Chapter 17: International
I. Why Nations Trade
• Resource distribution—unequal distribution
of land, labor, and capital.
• Absolute and Comparative Advantage
– Absolute advantage—“With the same amount of
resources, I make more than you.”
– Comparative advantage—“I can produce it
more efficiently than you.”
• Nation with lower opportunity cost has comparative
– Why trade and with whom?
• Specialize and trade products in
which a nation has the
• Specialization – countries decide to
only produce certain goods and
services which is determined by their
II. Trade Barriers and Agreements
• Trade Barriers—restrictions to trade.
– Import quotas—limit on amounts that
can be imported.
– Tariffs—tax on imported goods.
– Embargo – complete restriction
• Effects of Trade Barriers
– Increased prices for foreign goods.
– Trade wars.
• Other Barriers to Trade
• Other barriers to trade include
high government licensing fees
and costly product standards.
• Arguments for Protectionism—use of
trade barriers to protect industries from
– Protecting jobs.
– Protecting infant industries.
– National security.
Free Trade – trade with lack of restrictions
Arguments for Free Trade
1.Competition means improved products
2.Trade restrictions damage export industries
putting Americans out of work
3.Specialization and comparative advantage
Top 12 International Trading Partners
6. United Kingdom
7. South Korea
Top 5 Countries Receiving U.S. Exports
5. United Kingdom
Top 5 Countries Supplying U.S. Imports
• Recent trends have been toward lowering trade
barriers and increasing trade through international
• In 1948, the General Agreement on Tariffs and
Trade (GATT) was established to reduce tariffs
and expand world trade.
• In 1995, the World Trade Organization (WTO) was
founded to ensure compliance with GATT, to
negotiate new trade agreements, and to resolve
III. International Cooperation and
• The European Union.(EU)
– 27 member nations in Europe operating under same
currency and economic rules.
• NAFTA—North American Free Trade
– Creates largest free-trade zone (no barriers, tariffs, quotas,
etc.) in the world by 2009.
(As of January 1, 2008, all tariffs between the three countries
were eliminated. Between 1993-2007, trade tripled from
$297 billion to $1 trillion )
• Canada, Mexico, and the United States
Global Trade Agreements
Major Trade Organization Members
NAFTA & APEC
. Measuring Trade
• Exchange rates—value of a nation’s
currency in relation to a foreign currency.
• Strong and Weak Currencies
– Appreciation—when a currency gains
- Depreciation—when a currency loses
Reading an Exchange Rate Table
The following table shows an example of exchange rates.
Foreign Exchange Rates
U.S. $ Aust $ U.K. £ Canadian $ ¥en Euro Mexican NP Chinese renminbi
U.S. $ 1 0.6489 1.599 0.6764 0.01 1.051 0.11 0.12
Australian $ 1.541 1 2.465 1.042 0.01 1.62 0.17 0.19
U.K. £ 0.6252 0.4057 1 0.4229 0.01 0.657 0.07 0.08
Canadian $ 1.478 0.9593 2.365 1 0.01293 1.554 0.16 0.18
¥en 114.3 74.19 182.9 77.34 1 120.2 12.24 13.81
Euro 0.9516 0.6175 1.522 0.6436 0.01 1 0.1 0.11
Mexican 9.33 6.06 6.3 6.3 0.08 9.81 1 1.13
Chinese renminbi 8.28 5.37 13.25 5.6 0.07 8.7 9.8 1
Types of Exchange Rate Systems
Fixed Exchange-Rate Flexible Exchange-Rate
• A currency system in • Flexible exchange-rate
which governments try systems allow the
to keep the values of exchange rate to be
their currencies determined by supply
constant against one and demand.
another is called a
Balance of Trade
• When a nation exports more than it imports,
it has a trade surplus.
• When a nation imports more than it exports,
it creates a trade deficit.
The relationship between a nation’s
imports and its exports is called its
balance of trade.
The United States Trade Deficit
• The Trade Deficit
– The United States has run a trade deficit since the early
• Why the Trade Deficit?
– Imports of foreign oil as well as Americans’ enjoyment
of imported goods account in part for the large
American trade deficit.
• Reducing the Trade Deficit
– Quotas and other trade barriers can be used to raise
prices of foreign-made goods and urge consumers to
buy domestic goods.
Chapter 9: Labor
• Labor Market trends
– Emphasis on technology
– Fewer goods and more services
– Advanced education leads to higher pay
Types of Labor
• Unskilled Labor-
– No specialized skills, education, or training
– Ex: dishwashers, janitors, factory and farm workers
• Semi-skilled Labor-
– Minimal specialized skills and education
– Ex: lifeguards, short-order cooks, some construction
– Blue collar workers- work in industrial jobs and
• Skilled Labor-
– Specialized skills and training- need little supervision
– Ex: mechanics, plumbers, chefs, carpenters
– Advanced skills and education- White-collar
– Ex: managers, teachers, doctors, lawyers
• Brought on by the industrial revolution of
the earl and mid 1800s
• Long days and hours: 12 to 16 hrs, 7 days a
week for low wages. Men, women,
• Created to create a fair working
environment with livable wages
• Strike: an organized work stoppage
intended to force an employer to address
• Collective bargaining: when a
representative from both sides meets to
work on a compromise sometimes
Mediation is needed
• Arbitration: settlement technique where a
3rd party reviews the case and makes it
legally binding for both sides
• Right-to-work: measure that bans
mandatory union membership