Transcript last new notes!! - Mr. Book Stoney Creek High School

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 97%,
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
Resource Distribution
How Do Nations Decide What to
Produce and Trade?

Determine your country’s absolute and
comparative advantages
 Absolute

Advantage – you can
produce it at a lower cost than other
countries
 Comparative Advantage – your
opportunity cost is lower than other
countries for producing that good
The best option is to trade based on
comparative advantage
Huh?
 U.S.
can make 4 barrels of oil, or
12 bales of wheat
 Mexico can make 2 barrel of oil,
or 2 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?
Comparative/Absolute Review
Jim can produce 6 IPOD’s or 18 pairs
of shoes in 1 hour
 John can produce 3 IPOD or 3 pair of
shoes in an hour
 Who has the absolute advantage for
IPOD’s ?
 For Shoes?

Comparative/Absolute Review
What is the Jim’s opportunity cost for
each IPOD?
 What is John’s opportunity cost for
each IPOD?
 Who has the comparative advantage
for IPOD’s?
 For shoes?

Benefit of Trading Based on
Comparative Advantage
 Each
side will bargain to make the
best deal possible
 John can produce his own IPOD,
or send shoes to Jim in exchange
for IPOD
 By trading both sides can profit
Trade and Employment
Trading based on comparative
advantage creates specialization –
produce only some goods/services
rather than everything they need and
want
 Specialization can cause
unemployment, but it also makes
goods cheaper, overall

Trade Barriers
 U.S.
is the world’s largest exporter
and importer
 Trade Barrier – restriction on trade of
goods to or from foreign countries
 Trade Barriers can take many forms
Trade Barriers
 Tariff
– tax on imported goods,
discourages consumers from
buying those goods
 Embargo – total ban on trading
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 national
security for
critical
industries
needed in a
war
Trade Organizations
Current Free Trade Agreements

Reciprocal Trade
Agreement Act
Passed by
Congress to allow
the President to
reduce tariffs
 U.S. grants
“normal trade
relations” status to
trade partners

Current Free Trade Agreements

World Trade
Organization
(WTO)
Acts as a referee
in trade to
reduce tariffs
and restrictions
 149 Members

Current Free Trade Agreements
 European
Union (EU)
 Unified
economy of 12
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
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)