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Ch. 26
Section 1
INTERNATIONAL TRADE AND ITS BENEFITS
Why Nations Trade
 In 2005, about 10% of all the goods produced in the
U.S. were exported, or sold to other countries.
 A larger amount of goods were imported, or
purchased from abroad
 Importing goods gives Americans products they
might not otherwise be able to enjoy.
Why Nations Trade (cont.)
 Trade is one way that nations solve the problem of
scarcity
 Nations trade for goods/services because they do not
have them or are unable to make them cheaply.
 We buy bananas from Central America because we
do not have the soil or climate to grow them;
Commercial aircraft are sold to other countries
because they do not have the factories or skilled
workers.
Comparative Advantage
 Comparative Advantage is the ability of a
country to produce a good at a lower opportunity
cost than another country can.
 The U.S. could manufacture electronics but other
countries can make them at a lower cost, so we buy
them from other countries that make them
 Comparative Advantage leads nations to
specialize
Comparative Advantage (cont.)
 Specialization allows countries to use their scarce
resources to produce items better than any other
country
 When a country produces more than their people
can actually use, they sell the extra amount abroad.
 Countries can have a comparative advantage in
particular resources such as Saudi Arabia (oil
deposits), or the U.S. (skilled workers, advanced
technology)
Comparative Advantage (cont.)
International trade does accomplish two things:
1. Creates jobs
2. Creates new markets

Barriers to International Trade
 Foreign countries with a comparative advantage can
sell their product more cheaply than companies
making the product in their own country.
 As a consumer you would likely buy the cheaper
product
 Workers who make the product domestically may
lose their jobs when sales drop
 When this happens, government may step in to
impose trade barriers to protect domestic workers
and industry
Barriers to International Trade (cont.)
 Two most common trade barriers are tariffs and quotas
 A tariff is a tax on an imported good; 20% tariff means an
additional 20% to the final price of a foreign good.
 The goal is to make the price of an imported good higher
than the price of the same good produced domestically
 As a result, consumers would be more likely to buy the
domestic product.
Barriers to International Trade
(cont.)
 However, when people want the foreign product so
badly that higher prices have little effect on demand,
countries have to set quotas.
 Quotas set limits on the amount of foreign goods
allowed into a country (imported)
 During the 1980’s, Japanese cars were so popular that
American autoworker jobs were threatened.
 President Ronald Reagan placed quotas on Japanese-
made automobiles
Trade Agreements
 In general, trade barriers cost more than the benefits
gained
 Most countries try to achieve free trade with other
nations
 Most countries try to convince other countries to not
pass laws that block or limit trade
 A trend the world has been seeing lately is the
formation of free trade zones among key trading
partners
Trade Agreements (cont.)
 The European Union (EU) is an organization of
independent European nations, which formed a huge
market
 Goods, services, and even workers flow freely among
these nations because the EU has no trade barriers
 Since 2002, these countries have been linked even
closer due to the adoption of a common currency, the
euro.
Trade Agreements (cont.)
 In the 1990’s, the U.S., Canada, and Mexico signed
their own free trade agreement: North American Free
Trade Agreement (NAFTA).
 Elimination of all trade barriers among these
countries.
 Since its implementation, trade among the three
countries has grown twice as fast as the separate
economies themselves have grown
Trade Agreements (cont.)
 Opponents of NAFTA claimed that American
workers would lose their jobs because U.S. plants
would move to Mexico (cheaper labor, less
regulation, environmental and workers’ rights laws
ignored)
 Supporters of NAFTA argue that increased trade
would stimulate growth and put more low cost
products on the market.
Financing Trade
 Different nations use different currencies as a
medium of exchange:
U.S. = dollar
Mexico = peso
Japan = yen
 To buy something in Mexico, an American would
have to exchange your dollars for pesos by using
the exchange rate, or the price of one nation’s
currency in terms of another country’s currency
Financing Trade (cont.)
 Most nation’s use an adjustable exchange rate
system which allows supply and demand to set the
price of various currencies; currency prices change
each day
 Exchange rates have an important effect on a
nation’s balance of trade.
 Balance of Trade is the difference between the
value of a nations exports and its imports.
Financing Trade (cont.)
 If a nation’s currency depreciates, or becomes weak,
the nation will likely export more goods because its
products will become cheaper for other nations to
buy.
 If a nation’s currency appreciates, or becomes
stronger, exports will decline
Positive vs. Negative Balance of Trade
 When a countries value of exports exceeds the
value of imports, the country has a positive
balance of trade or trade surplus.
 A country is selling more than it is actually buying
 When a countries value of imports exceeds the
value of exports, the country has a negative
balance of trade or trade deficit.
 A country is buying more than it is actually selling