
U.S. Balance of Trade
• The United States
currently runs a trade
deficit.
– As a result of these
deficits, people from
other countries now
own a large part of the
U.S. economy.
– What was the
difference between
imports and exports in
1980? In 2005?
Chapter 17, Opener
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Slide 59
Effects of the Trade Deficit
• The fact that other countries own parts of the
U.S. economy leads some to fear that U.S.
national security is at risk and that overseas
investors may be reluctant to purchase
American assets, which would slow the
monetary flow in the United States.
• To reduce the trade deficit, the government
could depreciate the exchange rate. As a result,
exports would rise and imports would fall.
– The government could also cut back spending by
adjusting its monetary or fiscal policy.
Chapter 17, Opener
Copyright © Pearson Education, Inc.
Slide 60
Review
• Now that you have learned about how
exchange rates affect international trade,
go back and answer the Chapter Essential
Question.
– Should free trade be encouraged?
Chapter 17, Opener
Copyright © Pearson Education, Inc.
Slide 61