Ch. 16 – The Global Market Place

International Trade

Exports are goods and services that one country sells to another country.

Imports are goods and services that one country buys from another country.

(read don’t write)

Ford Mustang Toyota Sienna 65 % made in US 90% made in US Hard to distinguish: American vs. Foreign

made goods!

Imports (read don’t write)

The average American spends $5,460.00 per year for imports.

In 2010 the United States imported

$365 billion from foreign countries.

Exports (read don’t write)

The United States exported

$92 billion dollars in 2010.

The trade deficit was $263 billion dollars.

Example

(millions of pounds)

Country A Country B

Coffee

Cashews

Absolute Advantage

Absolute Advantage: is when a country can produce a good more efficiently than another country.

If a country produces a good with greater output per unit of input it has absolute advantage for trading over a country with less efficiency, therefore it is likely to trade that good with another country

Absolute Advantage

Country A can produce 40 million pounds of coffee or 8 million pounds of cashew nuts

Country B can produce 6 million pounds of coffee or 6 million pounds of cashew nuts.

Example

(millions of pounds)

Country A Country B

Coffee 40

(or)

6

(or)

Cashews 8 6

•Country A can produce more of either product so it has the absolute advantage

Comparative Advantage

Comparative Advantage is absolute advantage with a lower opportunity cost.

If a country can produce a good with a lower opportunity cost it has comparative advantage and is likely to trade that good.

Example (cont.)

(millions of pounds)

Country A Country B

Coffee 40 6

Cashews 8 6- Country A gives up 5 pounds of coffee to make 1 pound of cashews (5:1 ratio)

- Country B gives up 1 pound of coffee to make 1 pound of cashews (1:1 ratio)

- Country A has a Comparative Adv. in coffee & Country B has a Comparative Adv. in cashews

Example (cont)

Country A’s opportunity cost for every pound of cashew nuts is 5 pounds of coffee.

Country B’s opportunity cost for one pound of cashew nuts is 1 pound of coffee.

There for, A should grow coffee, B should grow cashews, and they should trade with each other.

Section 2 - Barriers

In order to restrict the free flow of products, countries institute obstacles that are designed to slow down or stop the movement of goods and services from country to country.

Ways to restrict:

Tariff is a tax on imports.

Quota is a limit on the amount of imports or exports.

Protectionism is the idea that we should limit international trade to protect our own self interest.

Why we protect:

The most commonly used reason for quotas & tariffs –protecting jobs.

These measures usually work in the short run.

Failing to compete in the long run will always lead to the loss of jobs in a global economy.

To-Do list:

p. 442 – “American Dependence” p. 443 – US Merchandise p. 444 – “Gains” p. 445 - # 2-4