Download Topic 10 Notes

Why do Americans buy so many goods from
overseas?
Wouldn’t it make more sense to produce
everything we need ourselves?
Answer lies in factor of production & scarcity.
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Factors of Production
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Factors of Production
Because we can't produce all goods with our
limited resources, we as a country need to
obtain them somehow.
Trade
What factors determine what countries produce?
Unequal distribution of resources creates a
need for specialization.
Nations produce only certain goods &
services
Then through trade they export g&s they make
to another country for sale & import g&s
bought from another country
What if a country had the resources and means
to be self-sufficient. Why trade?
...Because trade makes everyone better off
Absolute advantage: when a person or nation
can produce more of a given product than
another person or nation
Comparative advantage: when a person or nation
can produce a product more efficiently
Who has an absolute
advantage in producing tshirts?
Who has an absolute
advantage in producing
birdhouses?
Who should make what?
To answer that, look at
comparative advantage.
Law of comparative
advantage: a nation is
better off when it produces
goods & services for which
it has a comparative
advantage
Then use the money they
earn selling it to buy the
things that can’t produce
as efficiently
After trade, both parties are
better off.
After trade, both parties are
better off.
There is a shared need of countries for the
resources, goods, services, labor, & knowledge
supplied by other countries
When one country hurts/grows it affects other
economies as well
The US exports more
goods than any other
country except China
US excels in
technologically
sophisticated goods
(software, chemicals,
& medical testing
supplies)
US cultural exports
dominate as well
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US is world’s top importing country
Specialization has a huge impact on
employment (can be positive or negative)
A trade barrier (trade restriction) is a means of preventing
a foreign product or service from freely entering a
nation’s territory
 Tariffs: tax on imported goods
◦ Customs duties
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Quotas: import quotas place a limit on the amount of a
good that can be imported
◦ Many are now illegal under international trade laws
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Sanctions: actions a nation (or group of nations) may take
to punish or pressure another nation
◦ Ex. 1960, Cuba trade embargo
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Other barriers
◦ Government may require licenses
◦ Health, safety, environmental regulations
https://www.youtube.com/watch?v=bl
vxPshCDe4
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Higher prices for foreign goods
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Trade Wars
◦ This can help domestic producers compete with
foreign firms
◦ Consumers can lose out
◦ Barriers might fuel international conflict
◦ Trade wars are cycles of escalating trade barriers
◦ 1930, Congress passed Smoot-Hawley Act, raised
average tariff rate to 50%
 … Countries responded by raising tariffs on American
goods
 This trade war decreased foreign trade and worsened the
depression
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The use of trade barriers to shield
domestic industries from foreign
competition
Arguments for Protectionism
◦ Protects jobs
◦ Protects infant industries
◦ Safeguard national security
 If war breaks out, US needs an uninterrupted
supply of steel, energy, etc.
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Free Trade (opposite of protectionism)
◦ Lowering or eliminating trade barriers between nations
◦ Argue that free trade is the best way to pursue
comparative advantage, raise living standards, & further
cooperation
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World trade Organization (WTO)
Founded in
1995 with the
goal of making
world trade
more free
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Slowly developed over decades
Eliminates tariffs & trade restrictions
19 of 28 members use the euro
◦ (Austria, Belgium, Cyprus, Estonia, Finland, France, Germany,
Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the
Netherlands, Portugal, Slovakia, Slovenia, and Spain)
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The Euro makes the movement of goods & people more
efficient
BUT economic troubles in one country can cause the
value to depreciate
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International trade is more complex than
trading within your country because of
different currencies
Exchange rate: the value of a nation’s currency
in relation to a foreign currency
◦ Changes constantly
Appreciation: an increase in the value of a currency
Depreciation: A decrease in the value of a currency
(weakening)
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The process by which a nation improves the
economic, political, & social well-being of its
people
Developed Nations: high average material wellbeing
Less Developed Countries: low levels of
material well-being
Newly Industrialized Countries: has made great
progress towards developing their economies
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Per capita GDP
Energy use
Workforce
◦ Agricultural work? Sustenance farming?
Consumer goods
Social indicators
◦ Literacy rate
◦ Life expectancy
◦ Infant mortality rate
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Per 1000 births
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Things like illiteracy & poor nutrition hinder
development
Population growth can also be a serious
problem
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Building infrastructure, providing services, &
creating technology & industry all require lots
of money
Developing countries acquire money through:
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Internal financing
Foreign investment
Borrowing & debt
Foreign Aid
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Interconnection of producers, consumers, &
financial systems around the world
Middle Ages: Asian spice trade
Exploration: Columbus
Imperialism
Today, happening at much quicker
pace
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“Arguing against globalization is like arguing
against the laws of gravity.”
Closely linked financial markets
◦ 2007,2008 US financial mortgage crisis caused
trouble globally
https://www.youtube.com/watch?v=xP
D477FuqtY