Economics Chapter 17
Section 1
International Trade
Why Nations Trade
Focus:
International trade is based on resources that one country needs and another country can provide. Each country in the world possesses different 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.
Key Terms:
Absolute advantage comparative advantage
Law of comparative advantage export
Import
Review- “resource distribution” –the resources that are used to make goods and services are called the factors of production. They include natural resources (land), human resources (labor), and capital resources.
Unequal resource distribution-different countries have different types and quantities of resources. Some of these quantities and types are determined by nature, culture, status of war etc.
THE NEED FOR TRADE*
When nations specialize in producing ONLY certain goods and services, they obtain the goods they don’t/can’t produce through TRADE.
Specialization-this occurs when producers decided to produce only certain goods and services, rather than each country producing ALL the goods and services it needs.
Absolute advantage-the ability to produce more of a given product using a given amount of resources.
Comparative advantage-the ability to produce a product most efficiently given all the other products that could be produced.
Law of comparative advantage-the idea that a nation is better off when it produces goods and services for which it has a comparative advantage. Remember to consider the opportunity cost of their selection.
Chapter 17 con’t
Export-a good that is sent to another country for sale.
Import-a good that is brought in from another country for sale.
The United States- besides being the world’s LARGEST EXPORTER,
The US is also the world’s TOP IMPORTER
*Assignment: List 3 major exports and imports of the US as well as 3 major trading partners of the US. Chapter 7, section 1. Explain in your own words an argument for or against protectionism.
Chapter 17
Section 2
Trade Barriers and Agreements
Section Focus
The free exchange of goods can be restricted by barriers to trade, such as tariffs, quotas, and voluntary export restraints. International trade agreements and organizational work to reduce trade barriers.
Key Terms:
Trade barrier international free trade agreement
Import quota World Trade Organization (WTO)
Voluntary export restraint European Union (EU)
Customs duty euro
Tariff free-trade zone
Trade war NAFTA
Protectionism infant industry
Trade barrier-a means of preventing a foreign product or service from freely entering a nation’s territory.
Import quota-a limit on the amount of a good that can be imported.
Voluntary export restraint (VER)-a self-imposed limitation on the number of products shipped to a particular country.
Custom duty-a tax on certain items purchased abroad.
Tariff- a tax on imported goods.
Trade war-a cycle of increasing trade restrictions.
Protectionism-the use of trade barriers to protect a nation’s industries from foreign competition. The act of protectionism can isolate a country.
Infant industry-a new industry.
International free trade agreement-agreement that results from cooperation between two countries to reduce trade barriers and tariffs and to trade with each other.
World Trade Organization (WTO)-a worldwide organization whose goal is freer global trade and lower tariffs.
European Union (EU)-a regional trade organization made upof European nations
Euro-a single currency that replaces individual currencies among members of the European Union
Free-trade zone-a region where a group of countries agrees to reduce or eliminate trade barriers.
NAFTA-agreement that will eliminate all tariffs and other trade barriers between Canada, Mexico, and the United States.
Chapter 17, section 3
Workbook pg. 73
Section Focus:
International trade is complicated by the fact that different nations have different currencies. Countries pay for imports in their own currencies and receive foreign currency for exports. If a nation imports more than it exports, or vice versa, a trade imbalance is created.
Key Terms:
Exchange rate appreciation
Depreciation foreign exchange market
Fixed exchange-rate system trade surplus
Trade deficit balance of trade
Exchange rate: the value of a foreign nation’s currency in terms of the home nation’s currency.
Appreciation: an increase in the value of a currency.
Depreciation: a decrease in the value of a currency.
Foreign exchange market: the banks and other financial institutions that facilitate the buying and selling of foreign currencies.
Fixed exchange-rate system: a currency system in which governments try to keep the values of their currencies contrast against one another.
Flexible exchange-rate system: a currency system that allows the exchange rate to be determined by supply and demand.
Trade surplus: the result of a nation exporting more than it imports.
Trade deficit: the result of a nation importing more than it exports.
Balance of trade: the relationship between a nation’s imports and its exports.
Workbook pg. 73
Section 3
Measuring Trade
A.
In matters of International Trade
1. A U.S. tourist wants to buy a newspaper in Bejing.
The tourist must exchange dollars for Chinese renminbi.
2. You want to learn current exchange rates.
You may consult an exchange a rate table in a major newspaper or on the Internet.
3. A strong dollar makes American products more expensive in Japan.
Japanese consumers will probably buy fewer U.S. goods or services.
4. The dollar is devalued
Foreign consumers are more apt to buy U.S. products, and exports will increase. Other nations’ products become more expensive and imports will decrease.
5. An American firm needs to exchange yen for dollars
The firm makes the exchange on the foreign exchange market
6. Low labor costs abroad result in lower prices for U.S. imports
U.S. consumers are likely to buy cheaper imports than higher priced domestic goods, and imports will increase.
B. Reviewing Key Terms
7. Fixed exchange-rate system and flexible exchange-rate system-Under a fixed exchange-rate system, governments try to keep currency values constant against one another, while supply and demand determine the rate under a flexible system.
8. Trade surplus and trade deficit-a trade surplus occurs when a nation’s exports exceed its imports, but a deficit occurs when its imports exceed its exports.
9. Appreciation and depreciation-appreciation refers to an increase in the value of a currency while depreciation refers to a decrease in value.