3. 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
4. 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?
5. 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
6. 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)
7. US Exports
The US is among the top three
exporters in the world
Flips with Germany and China
China current leader (since 2009)
8. US Imports
We are also one of the largest
importers.
In total, we import more than we export
We have a trade deficit
9. 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
11. 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
12. 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
13. Trade Barriers
Tariffs...taxes on imported goods
Customs duty
Used to encourage purchasing of domestic
products
Other Trade Barriers
Licenses
Standards of production
14. 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
16. 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
17. 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
18. 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)
19. European Union
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
http://europa.eu.int/euro/
21. 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
24. 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
25. 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
26. 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
27. 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