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International Trade Chapter 17


International Trade Chapter 17 Resource Distribution and Trade Each country of the world possesses different types and quantities of land, labor, and capital resources. – PowerPoint PPT presentation

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Title: International Trade Chapter 17

International TradeChapter 17
Resource Distribution and Trade
  • Each country of the world possesses different
    types and quantities of land, labor, and capital
  • By specializing in the production of certain
    goods and services, nations can use their
    resources more efficiently.
  • Specialization and trade can benefit all nations.
    Open competition benefits everyone

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How do nations benefit from trade?Absolute and
Comparative Advantage
  • A person or nation has an absolute advantage when
    it can produce a particular good at a lower cost
    than another person or nation.
  • 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

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.
Kate has an absolute advantage because she
produces more of both items
  T-shirts Birdhouses
Kate 6 2
Carl 1 1
For Kate 1 birdhouse 3 T-shirts For Carl 1
birdhouse 1 T-shirt Carl should give up making
Carl has a comparative advantage in birdhouses
  Opportunity cost for T-shirts Opportunity cost for Birdhouses
Kate 1/3 Birdhouses 3 T-shirts
Carl 1 1
For Kate 1 T-shirt 1/3 BirdhouseFor Carl 1
T-shirt 1 Birdhouse
  T-shirts Birdhouses
Kate 6 2
Carl 1 1
  Opportunity cost for T-shirts Opportunity cost for Birdhouses
Kate 1/3 Birdhouses 3 T-shirts
Carl 1 1
Imports and Exports of the United States
America is the worlds richest country and
largest importer. In 2012, the US bought US2.334
trillion worth of imported products. That total
is up by 7.8 since 2008.
Worlds richest country the USA placed second in
exporting during 2012. America shipped US1.55
trillion worth of goods around the globe, up by
18.9 since 2008.
The United States main trading partners are
Canada and Mexico (NAFTA)
Goods and Services Deficit Increased in January
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1  Refined Petroleum 82,435,395,393.78 6.0
2  Cars 45,942,140,263.17 3.3
3  Integrated Circuits 38,076,490,687.79 2.8
4  Packaged Medicaments 33,799,228,734.32 2.5
5  Vehicle Parts 32,383,388,802.49 2.4
6  Gas Turbines 31,237,354,054.65 2.3
7  Planes, Helicopters, and/or Spacecraft 30,570,688,728.76 2.2
8  Gold 24,386,901,730.26 1.8
9  Medical Instruments 22,582,804,575.53 1.6
1  Crude Petroleum 316,662,798,759.68 15
2  Refined Petroleum 157,852,991,937.77 7.4
3  Digital Disk Drives 63,389,526,637.83 3.0
4  Integrated Circuits 55,700,511,530.66 2.6
5  Cars 46,784,971,542.74 2.2
6  Packaged Medicaments 34,320,314,631.01 1.6
7  Vehicle Parts 33,298,328,830.08 1.6
8  Gas Turbines 31,575,835,632.49 1.5
9  Planes, Helicopters, and/or Spacecraft 30,171,487,686.30 1.4
Trade and Employment
  • Workers who lose their jobs due to specialization
    face three options
  • Unemployment Inability to adapt and find a new
  • Relocation Moving to where current skills meet
    current jobs
  • Retraining Gaining new human capital to meet the
    demands of specialized labor markets

As nations begin to specialize in certain goods,
dramatic changes in the nations employment
patterns also occur.
What Are Trade Barriers?
A trade barrier is a means of preventing a
foreign product or service from freely entering a
nations territory.
  • Import Quotas
  • An import quota is a limit on the amount of a
    good that can be imported.
  • Voluntary Export Restraints
  • A voluntary export restraint (VER) is a
    self-imposed limitation on the number of products
    shipped to a certain country.
  • Tariffs
  • A tariff is a tax on imported goods, such as a
    customs duty.
  • Other Barriers to Trade
  • Other barriers to trade include high government
    licensing fees and costly product standards.
  • Subsidies lowers the cost of production

  • Closed v. Open Economies
  • Closed economy- does not engage in trade or
    other economic interaction with other countries.
    Very rare.
  • Open economy- free and unfettered trade. Also
  • Most economies give protection to certain
    domestic industries.
  • Interdependence- All nations need to trade with
    other nations to get natural resources.
  • The Effects of Trade Restrictions
  • Increased Prices for Foreign Goods
  • Tariffs 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 can lose
  • Trade Wars
  • When one country restricts imports, its trading
    partner may impose its own retaliatory

Arguments for Protectionism
Protectionism is the use of trade barriers to
protect a nations industries from foreign
  • Protecting Jobs
  • Protectionism shelters workers in industries that
    would be hurt by specialization and trade.
  • Protecting Infant Industries
  • Protectionist policies protect new industries in
    the early stages of development.
  • Safeguarding National Security
  • Certain industries may require protection from
    foreign competition because their products are
    essential to the defense of the United States.

  • Balance of Trade
  • When a nation exports more than it imports, it
    has a trade surplus.
  • When a nation imports more than it exports, it
    creates a trade deficit.
  • The relationship between a nations imports and
    its exports is called its balance of trade.
  • The United States Trade Deficit
  • The Trade Deficit
  • The United States has run a trade deficit since
    the early 1970s.
  • Why the Trade Deficit?
  • Imports of foreign oil as well as Americans
    enjoyment of imported goods account in part for
    the large American trade deficit.
  • Reducing the Trade Deficit
  • Quotas and other trade barriers can be used to
    raise prices of foreign-made goods and urge
    consumers to buy domestic goods.

International Cooperation
  • Recent trends have been toward lowering trade
    barriers and increasing trade through
    international trade agreements.
  • In 1948, the General Agreement on Tariffs and
    Trade (GATT) was established to reduce tariffs
    and expand world trade.
  • In 1995, the World Trade Organization (WTO) was
    founded to ensure compliance with GATT, to
    negotiate new trade agreements, and to resolve
    trade disputes.

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Global Trade Agreements
Many nations have formed regional trade
organizations. These trade organizations
establish free-trade zones, or regions where a
group of countries has agreed to reduce trade
barriers among themselves.
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  • Balance of payments- the value of all money
    coming into a country minus all of the money
    going out.
  • 2 Parts of balance of payments
  • Current account- includes all trading of goods
    and services and any money or aid that the US
    gives to foreign countries
  • Capital account- investments by foreigners in the
    US and US investments abroad.

Exchange Rates and International Markets
  • An increase in the value of a currency is called
  • A decrease in the value of a currency is called
  • Multinational firms convert currencies on the
    foreign exchange market, a network of about 2,000
    banks and other financial institutions.

The value of a foreign nations currency in
relation to your own currency is called the
exchange rate.
Types of Exchange Rate Systems
  • Fixed Exchange-Rate Systems
  • A currency system in which governments try to
    keep the values of their currencies constant
    against one another is called a fixed
    exchange-rate system.
  • Flexible Exchange-Rate Systems
  • Flexible exchange-rate systems allow the exchange
    rate to be determined by supply and demand.

Exchange Rates
  • Exchange rates move up and down as a reflection
    of the worth of a nations currency in comparison
    to another.
  • What will happen if the demand for U.S. products
  • More U.S. dollars needed to buy goods. Increase
    in demand causes the dollar to appreciate or
  • What would be the effect on prices?
  • US goods would be relatively more expensive for
  • US consumers could purchase goods from other
    countries more cheaply.

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  • Currency appreciation- a countrys currency is
    able to buy more units of another nations
  • Consequences
  • Consumers of foreign goods will benefit because
    they can buy more foreign goods with the same
    amount of currency.
  • Producers who sell a lot to foreign buyers will
    have trouble because their products will be
    relatively more expensive for foreign customers.
  • Therefore it is not good for a nation to have too
    much currency appreciation because this will
    reduce the countrys exports. If a country were
    experiencing a deficit they might activate
    devaluation or depreciation of currency on

  • Currency depreciation- if a currency depreciates
    it is able to buy fewer units of foreign currency
    than previously.
  • Consequences
  • The effects are opposite of appreciation.
    Exporters will be better off because more foreign
    buyers will purchase their products. However,
    consumers cannot buy as much of a foreign product
    as before.
  • If the US wanted to increase net exports or
    decrease the trade deficit they could depreciate
    the U.S. dollar, this would encourage foreign
    consumers to purchase more US products and US
    consumers will purchase fewer foreign goods.
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