Chapter Introduction
Section 1: Absolute and
Comparative
Advantage
Section 2: Barriers to
International
Trade
Section 3: Foreign Exchange
and Trade Deficits
Visual Summary
You and a classmate are planning
to open a lawn-service business.
You will each contribute $200
toward the purchase of a mower,
gas can, trimmer, and other
materials for the business. Now it
is time to get organized. Work with
a classmate and make a list of the
different “jobs” associated with
your lawn-service business. What
criteria will you use to divide up
these jobs? Why? Read Chapter
16 to find out how nations make
decisions about what to produce
and trade with other nations.
Trade and specialization lead
to economic growth for
individuals, regions, and
nations.
Section Preview
In this section, you will learn that comparative
advantage is the basis for international trade.
Content Vocabulary
• exports
• imports
• absolute
advantage
• comparative
advantage
• production
possibilities
frontier
• opportunity cost
Academic Vocabulary
• volume
• enabled
What products do you think the state
of Texas primarily trades?
A. Citrus fruits
B. Oil and cattle
C. Cattle and wine
D. Computers
0%
A
A.
B.
C.
0%
D.
B
A
B
C
0%
D
C
0%
D
Why Nations Trade
Trade allows nations to
specialize in some products
and then trade them for goods
and services that are more
expensive to produce.
Why Nations Trade (cont.)
• Reasons to trade
– Some countries lack essential raw
materials.
– Specialization
• Exports
• Imports
American Dependence on Trade
Why Nations Trade (cont.)
• Sheer volume of trade between nations is
proof that trade is beneficial.
U.S. Merchandise Trade by Area
The United States imports goods that
amount to approximately how much
per capita?
A. $8,500
B. $6,500
C. $5,500
D. $2,500
0%
A
A.
B.
C.
0%
D.
B
A
B
C
0%
D
C
0%
D
The Basis for Trade
Trade works best when
countries focus on those
products they can
produce best.
The Basis for Trade (cont.)
• Countries find it cheaper to import some
products than to manufacturer them.
• Absolute advantage—country can
produce more of a product than another
country.
The Basis for Trade (cont.)
• Production possibilities frontier—
diagram illustrating the maximum
combinations of goods and/or services one
can produce utilizing fully employed
resources.
The Gains from Trade
The Basis for Trade (cont.)
• Countries with an absolute advantage
benefit from trade with another country
whenever it has a comparative
advantage because its opportunity cost
is lower than another country’s.
• Total world output grows when there is
specialization and trade among nations.
What happens to world output when there is
specialization and international trade?
A. Growth is slow but
worthwhile.
D. There is a drop in world output.
0%
D
A
B
C
0%
D
C
0%
A
C. No additional growth in
output takes place.
A.
B.
C.
0%
D.
B
B. Growth is significant in
concentrated areas.
Section Preview
In this section, you will learn that nations use
tariffs and quotas to protect special interests,
while the free trade movement tries to eliminate
trade barriers.
Content Vocabulary
• tariff
• protectionists
• quota
• free traders
• imposed
• justify
• most favored
nation clause
• World Trade
• protective
• infant industries Organization
tariff
argument
(WTO)
• revenue tariff • balance of
• North American
payments
Free Trade
Agreement
(NAFTA)
Academic Vocabulary
Would you purchase a cell phone
imported from Japan just because the
price is a few dollars less than the
one manufactured here?
A. Yes, saving money is my goal.
0%
C
A
C. It depends.
B
A. A
B. B
C. 0%C
0%
B. No, a few extra dollars in my
pocket doesn’t compare to
lost American jobs.
Restricting International Trade
Tariffs and quotas are the
main ways to restrict
international trade.
Restricting International Trade (cont.)
• Restrictions to trade
– Tariff
• Protective tariff
• Revenue tariff
– Quota
– Imported foods subjected to rigorous
health inspections
Restricting International Trade (cont.)
• Restrictions to trade
– Requiring a license to import
– Culture and nationalism
Before the Civil War, tariffs were used
largely to generate revenue for the
federal government.
A. True
B. False
A. A
B. B
0%
A
0%
B
Arguments for Protection
Protectionists disagree with
free traders over the best way
to protect a country’s
independence, industries, and
workers.
Arguments for Protection (cont.)
• Protectionists and free traders are
constantly in debate.
– National defense
– Infant industries argument
– Protecting American jobs
– Keeping the money at home
– Balance of payments
– National pride
The United States imports significantly
more products from China than it exports.
The balance of payments is therefore
significant. With which side of the debate
do you align yourself?
B. Free traders
A
C. Neither
B
A. A
B. B
C. 0%
C
0%
0%
C
A. Protectionists
The Free Trade Movement
Because tariffs hurt more
than they helped during the
Great Depression, the United
States has found ways to
reduce trade restrictions.
The Free Trade Movement (cont.)
• Smoot-Hawley Tariff Act passed in 1930
– One of most restrictive tariffs in U.S.
history
– Import duties so high that other
countries did same
– International trade nearly ceased
The Free Trade Movement (cont.)
• Reciprocal Trade Agreements Act passed
in 1934
– Reduced tariffs up to 50% if other
countries did the same.
– Most favored nation clause
• General Agreement on Tariffs and Trade
(GATT) in 1947
The Free Trade Movement (cont.)
• World Trade Organization (WTO)
replaced GATT.
– Administers trade agreements signed
under GATT
– Settles trade disputes between nations
– Organizes trade negotiations
– Provides tech assistance and training to
developing countries
The Free Trade Movement (cont.)
• North American Free Trade Agreement
(NAFTA)
– Has allowed NAFTA partners to
capitalize on their comparative
advantages
If you were in charge of trade for all
businesses or government agencies
in your community, which trade
practices would you engage in?
A. Quotas
0%
D
A
B
C
0%
D
C
D. None of the above
0%
A
C. Most favored
nation clause
A.
B.
C.
0%
D.
B
B. Tariffs
Section Preview
In this section, you will learn that a long-lasting
trade deficit affects the value of a nation’s
currency as well as the value and volume of its
exports and imports.
Content Vocabulary
• foreign
exchange
• fixed exchange
rates
• foreign
exchange
rate
• flexible
exchange rates • trade-weighted
value of the
• floating
dollar
exchange rates
Academic Vocabulary
• secure
• persistent
• trade deficit
• trade surplus
Which do you think is better for the
U.S. economy?
A. Strong dollar
B. Weak dollar
C. Doesn’t matter
0%
A
A. A
B. B
C.0%C
B
0%
C
Financing International Trade
International trade relies on
the ability to exchange foreign
currencies.
Financing International Trade (cont.)
• Supply and demand causes the dollar
and other international currency to
fluctuate daily.
• Foreign exchange—different currencies
are bought and sold for international trade
• Foreign exchange rate—price of
one country’s currency in terms
of another country’s
Foreign Exchange Rates
Financing International Trade (cont.)
• Two major kinds of exchange rates exist:
– Fixed exchange rates
– Flexible exchange rates or floating
exchange rates
Flexible Exchange Rates
Financing International Trade (cont.)
• Whenever the dollar falls—exports tend to
go up and imports down. If dollar rises, the
reverse is true.
The Global Economy & YOU
Big Mac Index
Would the price of a pair of Levi jeans
in Russia be the same as the price
here in the United States?
A. No, price in Russia would be
overvalued against the dollar.
0%
D
0%
C
B
A
B. No, price in Russia would be A. A
undervalued against the dollar. B. B
0%
0%
C.
C
C. Yes, price would be the same.
D. D
Trade Deficits and Surpluses
The strength of the dollar
affects trade and therefore
trade deficits and surpluses.
Trade Deficits and Surpluses (cont.)
• The international value or strength of the
dollar affects trade:
– Trade deficit
– Trade surplus
Trade Deficits and Surpluses (cont.)
• Federal Reserve System tracks the tradeweighted value of the dollar.
– If index falls—dollar is weak in relation to
other currencies.
– If index rises—dollar is strong.
International Value of the Dollar
Trade Deficits and Surpluses (cont.)
• A persistent trade imbalance can affect
income and employment.
• No net gain in having a strong or a weak
dollar—one sector is helped, another hurt.
Profiles in Economics:
Jerry Yang
What is the result of U.S. exports
when the dollar is strong?
A. U.S. imports decline.
B. Exports become cheaper for
other nations.
C. U.S. imports increase.
D. U.S. trade surplus results.
A. A
B. B
C. 0%
C
0%
D. D
A
B
0%
C
0%
D
Absolute and Comparative Advantage A country has
absolute advantage when it can produce more of a product
than can another country. It has comparative advantage when it
can produce a product at a lower opportunity cost than another
country. When countries focus on those products for which they
have comparative advantage, world production increases.
Free Trade Movement After strict tariffs severely
limited world trade during the early years of the
Great Depression, the United States and other
countries worked to open trade.
Trade Deficits and Surpluses The strength of
the dollar affects the balance of trade of the United
States.
Jerry Yang (1968–
)
• cofounder of the Internet
Web portal Yahoo!
• became a billionaire three
years after starting the
company
• ranked on Forbes’s list of the
world’s richest people
Economic Concepts
Transparencies
Transparency 20 Absolute and
Comparative
Advantage
Transparency 21 Exchange Rates and
Balance of
Payments
Select a transparency to view.
exports
the goods and services that a nation
sells to other nations
imports
the goods and services that a nation
buys from other nations
absolute advantage
country’s ability to produce more of a
given product than another country
can produce
production possibilities
frontier
diagram showing the maximum
combinations of goods and/or
services an economy can produce
when all resources are fully employed
comparative advantage
country’s ability to produce a given
product relatively more efficiently than
another country by doing it at a lower
opportunity cost
opportunity cost
cost of the next-best alternative use
of money, time, or resources when
making a choice
volume
amount; quantity
enabled
made possible
tariff
tax placed on an imported product
quota
limit on the amount of a good that is
allowed into a country
protective tariff
tax on an imported product designed
to protect less-efficient domestic
producers
revenue tariff
tax placed on imported goods to raise
revenue
protectionist
person who wants to protect domestic
producers against foreign competition
with tariffs, quotas, and other trade
barriers
free trader
person who favors fewer or even no
trade restrictions
infant industries argument
argument that new and emerging
industries should be protected from
foreign competition until they are
strong enough to compete
balance of payments
difference between money paid to,
and received from, other nations
in trade
most favored nation clause
trade law allowing another country to
enjoy the same tariff reductions the
United States negotiates with any
third country
World Trade Organization
(WTO)
international agency that administers
trade agreements, settles trade
disputes between governments,
organizes trade negotiations, and
provides technical assistance and
training for developing countries
North American Free Trade
Agreement (NAFTA)
agreement signed in 1993 to reduce
tariffs and increase trade among the
United States, Canada, and Mexico
imposed
established; applied
justify
to defend as warranted or necessary
foreign exchange
various currencies used to conduct
international trade
foreign exchange rate
price of one country’s currency in
terms of another country’s currency
fixed exchange rate
system under which the values of
currencies are fixed in relation to one
another
flexible exchange rates
system that relies on supply and
demand to determine the value of
one currency in terms of another
floating exchange rates
system that relies on supply and
demand to determine the value of
one currency in terms of another
trade deficit
balance of payments outcome when
spending on imports exceeds
revenues received from exports
trade surplus
balance of payments outcome when
revenues received from exports
exceed spending on imports
trade-weighted value of the
dollar
index showing strength of the U.S.
dollar against a group of major
foreign currencies
secure
obtain
persistent
continuous, without signs of
weakening
To use this Presentation Plus! product:
Click the Forward button to go to the next slide.
Click the Previous button to return to the previous slide.
Click the Home button to return to the Chapter Menu.
Click the Transparency button from the Chapter Menu, Chapter Introduction, or
Visual Summary slides to access the Economic Concepts transparencies that are
relevant to this chapter. From within a section, click on this button to access the
relevant Daily Focus Skills Transparency.
Click the Return button in a feature to return to the main presentation.
Click the Economics Online button to access online textbook features.
Click the Reference Atlas button to access the Interactive Reference Atlas.
Click the Exit button or press the Escape key [Esc] to end the chapter slide show.
Click the Help button to access this screen.
Links to Presentation Plus! features such as Graphs in Motion, Charts in Motion,
and figures from your textbook are located at the bottom of relevant screens.
This slide is intentionally blank.