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Chapter Introduction

Section 1: Absolute and Comparative Advantage

Section 2: Barriers to International Trade

Section 3: Foreign Exchange and Trade Deficits

Visual Summary

Chapter Intro 1

You and a classmate are planning to open a lawn-service business. You will each contribute $200 toward the purchase of a mower, gas can, trimmer, and other materials for the business. Now it is time to get organized. Work with a classmate and make a list of the different “jobs” associated with your lawn-service business. What criteria will you use to divide up these jobs? Why? Read Chapter 16 to find out how nations make decisions about what to produce and trade with other nations.

Chapter Intro 2

Trade and specialization lead to economic growth for individuals, regions, and nations.

Chapter Intro-End

Section 1-Preview

Section Preview

In this section, you will learn that comparative advantage is the basis for international trade.

Section 1-Key Terms

Content Vocabulary

• exports

• imports

• absolute advantage

• production possibilities frontier

Academic Vocabulary

• volume • enabled

• comparative advantage

• opportunity cost

A. A

B. B

C. C

D. D

Section 1

A B C D

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What products do you think the state of Texas primarily trades?

A. Citrus fruits

B. Oil and cattle

C. Cattle and wine

D. Computers

Section 1

Why Nations Trade

Trade allows nations to specialize in some products and then trade them for goods and services that are more expensive to produce.

Section 1

Why Nations Trade (cont.)

American Dependence on Trade

• Reasons to trade

– Some countries lack essential raw materials.

– Specialization

• Exports

• Imports

Section 1

Why Nations Trade (cont.)

• Sheer volume of trade between nations is proof that trade is beneficial.

U.S. Merchandise Trade by Area

A. A

B. B

C. C

D. D

Section 1

A B C D

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The United States imports goods that amount to approximately how much per capita?

A. $8,500

B. $6,500

C. $5,500

D. $2,500

Section 1

The Basis for Trade

Trade works best when countries focus on those products they can produce best.

Section 1

• Countries find it cheaper to import some products than to manufacturer them.

• Absolute advantage—country can produce more of a product than another country.

The Basis for Trade (cont.)

Section 1

• Production possibilities frontier—diagram illustrating the maximum combinations of goods and/or services one can produce utilizing fully employed resources.

The Basis for Trade (cont.)

The Gains from Trade

Section 1

• Countries with an absolute advantage benefit from trade with another country whenever it has a comparative advantage because its opportunity cost is lower than another country’s.

• Total world output grows when there is specialization and trade among nations.

The Basis for Trade (cont.)

A. A

B. B

C. C

D. D

Section 1

A B C D

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What happens to world output when there is specialization and international trade?

A. Growth is slow but worthwhile.

B. Growth is significant in concentrated areas.

C. No additional growth in output takes place.

D. There is a drop in world output.

Section 1-End

Section 2-Preview

Section Preview

In this section, you will learn that nations use tariffs and quotas to protect special interests, while the free trade movement tries to eliminate trade barriers.

Section 2-Key Terms

Content Vocabulary

• tariff

• quota

• protective tariff

• revenue tariff

• protectionists

• free traders

• infant industries argument

• balance of payments

Academic Vocabulary

• imposed • justify

• most favored nation clause

• World Trade Organization (WTO)

• North American Free Trade Agreement (NAFTA)

A. A

B. B

C. C

Section 2

Would you purchase a cell phone imported from Japan just because the price is a few dollars less than the one manufactured here?

A. Yes, saving money is my goal.

B. No, a few extra dollars in my pocket doesn’t compare to lost American jobs.

C. It depends. A B C

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Section 2

Restricting International Trade

Tariffs and quotas are the main ways to restrict international trade.

Section 2

Restricting International Trade (cont.)

• Restrictions to trade

– Tariff

• Protective tariff

• Revenue tariff

– Quota

– Imported foods subjected to rigorous health inspections

Section 2

Restricting International Trade (cont.)

• Restrictions to trade

– Requiring a license to import

– Culture and nationalism

A. A

B. B

Section 2

Before the Civil War, tariffs were used largely to generate revenue for the federal government.

A. True

B. False

A B

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Section 2

Arguments for Protection

Protectionists disagree with free traders over the best way to protect a country’s independence, industries, and workers.

Section 2

• Protectionists and free traders are constantly in debate.

Arguments for Protection (cont.)

– National defense

– Infant industries argument

– Protecting American jobs

– Keeping the money at home

– Balance of payments

– National pride

A. A

B. B

C. C

Section 2

The United States imports significantly more products from China than it exports. The balance of payments is therefore significant. With which side of the debate do you align yourself?

A. Protectionists

B. Free traders

C. Neither 0% 0%0%

Section 2

The Free Trade Movement

Because tariffs hurt more than they helped during the Great Depression, the United States has found ways to reduce trade restrictions.

Section 2

• Smoot-Hawley Tariff Act passed in 1930

The Free Trade Movement (cont.)

– One of most restrictive tariffs in U.S. history

– Import duties so high that other countries did same

– International trade nearly ceased

Section 2

• Reciprocal Trade Agreements Act passed in 1934

The Free Trade Movement (cont.)

– Reduced tariffs up to 50% if other countries did the same.

– Most favored nation clause

• General Agreement on Tariffs and Trade (GATT) in 1947

Section 2

• World Trade Organization (WTO) replaced GATT.

The Free Trade Movement (cont.)

– Administers trade agreements signed under GATT

– Settles trade disputes between nations

– Organizes trade negotiations

– Provides tech assistance and training to developing countries

Section 2

• North American Free Trade Agreement (NAFTA)

The Free Trade Movement (cont.)

– Has allowed NAFTA partners to capitalize on their comparative advantages

A. A

B. B

C. C

D. D

Section 2

A B C D

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If you were in charge of trade for all businesses or government agencies in your community, which trade practices would you engage in?

A. Quotas

B. Tariffs

C. Most favored nation clause

D. None of the above

Section 2-End

Section 3-Preview

Section Preview

In this section, you will learn that a long-lasting trade deficit affects the value of a nation’s currency as well as the value and volume of its exports and imports.

Section 3-Key Terms

Content Vocabulary

• foreign exchange

• foreign exchange rate

• fixed exchange rates

• flexible exchange rates

• floating exchange rates

Academic Vocabulary

• secure • persistent

• trade deficit

• trade surplus

• trade-weighted value of the dollar

A. A

B. B

C. C

Section 3

Which do you think is better for the U.S. economy?

A. Strong dollar

B. Weak dollar

C. Doesn’t matter

A B C

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Section 3

Financing International Trade

International trade relies on the ability to exchange foreign currencies.

Section 3

Financing International Trade (cont.)

• Supply and demand causes the dollar and other international currency to fluctuate daily.

• Foreign exchange—different currencies are bought and sold for international trade

• Foreign exchange rate—price of one country’s currency in terms of another country’s

Foreign Exchange Rates

Section 3

Financing International Trade (cont.)

• Two major kinds of exchange rates exist:

– Fixed exchange rates

– Flexible exchange rates or floating exchange rates

Flexible Exchange Rates

Section 3

Financing International Trade (cont.)

• Whenever the dollar falls—exports tend to go up and imports down. If dollar rises, the reverse is true.

The Global Economy & YOUBig Mac Index

A. A

B. B

C. C

D. D

Section 3

A B C D

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Would the price of a pair of Levi jeans in Russia be the same as the price here in the United States?

A. No, price in Russia would beovervalued against the dollar.

B. No, price in Russia would beundervalued against the dollar.

C. Yes, price would be the same.

Section 3

Trade Deficits and Surpluses

The strength of the dollar affects trade and therefore trade deficits and surpluses.

Section 3

• The international value or strength of the dollar affects trade:

Trade Deficits and Surpluses (cont.)

– Trade deficit

– Trade surplus

Section 3

• Federal Reserve System tracks the trade-weighted value of the dollar.

Trade Deficits and Surpluses (cont.)

International Value of the Dollar

– If index falls—dollar is weak in relation to other currencies.

– If index rises—dollar is strong.

Section 3

• A persistent trade imbalance can affect income and employment.

• No net gain in having a strong or a weak dollar—one sector is helped, another hurt.

Trade Deficits and Surpluses (cont.)

Profiles in Economics:Jerry Yang

A. A

B. B

C. C

D. D

Section 3

A B C D

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What is the result of U.S. exports when the dollar is strong?

A. U.S. imports decline.

B. Exports become cheaper for other nations.

C. U.S. imports increase.

D. U.S. trade surplus results.

Section 3-End

Absolute and Comparative Advantage A country has absolute advantage when it can produce more of a product than can another country. It has comparative advantage when it can produce a product at a lower opportunity cost than another country. When countries focus on those products for which they have comparative advantage, world production increases.

VS 1

VS 2

Free Trade Movement After strict tariffs severely limited world trade during the early years of the Great Depression, the United States and other countries worked to open trade.

VS 3

Trade Deficits and Surpluses The strength of the dollar affects the balance of trade of the United States.

VS-End

Figure 1

Figure 2

Figure 3

Figure 4a

Figure 4b

Figure 5

Figure 6

Figure 7

Profile

Jerry Yang (1968– )

• cofounder of the Internet Web portal Yahoo!

• became a billionaire three years after starting the company

• ranked on Forbes’s list of the world’s richest people

Concept Trans Menu

Economic Concepts Transparencies

Transparency 20 Absolute and Comparative Advantage

Transparency 21 Exchange Rates and Balance of Payments

Select a transparency to view.

Concepts Trans 1

Concepts Trans 2

DFS Trans 1

DFS Trans 2

DFS Trans 3

Vocab1

exports

the goods and services that a nation sells to other nations

Vocab2

imports

the goods and services that a nation buys from other nations

Vocab3

absolute advantage

country’s ability to produce more of a given product than another country can produce

Vocab4

production possibilities frontier

diagram showing the maximum combinations of goods and/or services an economy can produce when all resources are fully employed

Vocab5

comparative advantage

country’s ability to produce a given product relatively more efficiently than another country by doing it at a lower opportunity cost

Vocab6

opportunity cost

cost of the next-best alternative use of money, time, or resources when making a choice

Vocab7

volume

amount; quantity

Vocab8

enabled

made possible

Vocab9

tariff

tax placed on an imported product

Vocab10

quota

limit on the amount of a good that is allowed into a country

Vocab11

protective tariff

tax on an imported product designed to protect less-efficient domestic producers

Vocab12

revenue tariff

tax placed on imported goods to raise revenue

Vocab13

protectionist

person who wants to protect domestic producers against foreign competition with tariffs, quotas, and other trade barriers

Vocab14

free trader

person who favors fewer or even no trade restrictions

Vocab15

infant industries argument

argument that new and emerging industries should be protected from foreign competition until they are strong enough to compete

Vocab16

balance of payments

difference between money paid to, and received from, other nations in trade

Vocab17

most favored nation clause

trade law allowing another country to enjoy the same tariff reductions the United States negotiates with any third country

Vocab18

World Trade Organization (WTO)

international agency that administers trade agreements, settles trade disputes between governments, organizes trade negotiations, and provides technical assistance and training for developing countries

Vocab19

North American Free Trade Agreement (NAFTA)

agreement signed in 1993 to reduce tariffs and increase trade among the United States, Canada, and Mexico

Vocab20

imposed

established; applied

Vocab21

justify

to defend as warranted or necessary

Vocab22

foreign exchange

various currencies used to conduct international trade

Vocab23

foreign exchange rate

price of one country’s currency in terms of another country’s currency

Vocab24

fixed exchange rate

system under which the values of currencies are fixed in relation to one another

Vocab25

flexible exchange rates

system that relies on supply and demand to determine the value of one currency in terms of another

Vocab26

floating exchange rates

system that relies on supply and demand to determine the value of one currency in terms of another

Vocab27

trade deficit

balance of payments outcome when spending on imports exceeds revenues received from exports

Vocab28

trade surplus

balance of payments outcome when revenues received from exports exceed spending on imports

Vocab29

trade-weighted value of the dollar

index showing strength of the U.S. dollar against a group of major foreign currencies

Vocab30

secure

obtain

Vocab31

persistent

continuous, without signs of weakening

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