The document discusses why nations trade and the factors that influence international trade. It notes that resources are unevenly distributed globally, with some areas having more natural resources, skilled labor, or physical capital than others. This unequal distribution encourages nations to specialize and trade based on comparative advantage. Nations benefit from specializing in areas where they have lower opportunity costs and trading for goods they do not produce as efficiently. International trade allows nations to maximize production and consumption. Major trade agreements like the WTO, EU, and NAFTA aim to reduce trade barriers and promote freer exchange between nations.

1. International TradeInternational Trade
Basics of BusinessBasics of Business

2. Why Nations TradeWhy Nations Trade

3. Resource DistributionResource Distribution
 The factors of production are not evenlyThe factors of production are not evenly
distributed throughout the worlddistributed throughout the world
• Natural resourcesNatural resources are more plentiful in someare more plentiful in some
areas (Oil & gas deposits, water, timber)areas (Oil & gas deposits, water, timber)
• Human capitalHuman capital is more skilled in nations withis more skilled in nations with
higher literacy rateshigher literacy rates
• Physical capitalPhysical capital is deeper in some nationsis deeper in some nations
 Better machineryBetter machinery
 Better infrastructure allows for goods to beBetter infrastructure allows for goods to be
transported easier on new roads, bridges, etc.transported easier on new roads, bridges, etc.

4. Resource DistributionResource Distribution
 The unequal distribution of resources encourages nations toThe unequal distribution of resources encourages nations to
specializespecialize
• The availability of resources differs greatly from countryThe availability of resources differs greatly from country
to countryto country
 Although some countries could be self sufficient, it is toAlthough some countries could be self sufficient, it is to
their advantage to specialize in certain areastheir advantage to specialize in certain areas
• Ex: U.K. has double the airports as Peru despite beingEx: U.K. has double the airports as Peru despite being
much smaller in sizemuch smaller in size

5. Absolute and ComparativeAbsolute and Comparative
AdvantageAdvantage
 Absolute advantageAbsolute advantage...when one nation can produce a...when one nation can produce a
good at a lower cost than another (must decide what togood at a lower cost than another (must decide what to
produce)produce)
 Comparative advantageComparative advantage...the ability for a nation to...the ability for a nation to
produce at a lower opportunity costproduce at a lower opportunity cost
• Presented by David RicardoPresented by David Ricardo
• The nation with the lowest opportunity cost shouldThe nation with the lowest opportunity cost should
specialize in that productspecialize in that product
 Known as the law of comparative advantageKnown as the law of comparative advantage
 Nations will make more $$ selling their specific goodNations will make more $$ selling their specific good

6. International TradeInternational Trade
 Since countries may have a comparative advantage overSince countries may have a comparative advantage over
others, it makes sense for them to tradeothers, it makes sense for them to trade
• Whichever nation has comparative advantage shouldWhichever nation has comparative advantage should
specialize in the production of that goodspecialize in the production of that good
 The US and tradeThe US and trade
• The US is the 2The US is the 2ndnd
largest importer of goods behind thelargest importer of goods behind the
European UnionEuropean Union
• 33rdrd
exporter behind China and EUexporter behind China and EU

7. US ExportsUS Exports
 33rdrd
Largest after China & E.U.Largest after China & E.U.
 U.S. used be the largest exporter in the worldU.S. used be the largest exporter in the world
• We used to export goods such as: comp software,We used to export goods such as: comp software,
medical equip, other advanced technology at a very highmedical equip, other advanced technology at a very high
raterate
 Exportation of services is becoming greater in the globalExportation of services is becoming greater in the global
economyeconomy

8. US ImportsUS Imports
 22ndnd
Largest behind the E.U.Largest behind the E.U.
 The US imports nearly $2.3 trillion in goods and servicesThe US imports nearly $2.3 trillion in goods and services
annuallyannually
 In total, we import more than we exportIn total, we import more than we export
 Why do we import so many goods and services?Why do we import so many goods and services?

9. Trade on EmploymentTrade on Employment
 International trade has caused many changes and trends inInternational trade has caused many changes and trends in
employmentemployment
 Due toDue to comparative advantagecomparative advantage, workers need to gain, workers need to gain
certain skills in order to find employmentcertain skills in order to find employment
• Ex: Japanese cars might be priced lower because ofEx: Japanese cars might be priced lower because of
machines doing the work and not people. US carmachines doing the work and not people. US car
companies have been forced to lay off many peoplecompanies have been forced to lay off many people

10. Trade Barriers andTrade Barriers and
AgreementsAgreements

11. Free Trade?Free Trade?
 Many people argue that governments should regulate tradeMany people argue that governments should regulate trade
in order to protect industries and jobs from foreignin order to protect industries and jobs from foreign
competitioncompetition
• This is known asThis is known as protectionismprotectionism
 Many nations set up trade barriers in order to provideMany nations set up trade barriers in order to provide
protectionismprotectionism
• Gov’ts want to protect their companies from foreignGov’ts want to protect their companies from foreign
competitioncompetition

12. Trade BarriersTrade Barriers
 Trade barriersTrade barriers...restrictions that prevent foreign products...restrictions that prevent foreign products
or services from freely entering a countryor services from freely entering a country
• Import quotasImport quotas...limits on the amount that can be...limits on the amount that can be
imported (US limits the amount of raw cotton coming in)imported (US limits the amount of raw cotton coming in)
• Voluntary Export RestraintsVoluntary Export Restraints...self imposed export...self imposed export
restraint (hopes to avoid import quotas) – done torestraint (hopes to avoid import quotas) – done to
prevent binding trade barriersprevent binding trade barriers

13. Trade BarriersTrade Barriers
 TariffsTariffs...taxes on imported goods...taxes on imported goods
• Customs duty (tax on goods from abroad)Customs duty (tax on goods from abroad)
• Used to encourage purchasing of domestic productsUsed to encourage purchasing of domestic products
 Other Trade Barriers (Informal)Other Trade Barriers (Informal)
• LicensesLicenses
 High fees or slow processing will act as barriersHigh fees or slow processing will act as barriers
• Standards of productionStandards of production
 Banning of goods produced bec of certain methodsBanning of goods produced bec of certain methods

14. Effects of Trade BarriersEffects of Trade Barriers
 Increased prices for foreign goodsIncreased prices for foreign goods
• $20,000 USA made car or $22,000$20,000 USA made car or $22,000
foreign made car bec of a tariff?foreign made car bec of a tariff?
 Trade barriers will limit supplyTrade barriers will limit supply
 Trade WarsTrade Wars will take placewill take place
• When countries institute restrictions onWhen countries institute restrictions on
each othereach other
• Usually leads to poor trade for bothUsually leads to poor trade for both
countriescountries

15. Arguments for ProtectionismArguments for Protectionism
 Protects jobsProtects jobs…protecting domestic industry will protect…protecting domestic industry will protect
jobsjobs
• We want to protect markets that have comparativeWe want to protect markets that have comparative
advantageadvantage
 Protects infant industriesProtects infant industries
• Helps to reduce competition and barriers for certainHelps to reduce competition and barriers for certain
start up industriesstart up industries
• Protects national security…reduces dependence onProtects national security…reduces dependence on
foreign nations/productsforeign nations/products

16. International Trade AgreementsInternational Trade Agreements
 Recent trends are encouraging free tradeRecent trends are encouraging free trade
• Raises living standardsRaises living standards
• Encourages world peaceEncourages world peace
• Many free trade agreements have been establishedMany free trade agreements have been established
• International Free Trade AgreementsInternational Free Trade Agreements
 Cooperation of two or more countries to reduce tradeCooperation of two or more countries to reduce trade
barriers (will reduce conflict)barriers (will reduce conflict)

17. World Trade OrganizationWorld Trade Organization
 GATTGATT......General Agreement on TariffsGeneral Agreement on Tariffs
and Tradeand Trade...founded in 1948...founded in 1948
• Reduce tariffs & expand world tradeReduce tariffs & expand world trade
 WTOWTO……World Trade OrganizationWorld Trade Organization
worldwide organization whose goal isworldwide organization whose goal is
freer global trade and lower tariffs -freer global trade and lower tariffs -
founded in 1995 to ensurefounded in 1995 to ensure GATTGATT
• Acts as a referee for trade agreementsActs as a referee for trade agreements
• Will negotiate new trade agreementsWill negotiate new trade agreements

18. Free Trade ZonesFree Trade Zones
 Areas established by countries toAreas established by countries to
reduce or eliminate trade barriersreduce or eliminate trade barriers
 Two such OrganizationsTwo such Organizations
• European Union (EU) (1957)European Union (EU) (1957)
 Set up to market & coordinate trade policiesSet up to market & coordinate trade policies
 ““Euro” is used in all 28 countriesEuro” is used in all 28 countries
• North American Free TradeNorth American Free Trade
Agreement (NAFTA)Agreement (NAFTA)
 Eliminates trade barriers in Canada, MexicoEliminates trade barriers in Canada, Mexico
& USA& USA

19. European UnionEuropean Union
 Regional trade organization made up of 28Regional trade organization made up of 28
member nationsmember nations
 Essentially developed a single marketEssentially developed a single market
(EEC...European Economic Community) in(EEC...European Economic Community) in
Europe (trades w/USA A LOT!)Europe (trades w/USA A LOT!)
• EU has a parliament, a flag, a council, anEU has a parliament, a flag, a council, an
anthem, and currency (the euro)anthem, and currency (the euro)
 Goal is to create a single economy thatGoal is to create a single economy that
rivals the USrivals the US
• Currently the largest trading partner of the USCurrently the largest trading partner of the US
 Canada, Mexico, and Japan are nextCanada, Mexico, and Japan are next

20. NAFTANAFTA
 Created to eliminate all tariffs and barriers in the regionCreated to eliminate all tariffs and barriers in the region
(Canada, Mexico, US) – ratified in 1994(Canada, Mexico, US) – ratified in 1994
• Largest free trade zone in worldLargest free trade zone in world
 Although there has been much controversy, NAFTA hasAlthough there has been much controversy, NAFTA has
increased trade between the three nationsincreased trade between the three nations
• Today, NAFTA is working to expand to other countries inToday, NAFTA is working to expand to other countries in
Western HemisphereWestern Hemisphere

22. ReviewReview
1. Protectionism does not1. Protectionism does not
• (a)(a) protect immigrant labor.protect immigrant labor.
• (b)(b) protect domestic jobs.protect domestic jobs.
• (c)(c) protect infant industries.protect infant industries.
• (d)(d) safeguard national security.safeguard national security.
2. Members of regional trade organizations2. Members of regional trade organizations
generally work together togenerally work together to
• (a)(a) abolish free-trade zones.abolish free-trade zones.
• (b)(b) limit commerce between member states.limit commerce between member states.
• (c)(c) establish centrally planned economies.establish centrally planned economies.
• (d)(d) eliminate trade barriers.eliminate trade barriers.

23. Measuring TradeMeasuring Trade

24. Exchange RatesExchange Rates
 Value of a foreign nation’s currency in terms of the homeValue of a foreign nation’s currency in terms of the home
nation’s currency (allows us to exchange $$)nation’s currency (allows us to exchange $$)
 Exchange rates fluctuate on a daily basis with the strengthExchange rates fluctuate on a daily basis with the strength
and weakness of a nation’s currencyand weakness of a nation’s currency
 http://www.xe.com/ucc/http://www.xe.com/ucc/

25. Strength of CurrencyStrength of Currency
 AppreciationAppreciation...increase in the value of currency: “a strong...increase in the value of currency: “a strong
dollar”dollar”
• When a currency appreciates, exports decline (US goodsWhen a currency appreciates, exports decline (US goods
are more expensive)are more expensive)
 Products are more expensive in other nationsProducts are more expensive in other nations
 DepreciationDepreciation...decrease in the value of currency: “weak...decrease in the value of currency: “weak
dollar”dollar”
• When a currency depreciates, exports rise and importsWhen a currency depreciates, exports rise and imports
decreasedecrease
 Other nations’ products are more expensive here inOther nations’ products are more expensive here in
the USAthe USA

26. Exchange Rate SystemsExchange Rate Systems
 Fixed Exchange Rate SystemFixed Exchange Rate System  governments try togovernments try to
keep their currency constant with one anotherkeep their currency constant with one another
• Requires countries to keep similar economic systems-Requires countries to keep similar economic systems-
should be plus or minus 2% of centershould be plus or minus 2% of center
• Ex: The euro for the EUEx: The euro for the EU
 Flexible Exchange Rate SystemFlexible Exchange Rate System  exchange rate isexchange rate is
determined by supply and demand and it fluctuatesdetermined by supply and demand and it fluctuates
• Used by most major currencies todayUsed by most major currencies today
• Accounts for day to day changes in valueAccounts for day to day changes in value

27. Balance of TradeBalance of Trade
 Trade surplusTrade surplus...export more than...export more than
you importyou import
 Trade deficitTrade deficit...import more than...import more than
you exportyou export
 Balance of tradeBalance of trade...relationship...relationship
between exports and importsbetween exports and imports
• Balancing trade will protect currencyBalancing trade will protect currency
• If imports are high – currency will fallIf imports are high – currency will fall
 Balancing trade requires internationalBalancing trade requires international
cooperationcooperation

28. ReviewReview
1. When a nation imports more than it exports,1. When a nation imports more than it exports,
economists say it has aeconomists say it has a
• (a)(a) trade insufficiency.trade insufficiency.
• (b)(b) trade deficit.trade deficit.
• (c)(c) balance of payments.balance of payments.
• (d)(d) trade surplus.trade surplus.
2. When an economist says that a currency has2. When an economist says that a currency has
become stronger, he or she means thatbecome stronger, he or she means that
• (a)(a) it will buy less foreign goods.it will buy less foreign goods.
• (b)(b) it can be exchanged for more of a foreign currency.it can be exchanged for more of a foreign currency.
• (c)(c) services, unlike goods, can be exported freely.services, unlike goods, can be exported freely.
• (d)(d) there are very few things that the currency cannot buy inthere are very few things that the currency cannot buy in
a foreign market.a foreign market.

29. OutsourcingOutsourcing