Download Chapter 18 International Trade

18.1 Benefits of Trade
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International Trade and
Finance
18.1 Benefits of Trade
18.2 Trade Restrictions and
Free-Trade Agreements
18.3 Balance of Payments
18.4 Foreign Exchange Rates
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18.1 Benefits of Trade
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CONSIDER
 If the United States is such a rich and productive nation,
why are so many goods and services imported?
 Why isn’t the United States self-sufficient?
 If free trade is such a good idea, why do some producers
try to restrict foreign trade?
 What’s up with the euro?
 Is a growing U.S. trade deficit a growing worry?
 What “fudge factor” guarantees the balance of payments
account do, in fact, balance?
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18.1 Benefits of Trade
Objectives
 Identify sources of comparative
advantage.
 Discuss the gains from international trade
even without comparative advantage.
 Describe the most important U.S. exports
and imports.
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18.1 Benefits of Trade
Key Terms
 world output
 European Union (EU)
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Comparative Advantage
To maximize the benefits of trade, each
country specializes in the goods that it
produces at the lowest opportunity cost.
As a result, all countries can become
better off than if each tried to go it alone.
World output—the combined GDP of all
nations in the world
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Labor and Capital
 Two key resources are labor and capital.
 Countries differ in their availability of labor and
capital and the qualities of these resources.
 Countries with a well-educated and well-trained labor
force will specialize in producing goods that require
such talent.
 Countries with state-of-the-art manufacturing
technologies will specialize in producing goods that
require high-tech capital.
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Soil and Seasons
Some countries are blessed with fertile
land and favorable growing seasons.
Seasonal differences across countries
also create gains from trade.
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Mineral Deposits
Mineral resources often are concentrated
in particular parts of the world, such as oil
in Saudi Arabia, uranium in Australia, and
diamonds in South Africa.
The United States has abundant coal deposits
but not enough oil to satisfy domestic
demand.
Thus, the United States exports coal and
imports oil.
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18.1 Benefits of Trade
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Other Benefits of Trade
 Economies of scale
 If a producer experiences economies of scale—that
is, if the average cost of output declines as a firm
expands its scale of production—countries can gain
from specialization and trade.
 European Union (EU)—Twenty-five nations joined to
enhance economic cooperation
 Differences in tastes
 Countries can gain from trade as long as tastes and
preferences differ across countries.
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U.S. Exports and Imports
 Countries trade with one another—or, more
precisely, people, firms, and governments in one
country trade with those in another—because
each side expects to gain from the exchange.
 Traders expect to increase their consumption
possibilities.
 U.S. exports
 U.S. imports
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18.1 Benefits of Trade
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Composition of U.S.
Exports and Imports in 2005
Figure 18.1
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Services are the largest category of U.S. exports,
while industrial supplies and materials, which
includes oil, are the largest category of imports.
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18.1 Benefits of Trade
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Largest trading parters for the
U.S.…
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1. Canada
2. China
3. Mexico
*In the U.S., exports of goods and services make up
approx. 1/10 of our GDP (2005)
To compare…1/4 in Canada and U.K., 1/3 in Germany,
1/7 in Japan
*In the U.S., imports make up 1/6 of our GDP.
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