Chapter 10 Sections 1 and 2

Comparative advantage and world trade

-The nation having the lower opportunity cost in producing a good has a comparative advantage in producing that good -The nation with the comparative advantage in producing a good should specialize in producing that good -then carries out that trade by shipping it's goods to other countries and allowing them to ship goods to it

Regional trade organization

-The smaller regional trade organizations are often made up of several countries in the same general geographic area -These seek to enhance free trade among member nations

The impact of trade on jobs

-Trade allows nations to specialize in producing a limited number of goods while consuming a greater variety of goods -however the impact of it can dramatically affect a nation's employment patterns which can be negative like a loss of jobs or positive like the creation of new job opportunities or both

Protecting jobs

-protectionism shelters workers and industries that may be hurt by foreign competition -if workers are laid off then they will have to find new jobs in other industries -few industries or political leaders want to see this so they favor of protectionism to keep companies alive and people working

unequal resource distribution

-the availability of resources differs greatly from one country to another -a nation's ability to exploit or use its physical resources is affected by culture and history -for example: prolonged warfare may severely damaged a nations farms,forests, and transportation systems -labor shortage led to the establishment of slavery

Chapter 10 section 1-Resource distribution and specialization

-the factors of production=the resources that are used to make goods and services -they include land(natural resources),labor, and capital(both physical and human) -because the resources are scarce, countires need to choose how to use their factors of production to produce particular goods -trade is how countries obtain those goods that they do not produce

Chapter 10 section 2-free trade and trade barriers

-today many people favor increased foreign trade while others fear it's affects -A trade barrier or trade restriction is a means of preventing a foreign product or service from freely entering a nations territory

Higher prices for foreign goods

-trade barriers can help domestic producers compete with foreign firms -By limiting imports from those firms, or by making the prices of those imports higher, trade barriers give a competitive advantage to domestic companies -Although domestic producers may benefit, consumers can lose out because of higher prices

Specialization and trade

-unequal distribution of resources creates a need for specialization -specialization occurs when individuals, businesses, or nations produce only certain goods and services -when nations specialize in certain goods, they obtain the goods they do not or cannot produce through importing and exporting -an export is a good or service sent to another country for sale -an import is a good or service brought in from another country for sale -in some cases, more than 70% of a nations trade depends upon a single resource

Trade wars

-when one country restricts imports, it's trading partner may retaliate by placing its own restrictions on imports -if the first country responds with further trade limits, the result is a trade war, or cycle of escalating trade barriers -Trade wars occur still but they usually involve a few products rather than all imports -tariffs on imported steel was to help American steelmakers recover from bankruptcy -European nations retaliated, starting the steel war which ended when an international panel ruled that the tariffs were a illegal

Specialization and job loss

-when people specialize in making a product that is no longer in demand they get laid off -people are better off knowing how to produce what there is a demand for -people can find a job retraining program and learn to make the product in demand -or they can move to an area that still has a demand for the product they already know how to make -but this impacts new wages, new homes, new taxes, and your family -or people can stay in their area and take a job that calls for less skills but this also means less income and you may need a second job -if none of these options are chosen then that person will be unemployed

Absolute and comparative advantage

-while self sufficiency may sound appealing it is actually better for countries to specialize in some products and trade for others -a person or nation has an absolute advantage when it can produce more of a given product than another person or nation using a given amount of resources

The mutual benefits of specialization

-you can either make goods or make other goods and trade them for goods that you need -trade in a way that you are in a benefit -each person specializes in producing the good for which he or she has a comparative advantage -since both producers Are operating at greater efficiency more total goods are produced overall -after the trade each of them is left with an extra unit of the good originally produced which can be used to trade for other goods

Roots of free trade

- The Smoot-Hawley Act caused a rapid decline in international trade -to encourage trade, Congress passed the reciprocal trade agreement act of 1934 -it gave the president the power to reduce tariffs by as much as 50% -The law allowed Congress to grant most favored nation (MFN) status to the US trading partners -today MFN status is called normal trade relations status or NTR -All countries with NTR status pay the same tariffs, though imports from non NTR nations may be taxed at a higher rate -after World War II had disrupted world trade, many nations reached an agreement called the general agreement on tariffs and trade (GATT) -it's goal was to reduce tariffs and stabilize world trade

Other barriers to trade

-A government may require foreign companies to obtain a license to sell goods in that country -High licensing fees and slow licensing processes act as informal trade barriers -Health, safety, or environmental regulations can also act as a trade barrier -Products that do not meet the requirements of a country will be prohibited from importing -A nation may impose trade barriers and other economic sanctions for political reasons -sanctions are actions a nation or group of nations take in order to punish or put pressure on another nation -for example, in the 1960s, the US banned all trade with Cuba -The purpose of this trade embargo was to cause economic strain that might weaken Cuba is communist dictatorship -And embargo is an official ban on trade or other commercial activity with a country

The role of multinationals

-A large corporation that sells goods and services throughout the world is a multinational -The decision to build production facility is in a foreign country benefits both the multinational and the host nation and cheaper labor -The host nation benefits by gaining jobs and tax revenue -Who is the nations fear that multinationals could drive out domestic industries and exploit local workers if gained too much power -to protect domestic industries, some host nations have created rules requiring multinationals to export a certain percentage of their products

The impact of US exports

-China exports more goods than any other country and the US is third -The US exports products like soybeans and telecommunications equipment -also the US excels in technologically sophisticated goods such as software, chemicals, and medical testing supplies -The US is the worlds leading exporter of services -these include education, computer and data processing, financial services, and medical care -American movies capture about 2/3 of ticket sales in Western Europe, creating difficulties for domestic production companies -these can convey particular images of the American lifestyle and values, introducing new ideas to people of other cultures -nearly half of all exports are capital goods- transistors, aircraft, motor vehicle parts, computers, and telecommunications equipment -another quarter of industrial supplies, and the remainder coming from consumer goods and agricultural products -sometimes US products compete with locally produced goods and low-cost US products have an impact on local suppliers -competition from these products has cut the income of as many as 3 million Mexican farmers

Arguments for protectionism

-One reason to impose trade barriers is protectionism, or the use of trade barriers to shield domestic industries from foreign competition -arguments for protectionism: saving jobs, protecting infant industries, and safeguarding national security

NAFTA

-Other nations have created free trade zone where a group of countries agrees to reduce or Eliminate trade barriers -for example the north American free trade agreement created a free trade zone linking the US, Canada, and Mexico -Americans thought they would lose their jobs to Mexicans but it really claimed that the measure would create more jobs in the US because it would increase exports to Mexico and Canada -The Senate ratified NAFTA with these provisions: -Tariffs on all farm products and on some 10,000 other goods were eliminated over 15 years -some auto tariffs were eliminated immediately while others were phased out in periods of 5 to 10 years -trucks were to have free access across borders and throughout the three member countries -special judges were given authority to resolve trade disputes -The agreement could not be used to override national and state environmental, health, or safety laws -NAFTA Increased US trade with Canada and Mexico by triple

The European Union

-The EU is one country that has signed agreements to abolish tariffs and trade restrictions among member nations and adapt uniform tariffs for all countries that are not members -at first some of the countries created a common market then when tariffs were eliminated, they created a single market, called the European economic community (EEC) -this created the European Union and became the largest trading bloc in the world -The European Union adopted various policies to strengthen member economies such as using agricultural subsidies and tariffs to keep farm prices high -The European monetary union, agreed to adapt a single currency and monetary system of euros -The European Union adopted political ties, forming a parliament and counsel that make laws all member nations must follow -to some nations this was a threat to their own decision making

The impact of US imports

-The US is the worlds top importing country China is second and EU is first -Canada and Mexico provide the US with 14.1% and 12% of all imports which has a significant impact on the US' economy -Saudi Arabia helps fuel the US -19% of imports are from China - The imports include computer equipment, communications devices, consumers manufactured goods (toys and games), clothing, and electronic parts -The imports are cheaper than from other sources and help fuel China's economic growth

The United States and its trading partners

-The United States enjoys a comparative advantage in producing many goods and services

Trade and employment in the US

-The comparative advantage of nations affects the economic well-being of workers living in those nations -In the 1970s high work productivity and new technologies like robotics helped give Japan a comparative advantage in making automobiles -as a result more people bought Japanese cars because they were less expensive than American cars -falling of sales lead them to reduce their workforce, costing manyAmerican auto workers their jobs -businesses and government often provide help to retrain laid off workers or assist them in relocating -but often re-training or relocating is not an option for older or family workers -in this case they would be forced to take a lower paying jobs or face prolonged unemployment -trade can result in the creation of jobs -The more products you make and sell to other countries the more jobs there will be for people in the country making those products -in 2013 1.3 million American jobs were created as a result of increased exports -workers who lost jobs because they were on the negative end of comparative advantage may find work in those growing industries -to do so they have to re-train to gain the needed skills for a specific job

Comparative advantage in action

-The country with the lower opportunity cost has a comparative advantage in producing that product -therefore that country should specialize in producing it and exporting it to other places -trade allows countries to obtain goods for which they might have a high opportunity cost -then countries can use the money they get from exporting goods to pay for imported ones (economic growth) -if a country focuses its resources on producing certain goods it can make more of them

Other regional trade agreements

-about 100 regional trading organizations operate today -(APEC) The Asia-Pacific economic cooperation is an economic forum that includes 21 countries along the Pacific rim including the US(signed to reduce tariffs) -(MERCOSUR)The southern common market is similar to the European Union and it's goals(members=South American nation's) -(CARICOM) The Caribbean community and common market includes countries from South America and the Caribbean -(ASEAN) The 10 member association of south east Asia nations has taken steps to establish a free trade zone similar to the European Union

Opportunity cost and comparative advantage

-according to the law of comparative advantage each person should produce the good for which he or she has a lower opportunity cost than other producers -It is sensible for people to produce the lower amount of opportunity cost

Effects of trade barriers

-by limiting supply, trade barriers can have very different effects on domestic producers and consumers -trade barriers may create tense relations between importing and exporting countries

Safeguarding national security

-certain industries may require protection because their products are essential to defending the country -in the event of a war, the US would lead an uninterrupted supply of steel, energy, and advanced technologies -so the government wants to ensure that such domestic industries remain active

The debate over free trade

-debates over the impact of NAFTA became a campaign issue and the American presidential election of 2008 -protest across the Americas slowed negotiations on the FTAA -A 1999 WTO meeting in Washington drew as many as 50,000 angry demonstrators -they were concerned that current free trade agreements gave too much economic power to large multinational corporations

Explaining absolute advantage

-if someone is more productive than others and produce more goods and services, they have an absolute advantage over others

Quotas and VERs

-imported quotas place a limit on the amount of good that can be imported -The US limits the annual amount of raw cotton coming into the country from other nations -many import quotas are now illegal under international trade laws -Tariffs and quotas are ball set by the importing country -by contrast, voluntary export restraint (VER) is a voluntary limit set by the exporting country, restricting the quantity of a product it will sell to another country -A nation that adopts a VER seeks to reduce the risk that the importing country will impose damaging trade barriers it's self

World trade organization

-in 1995 the world trade organization (WTO) was founded with the goal of making global trade more free -The WTO works to ensure that countries comply with GATT, to negotiate new trade agreements, and resolve trade disputes -today the WTO acts as a referee, enforcing the rules agreed-upon by the member countries -WTO decisions resolved the beef war and the steel tariff disputes between the US and EU

CAFTA-DR and FTAA

-in 2003 the US government reached a free trade agreement with five nations of central America called central American free trade agreement -when the Dominican republic joined it was changed to CAFTA-DR -free trade hit a roadblock with the failure of the free trade area of the Americans(FTAA) -it would have open trade among 34 nations of north and south America but was rejected by several key south American nations

Trade agreement

-in opposition to protectionism, the principle of free trade involves the lowering or eliminating of protective tariffs and other trade barriers between two or more nations -this is the best way to pursue comparative advantage, raise living standards, and further cooperative relationships among nations -free trade agreements can involve many nations

Explaining comparative advantage

-in the early 1900s British economist David Ricardo argued that the key to determining which country should produce which goods is opportunity cost -opportunity cost is what you give up in order to produce a certain product -A country has a comparative advantage in the product that it can produce most efficiently given all the products it could choose to produce -The nation with the comparative advantage not necessarily the one with the absolute advantage should specialize in producing that good -according to the law of comparative advantage a nation is better off when it produces goods and services for which it has a comparative advantage -each nation can then use the money it earns selling those goods and services to buy those that it cannot produce as efficiently

Growing interdependence

-interdependence is the shared need of countries for resources, goods, services, labor, and knowledge supplied by other countries -The growth of international trade has led the greater economic interdependence among nations -Because countries are interdependent changes to one countries economy influences other economies with positive and negative outcomes

Natural resources

-natural resources along with climate and geographic location help determine what goods and services an economy produces -fertile soil and a good growing climate allowed the central United States to develop an economy based on agriculture -much of southwest Asia has an economy based on extracting and selling oil and natural gas(scarce farmland and water)

Capital and labor

-physical capital includes the things that people make in order to produce final goods and services -examples include: machinery, tractors, and transportation and communication networks that allow the flow of goods and information -also includes the money needed to invest in businesses and use natural resources -labor refers to the size of a nations workforce -human capital is the knowledge and skills a worker gains through education and experience -every job requires human capital -a country whose citizens have more schooling than those of another country has more human capital(measure of human capital)

Protecting infant industries

-protectionism helps industries in the early stages of development produce in a certain amount of time -tariffs that raise the price of imported goods provide a period of time for these infant industries to become more competitive -in this time, tariffs can be eliminated -Alexander Hamilton favored using tariffs to protect young American industries from European competition -today many developing nations adapt protectionist policies for similar reasons -A protected infant industry may lack the incentive to grow up, or become more efficient and competitive -once an industry has been given tariff protection, lawmakers may find it difficult for political reasons to take the protection away -A protected industry can keep its prices relatively high, increasing cost to consumers

Tariffs

One common trade barrier is a tariff or tax on imported goods -tariffs were a major tool of fiscal policy in the US and the main source of revenue for the federal government -while today the US continues to collect tariffs on steel, foreign made cars, and many other products, they are much lower -if you travel abroad you may have to pay a tax on foreign goods you brought back to the US which is a form of tariff