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International Trade
International Trade
Resource Distribution & Specialization
A nation’s economic patterns are based on the factors of production it
has. These may change over time
Specialization occurs when a narrow range of products are made
– Results:
–increased productivity & profit
–economic interdependence—reliance on others for products not
able to make
–Ex: Japan trades for the raw materials it uses to produce
automobiles. It then turns around & trades the automobiles for
other goods.
Absolute & Comparative Advantages
Absolute advantage —nation’s ability to make product more
–due to uneven distribution of production factors in different
Comparative advantage —ability to produce at lower opportunity
–absolute cost of product not important, just opportunity cost
How International Trade Affects
the National Economy
Exports —goods & services produced in one country, sold in others
Imports—products produced in one country, purchased by another
Costs & benefits
Varies by nation
Higher prices at home offset by more jobs & income
created by production that was expanded to meet the demand
Trade Barriers
• Nations limit trade to protect domestic industries, which then leads to higher
prices & economic retaliation by other nations. Over time, industries can only
be saved by becoming competitive.
• Trade barrier — law limiting free trade among nations
– Import Quota — limits on the amount of a product that can be
– Tariff—fee charged for goods brought in from another country
– Voluntary export restraint — nation’s self-imposed limit on exports
that is used to avoid a quota or tariff
– Embargo — law that cuts most/all trade with a specific country
The Impact of Trade Barriers
Higher Prices
Trade barriers raise prices or keep them high
In 2000, U.S. & Japan set tariffs on South Korean semiconductor
chips. Korean & domestic chip prices went up in U.S. & Japan
Trade Wars
Trade wars often result from disagreements over quotas/tariffs
Balance of Trade
• Balance of trade—difference between value of imports & exports
• Trade surplus—nation exports more than imports; favorable balance
• Trade deficit—nation imports more than exports; unfavorable balance
Balance of Trade
U.S.-China Trade
Made U.S. top destination for Chinese exports (Most Favored Nation
– China has record trade surplus of $200 billion with U.S.
Modern Organizations to Combat Trade Barriers
Free-trade zones — areas where nations trade without protective
Customs unions — agreements that abolish trade barriers among
members. They establish uniform tariffs for non-members
The European Union
•established in 1993
•economic & political union; no trade barriers for members
•20% of global exports & imports
•wants to remove all barriers to international trade
• Euro — currency used by 12 of 27 member nations
NAFTA (North American Free Trade Agreement)
•Established in 1994
•phased out trade barriers between Canada, Mexico & U.S. by 2009
•Has led to specialization, efficiency, expanded markets, new jobs
•also competitive advantage over EU and Japan
•All countries have had economic gain; trade has more than doubled
Other Regional Trade Groups
– Mercosur, APEC
– World Trade Organization—formed in 1995 by nations that follow
GATT (General Agreement on Tariffs & Trade) – part of the UN
– OPEC — Organization of Petroleum Exporting Countries
– Cartel - group of producers that controls production, pricing &
marketing of a product
Measuring the Value of Trade
with Foreign Exchange
Trade needs way to set relative value of trading nations’ currencies
Foreign exchange market — where different currencies are bought
& sold. It’s a network of major commercial, investment banks linking
world economies
Foreign exchange rate — price of a currency in other currencies
– fixed rate of exchange—nation’s currency constant in relation to
– flexible exchange rate—changes along with currency’s supply,
Analyzing Tariffs—Who Wins and Who Loses?
The United States has had tariffs on sugar since the days of the early
In recent WTO talks, less-developed countries have objected to the lack of
market access for their goods and their price disadvantage.
What’s the Issue
How do the trade barriers set up by the U.S. government affect producers
(both foreign and domestic) and consumers?
Thinking Economically
Which argument for protection does document C seem to make? Is this
argument economically valid? Explain.
Is the difference in price shown in document B an unavoidable outcome of
the program outlined in document A? Explain.
How does U.S. government intervention in the sugar industry limit the
functioning of the economy as a free market? Use examples from the
documents in your answer.
Reviewing Key Concepts
Explain the relationship between the terms in each of
these pairs:
free-trade zone and customs union
OPEC and cartel