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1 Chapter 17 International Trade •1. Absolute and Comparative Advantage •2. Trade Barriers and Agreements •3. Measuring Trade Resource Distribution and Specialization •Factors of Production •Natural Resources •Capital and Labor •Unequal Resource Distribution •Specialization and Trade –importing-items coming into country –exporting-items leaving the country 1. Absolute and Comparative Advantage •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 - a nation is better off when it produces goods and services for which it has a comparative advantage Comparative Advantage and World Trade •Interdependence - the shared need of countries for resources, goods, services, labor, and knowledge supplied by other countries The United States and Trade •The United States as an importer - world’s top importer (15% of the world’s total trade) •The United States as an exporter - world third largest exporter, close behind Germany and China The Effects of Trade Employment •Specialization and Job Loss •Trade allows nations to specialize in producing a limited number of goods while consuming a greater variety of goods •However, specialization leads can lead to job loss or job opportunities 2. Trade Barriers and Agreements •Trade Barriers - trade restrictions on foreign items coming into the country •tariff - tax on imported goods •Import quota - set limit on the amount of a good that can be imported 2 •Sanctions - actions a nation or group of nations takes in order to punish or put pressure on another nation •Embargo - a ban or trade with a particular country Effects of Trade Barriers •Increased prices on foreign goods •Trading Wars - a cycle of escalating trade barriers Arguments for Protection •Protectionism - the use of trade barriers to shield domestic companies from foreign competition •Protecting jobs •infant companies - early stages of development •safeguard national security Trade Agreements •Free trade - lowering or eliminating protective tariffs and other trade barriers between two or more nations •World Trade Organization - uniting global trade and making it more free •The European Union - agreement to abolish tariffs and trade restrictions among member nations •NAFTA - North American Free Trade Agreement - region where a group of countries agree to reduce or eliminate trade barriers The Role of Multinationals •Large corporations that sells goods and services throughout the world 3. Measuring Trade •The difference in a dollar Foreign Exchange •Exchange Rates - the value of a nation’s currency in relation to a foreign currency •Appreciation - increase in the value of currency •Depreciation - decrease in the value of currency •Foreign Exchange Markets - system of financial institutions that facilitate the buying and selling of foreign currencies Exchange Rate Systems •Fixed Exchange Rates - governments try to keep the values of their currencies constant against one another •Flexible Exchange Rate system - exchange rate is determined by supply and demand 3 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 exports less goods than it imports •balance of payment - the value of all monetary transactions between a country’s economy and the rest of the world The United States Trade Deficit •The United States imports more than it exports, resulting in a trade deficit •began in the 1970’s when OPEC increased the price of oil Chapter 18 Development and Globalization •1. Levels of Development •2. Issues in Development •3. Economies in Transition •4. Challenges of Globalization 1. Levels of Development •Development - the process by which a nation improves the economic, political, and social well-being of its people •Developed Nations - a nation with a relatively high average level of material well being •Less developed - relatively low level of material well being •newly industrialized countries - less developed country that has made great progress toward developing its economy Measuring Development •Per Capita GDP - a nation’s gross domestic product divided by its population •Industrialization - organization of an economy for the purpose of manufacturing •literacy rate - over the age of 15 can read or write •life expectancy - the average life span of an individual Characteristics of Developed Nations •Quality of life •High Productivity •Urbanization and Infrastructure Characteristics of Less Developed Countries •Low productivity - subsistence agriculture - farming in which a person makes enough for his or her family •low quality of life 4 2. Issues in Development •Some nations hinder development due to illiteracy and poor nutrition Rapid Population Growth •A measure of how rapidly a country’s population increases in a given year Limited Resources and Capital •Physical capital •Education and Training •Nutrition and Health - (Malnutrition -inadequate nutrition Political Obstacles •Political factors may also limit or even reserve a nation’s development Financing Development •Internal Financing - capital derived from the saving of a country’s citizens •foreign investments - capital that originates in other countries –foreign direct investment-the establishment of a business by investors from another country –foreign portfolio investment-purchases made in a country’s financial markets by investors from another country International Institutions •World Bank •United Nations Development Program •International Monetary Fund –debt rescheduling- agreement between a lending nation and a debtor nation that lengthens the time of debt payment and forgives part of the loan –stabilization program - agreement between a debtor nation and the International Monetary Fund in which the nation agrees to change its economic policy to match IMF goals Non governmental Agencies •Independent groups that raises money and used it to fund aid and development programs 3. Economies in Transition •Change is always challenging Toward a Market Economy •Privatization - sale of transfer of government-owned business to individuals •Protecting Property Rights 5 Transitions in Russia •Fall of Communism •A Painful Transition •Russia in the New Century Growth in Asia •China - the economic power of the world •India - the world’s second most populous nation after China Challenges in Africa and Latin America •Persistent Poverty in Africa •Economies largely based on subsistence farming •In Latin America, the two biggest success stories are Brazil and Mexico - abundant resources 4. Challenges in Globalization •Globalization - the increasingly tight interconnection of producers, consumers, and financial systems around the world Causes of Globalization •Rapid Transportation and Communication •Expansion in the Free Market •Trading Blocs •Foreign Exchange Markets •Free Trade Agreements Issues in Globalization •Interconnected Financial Markets •Multinational Corporations •Job Loss Population Shifts •Rural to Urban - farm to city •Country to Country- leave less developed countries and go to better ones •remittances - cash payments sent by workers who have migrated to a new country to family members •brain drain - migration of the best educated peoples of less developed countries Challenges Ahead •Developed v. Developing 6 •Environmental Protection –sustainable development - the goal of meeting current development needs without using up resources needed by future generations –deforestation -large scale destruction of forests The United States and the World Economy •Adapting to a changing workplace •the pressure to compete •the pressure to innovate