Nations trade due to differences in natural resources, human capital, physical capital, and economic specialization. Trade occurs due to absolute advantage, where one nation can produce more of a good using the same resources, and comparative advantage, where a nation can produce a good more efficiently. The US enjoys comparative advantages in many goods and services and is a major global trader. However, barriers like tariffs and quotas still regulate trade between nations and sometimes lead to trade wars. Major trade agreements aim to reduce barriers and promote regional free trade.

1. Why Nations Trade
 Trade between nations will occur when one country
can provide something another country can not or
will not provide. This could be due to:
 A lack or bounty or natural resources.
 A lack or bounty of human capital (an uneducated
and unskilled population vs. educated and skilled
for example)
 A lack or bounty of physical capital (machinery or
factories)
 Shifts in economic activity patterns (such as the
shift to a white collar labor force in the USA)

2.  Trade might occur because of
absolute advantage, or the ability of
one nation to produce more of a
given product using a given
amount of resources.
 Some countries are just better at
making certain things than others.

3.  Example: They have access to the
same amount of resources.
 Rubber Chickens Fake Vomit
Country A 6 2
Country B 1 1
 Country A is just more productive

4.  Trade might occur because of
comparative advantage, or the
ability of one nation to produce a
product more efficiently given all
the other products that could be
produced.

5.  Example: It takes Country A one week to make one
spaceship and Country B four weeks to make a
spaceship. Country A takes six weeks to make nuclear
reactor and Country B only takes three weeks.
 Country A would be better off focusing on spaceships
and Country B would be better off focusing on reactors.
 The two countries would specialize and trade with each
other.
 Country A’s opportunity cost to build spaceships is far
lower than Country B’s, but B’s opportunity cost to
build reactors is lower than A’s.
 The Law of Comparative Advantage: The idea that a
nation is better off producing goods and services for
which it has a comparative advantage.

6.  The US and Trade: The US enjoys a
comparative advantage in
producing many goods and
services, but in some cases other
countries have the advantage or an
absolute advantage.
 As a result the US is the largest
exporter and importer of goods and
services in the world.

7.  The Shift in the US: The US has
shifted from blue collar to white collar
because trade has allowed for
specialization and because education
and skill tends to be higher in the US
than in many other countries.
 The US focuses on innovation, heavy
equipment, specialized
equipment, technology, and services.
 The US is no longer interested in the
manufacturing of many goods and
trades for those goods.

8. Many barriers regulate the
exchange of goods between
the US and other nations.
 Trade Barrier: A means of preventing a foreign product or service from
freely entering a nation’s territory.
 Usually results in higher prices.
 Forms:
◦ Import Quota: A limit on the amount of a good that can be imported into a country.
◦ Voluntary Export Restraint (VER): A self imposed limitation on the number of
products shipped to a particular country.
◦ Custom Duty: A tax on certain items purchased abroad.
◦ Tariff: A tax on imported goods.
 Trade Wars: A cycle of increasing trade restrictions between two countries.

9.  A full-blown trade row erupted
between the US and China after
Beijing accused Washington of
“rampant protectionism” for imposing
heavy duties on imported Chinese
tyres and threatened action against
imports of US poultry and vehicles
after after Barack Obama signed an
order to impose a new duty of 35 per
cent on Chinese tyre/tire imports on
top of an existing 4 per cent tariff.

10. Arguments for
Protectionism, or the use of
barriers.
 Job protection.
 Infant industry protection.
 National Security.

11.  Many agreements encourage trade
between the US and other nations.
 They are often pushed by and are in
the best interest of multinationals.

12.  The European Union (EU): A
regional trade organization made
up of European nations.
 The goal is a common market with
one currency called the Euro.

13.  North American Free Trade
Agreement (NAFTA): An agreement to
create a free trade zone on the North
American continent.
 It has eliminated many barriers and
tariffs between the members.
 The members are the
USA, Canada, and Mexico.
 Special judges have been created to
deal with disputes and over the
course of time more tariffs are to be
removed.
 The agreement can not override
national and state
environmental, security, health, and

14. The Balance of Trade
 Nations seek to maintain a balance
of trade to protect its economy and
the value of its currency.
 When a trade imbalance occurs it
can slow or harm the economy.
 This is the relationship between
exports and imports.

15. Trade Surplus
 The result of a nation exporting
more than it imports.
 This can impact the balance or
trade and in turn the economy and
the value of a currency.

16. Trade Deficit
 The result of a nation importing
more than is exports.

17. The US Deficit
 The US is currently carrying the
largest deficit in history.
 This condition has been going on
since the early 1970’s.
 The US is importing many goods
and not exporting as many.

18. Deficit Issues
 Is this good or bad?
 What are these goods being
imported in?
 Foreign investment, is it a
problem? (Loans covering debt)

19. Tracking Economic Levels of
Development
 Development: The process by which a
nation improves the economic, political,
and social well being of its people.
 Developed Nation: A nation with a high
average level of material well being.
 Less Developed Country (LDC): A nation
with a low level of material well being.
 The Economic Indicators will be used to
look at a country and classify it.