Chapter 17

Chapter 17, Section 1

Resource Distribution
 The factors of production are not evenly
distributed throughout the world
Human capital is more skilled in nations with
higher literacy rates
Physical capital is deeper in some nations
 Better machinery
 Infrastructure is better
Resource Distribution
 The unequal distribution of resources
encourages nations to specialize
 Although some countries could be self
sufficient, it is to their advantage to
specialize...why?
Absolute and Comparative Advantage

 Absolute advantage...when one nation can

produce a good at a lower cost than
another
 Comparative advantage...the ability for a
nation to produce at a lower opportunity
cost
The nation with the lowest opportunity cost
should specialize in that product
 Known as the law of comparative advantage
International Trade
 Since some countries may have a
comparative advantage over others, it
makes sense for them to trade
 The US and trade
The US is the largest importer and one of
the top three exporters of goods (Germany
and China)
US Exports
 The US is among the top three
exporters in the world
Flips with Germany and China
China current leader (since 2009)
US Imports
 We are also one of the largest
importers.
 In total, we import more than we export
 We have a trade deficit
Trade on Employment
 International trade has caused many
changes and trends in employment
 Due to comparative advantage, workers
need to gain certain skills in order to find
employment
Chapter 17, Section 2
Free Trade?
 Many people argue that governments
should regulate trade in order to protect
industries and jobs from foreign
competition
This is known as protectionism
 Many nations set up trade barriers in
order to provide protectionism
Trade Barriers
 Trade barriers...trade restrictions that
prevent foreign products or services
from freely entering a nation’s territory
Import quotas...limits on the amount that can
be imported
Voluntary Export Restraints...self imposed
export restraint (hopes to avoid import
quotas
Trade Barriers
 Tariffs...taxes on imported goods
Customs duty
Used to encourage purchasing of domestic
products
 Other Trade Barriers
Licenses
Standards of production
Effects of Trade Barriers
 Increased prices for foreign goods
 Trade Wars
When countries institute restrictions on each
other
Usually leads to poor trade for both
countries
Arguments for Protectionism
 Protects jobs
 Protects infant industries
 Protects national security
International Trade Agreements
 Recent trends are encouraging free
trade…why?
Raises living standards
Encourages world peace
Promotes competition
International Free Trade Agreements
○ Cooperation of two or more countries to
reduce trade barriers
World Trade Organization
 GATT...general agreement on tariffs and
trade...founded in 1948
 WTO…a worldwide organization whose
goal is freer global trade and lower
tariffs...founded in 1995 to ensure GATT
Acts as a referee for trade agreements
Free Trade Zones
 Areas established by countries to
reduce or eliminate trade barriers
 Two such Organizations
European Union (EU)
North American Free Trade Agreement
(NAFTA)
European Union
http://europa.eu.int/euro/
 Regional trade organization made up of 27
member nations
 Essentially developed a single market
(EEC...European Economic Community) in
Europe
 Goal is to create a single economy that
rivals the US
Currently the largest trading partner of the US
 Canada and Mexico are next
EU
NAFTA
 Created to eliminate all tariffs and
barriers in the region (Canada, Mexico,
US)
 Ratified in 1994
 Although there has been much
controversy, NAFTA has increased
trade between the three nations
Chapter 17, Section 3
Exchange Rates
 Value of a foreign nation’s currency in
terms of the home nation’s currency
 Exchange rates fluctuate on a daily
basis with the strength and weakness of
a nation’s currency
 Based on supply and demand for
currency
Strength of Currency
 Appreciation...increase in the value of
currency
When a currency appreciates, exports
decline
 Products are more expensive
 Depreciation...decrease in the value of
currency
When a currency depreciates, exports rise
 Products become cheaper
Exchange Rate Systems
 Fixed Exchange Rate
System...governments try to keep their
currency constant with another
Known as pegging currency
China
 Flexible Exchange Rate
System...exchange rate is determined by
supply and demand and it fluctuates
Used by most major currencies today
Balance of Trade
 Trade surplus...export more than you
import
 Trade deficit...import more than you
export
 Balance of trade...relationship between
exports and imports