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AOF Business in a Global Economy

Lesson 5International Trade

Teacher Resources

Resource Description

Teacher Resource 5.1 List: International Trade Statements

Teacher Resource 5.2 Presentation and Notes: How and Why Countries Manage Trade (includes separate PowerPoint file)

Teacher Resource 5.3 List: Countries and Factors of Production

Teacher Resource 5.4 Assessment Criteria: Memo to the President

Teacher Resource 5.5 Key Vocabulary: International Trade

Teacher Resource 5.6 Bibliography: International Trade

Copyright © 20092016 NAF. All rights reserved.

AOF Business in a Global EconomyLesson 5 International Trade

Teacher Resource 5.1

List: International Trade StatementsRead as many of these statements as possible so that students can consider an array of them before making their comprehensive vote on international trade. Notes, in italics, are provided to foster discussion; if students have difficulty coming up with answers, use the notes to stimulate ideas.

International Trade Issues1. Low prices can hide the true cost of a good.

Prices may be lowered relative to domestic production by importing cheap goods and/or outsourcing labor, which can reduce domestic employment; unrealistically low prices can give consumers a false sense of the true value of goods; some countries engage in dumping products by exporting them at a price below the cost of production.

2. International competition introduces consumers to foreign goods and services.

International competition can foster innovation and improvements in goods and services, but when a country’s economy becomes very specialized, innovation may decrease in that country for other goods and services.

3. Introducing foreign capital to a new market brings economic prosperity to the new market.

Introduction of capital and technology to developing countries can help those countries raise productivity and increase their standard of living; may help equalize the economic playing field for countries that have, or used to have, rigid social stratification and limited social mobility, but may also increase inequality by favoring urban elites at the expense of others; spreads capitalism.

4. Outsourcing jobs decreases the number of domestic jobs.

Domestic jobs can be lost through international outsourcing; outsourcing brings new jobs and new opportunities for developing countries; companies’ costs can be lowered by finding the place for production where labor costs are lowest, allowing for differences in productivity as well as wages.

5. Specializing in a small number of products allows firms to offer the lowest prices.

Specialization allows the most efficient firms to produce most of the goods, which tends to keep costs and prices low; international specialization tends to exclude certain companies and countries from certain industries because costs are uncompetitive; companies or countries may find it difficult to get started in an industry because their costs can’t be competitive when operating on a small scale.

6. National security is decreasing because of international trade.

A feeling of the world being smaller—more interdependent and interconnected—may help increase understanding between peoples and thereby tend to reduce international tensions; some countries/cultures may feel threatened by economic consequences of globalization.



7. International trade causes countries to be dependent on one another.

Globalization makes the world smaller; more and more people are speaking English and communicating via the Internet; many indigenous languages and cultures are dying out or threatened; some indigenous ethnic groups may even disappear as distinct societies.

8. The environmental consequences of international trade are less important than the benefits.

Importing and exporting may increase pollution, not only because of long-distance transport and the associated pollution, but because host country and home country environmental laws can differ, and some companies may seek out places where they are allowed to pollute more: this is called exporting pollution, and it can enable significant environmental damage.




Presentation Notes: How and Why Countries Manage Trade

Before you show this presentation, use the text accompanying each slide to develop presentation notes. Writing the notes yourself enables you to approach the subject matter in a way that is comfortable to you and engaging for your students. Make this presentation as interactive as possible by stopping frequently to ask questions and encourage class discussion.

Whenever you purchase something, you have to make choices. Even buying a tube of toothpaste requires choosing from different brands, different prices, and different features.

But have you ever thought about where the products you buy are made? Are they local, or do they come from thousands of miles away? Were they transported on a huge ship, truck, or train and then on to the store you bought them from? Perhaps the products you buy consist of parts or ingredients made in one country and assembled in another. Chances are good that the governments of the countries the products come from have encouraged their export in some way.

Trade is global, with trillions of dollars’ worth of goods and services moving between businesses from one country to another. But why do governments seek to manage international trade, and what are the risks and benefits of managing trade?

Presentation notes



Trade is the exchange of goods or services between two or more parties. It has existed in some form since the beginning of human history. You have probably been trading for much of your life. Even as a kid you might have swapped a peanut butter and jelly sandwich for a turkey one.

Trading one thing for another is called bartering. Bartering is how people exchanged things before money existed. Each side had to agree on how much of one thing was equal in value to another to make the trade fair, meaning it was attractive and acceptable to both parties. For instance, if the blacksmith wanted to trade milk for horseshoes, he and the farmer would have to agree on how much milk was equal in value to how many horseshoes.

Although the principles of trade are basically similar today, there are some big differences between modern trade and bartering. Now, of course, we use money. We buy or sell items or services rather than barter for them. Also, in olden times, most deals occurred face to face. Now, in a global market with modern modes of shipping and communication, a business in one country can send or receive goods from another company thousands of miles away without the people making the trade actually meeting in person.

In some cultures, face-to-face meetings are very important and can generally help to build trust and rapport. Skype and Internet communications have allowed for a personal experience without hours of travel time, which could help to increase efficiencies and build stronger relationships.

Presentation notes



Governments influence trade in many different ways. They may enter into bilateral or multilateral trade agreements (also called trade treaties or pacts).They may undertake protectionist measures or limit imports through tariffs and quotas. A tariff is a tax on businesses importing a specific product. For instance, the US government collects a 2.5% tariff on imported cars, which tends to make the foreign cars more expensive than similar domestically made cars. A quota is a limit on how much of an item is allowed to be imported.

Governments regulate trade for a variety of reasons. Poorer countries use tariffs as a major revenue source, because tariffs are generally easier to collect than other taxes or to protect domestic industries they think are at risk. Sometimes a government restricts trade with another country for political reasons; a ban on imports from a specific country (and/or exports to it) is called an embargo.

To increase the exports by a specific industry, governments sometimes grant export subsidies, payments to certain businesses encouraging them to export or to keep certain industries competitive against foreign competition.

Presentation notes



Factors of production are what companies use to make goods and provide services. They are the building blocks of the economy. Economists put these factors into different categories. Land, labor, and capital are three of the main categories.

Land actually means any natural resource that comes from the land as well as land itself. Water, oil, natural gas, and forests fall in this category. They are the raw materials of the production process. In countries with fertile soil, farmers can produce more crops than their country needs; this surplus can be traded for other goods. Saudi Arabia, has a much larger supply of oil than its citizens can use and therefore trades oil for income.

Labor is the human effort used in production. If you have ever received a paycheck, you have contributed labor to the production of goods or services. Everyone from waiters to engineers to pilots contribute to this category. Some countries have become hubs for firms that specialize in providing specific kinds of labor, such as India with its call centers or China with its manufacturing.

Capital refers to human-made goods that are retained over time and used in producing other goods and services. Capital includes machines, tools, and buildings. Capital to a doctor includes tools of the trade, such as stethoscopes; for teachers it includes books and desks. Capital depreciates, or loses value, over time but is not used up in production like electricity or raw materials are.

Presentation notes



Specialization occurs when an industry in a certain country is able to produce a particular good or service more efficiently than it can be produced in any other place. Specialization is based on the costs of the land, labor, and capital. The most efficient producers are often those with access to the most favorable combination of these factors of production. That is why they are able to provide the product at the lowest price.

If it's cheaper to import a part from another country, a company trying to maximize its profits should do it. If, on the other hand, it costs less to purchase the part from a local company, that's what the business should do.

If a country’s firms are more efficient than those in any other country in producing a particular good, then that country’s firms are said to have an absolute advantage with that product.

Presentation notes



It's easy to see why companies would want to send their goods to other markets. For one thing, exporting increases the amount of goods a firm can sell. If you're an automaker, you may have hit the maximum number of cars you can sell in your home country. But selling cars to other countries opens up whole new markets with many new consumers. This allows you to make and sell more cars.

Another reason to export is that a business can sometimes get higher prices in a foreign market. At home, there might be several companies making a product, and the competition forces prices down. But that same product might be scarce in other countries, so a business can charge more for it.

Making a huge amount of something can make production more efficient—faster and cheaper. So, many companies use large-scale production to make more of something than they can sell at home. Examples include Korean car manufacturers, growers of certain types of food, and companies that mine the iron ore that is used in making iron and steel. Countries can grow their economies by producing on a large scale, exporting products and services they can make very efficiently and importing the rest.

Presentation notes



It may seem strange that a country, especially one rich in resources like the United States, would buy products from other nations. What's the advantage to buying something from another country when you can make it at home? In fact, there isn't much imported into this country that businesses in the United States cannot produce themselves, yet we import a tremendous amount of goods into this country.

Up until 2014, the United States imported more oil than it produced at home. But today, better fuel efficiency, alternative forms of energy, and innovation in the way we produce oil have all brought our dependence on foreign oil down.

In other cases, goods or services are imported for reasons that have nothing to do with a lack of them at home. There are products that other countries can produce more cheaply. For instance, developing countries often have cheaper labor, and if a company pays its workers less, it can produce an item—say, a plastic toy—more cheaply. Or, a country may specialize in a product and make it very efficiently compared with many other countries. We may specialize in making a particular kind of vehicle that we export, but import one that we don’t specialize in—a sports car, for example. Finally, even when the home country produces a product competitively, consumers may prefer the foreign version. For instance, although the United States makes a huge selection of cars, some people prefer Japanese or German automobiles.

Presentation notes



A country's trade balance measures the difference between its exports and its imports. If a country’s exports exceed its imports, the country has a trade surplus—the country’s firms take in more money selling goods and services to other countries than that country spends on buying imported goods and services. The opposite of a trade surplus is a trade deficit, in which a country’s firms and households spend more on imports than firms in that country take in from selling exports. The United States, which does more trade than any other country, has a huge trade deficit. In 2015, the United States made $1.505 trillion from exporting goods around the globe. It bought $2.3009 trillion worth of imported products. In 2015, the trade deficit was 44.7 billion dollars.

Economists debate whether having a deficit is detrimental to a country's economy. Many argue that it isn’t. Others argue that it's negative to be too dependent on other countries for needed goods and services, especially for essential resources. Critics of free trade feel it hurts job growth and workers at home when workers in other countries are paid to produce belongings that could be made at home. Spending a lot of money in other countries weakens the home economy and makes it more susceptible to a financial crisis.

Economists also see benefits to a trade deficit. For instance, since one of the reasons for importing goods is that they are cheaper, people in countries with trade deficits enjoy lower prices as a result, and this contributes to a higher standard of living. Some see a trade deficit as a sign of a healthy economy because people and companies have money to spend on both foreign and domestic goods.

Presentation notes



Trading has a long history. Whether it's old-fashioned bartering or making deals over the Internet in this modern global economy, trading has its risks.

Each nation’s government administers its trade policy by weighing the costs and benefits of its firms producing goods and services domestically versus importing them. There are advantages to importing items, even for a wealthy nation. For instance, a US business can offer cheaper products by having some parts of a product—or all of it—made in another country where workers make less than the American workers would make doing the same job. Or, the productivity or quality in making that particular part is higher. As it considers trade policy, the government needs to examine whether the loss in domestic jobs is worth the cost savings to its consumers. If there are any unfavorable results, the government needs to consider policies to change those results.

In the end, each country’s government has the power, to some degree, to influence its trade balance and to weigh the advantages and disadvantages of its trade policies. Does an economy get weaker when it relies on importing a large amount of goods and services at a lower price? Does it make the marketplace more competitive when consumers have the option of buying goods from all over the world? Should governments influence consumers on what they can buy and from whom? In today’s global marketplace, these are questions businesses and governments must consider.

Presentation notes




List: Countries and Factors of ProductionProvide a copy of this list for each group. Assign each group a country and have them use the information on this sheet to prepare for the trade conference.

Roland Land: adjacent to major sea, rice, fish, large cities, rapidly developing countryside

Labor: factory workers with good basic manufacturing skills, limited high-technology skills, large rural population of farmers

Capital: manufacturing equipment, efficient rail and sea transportation, few highways

Needs: fuel, lower pollution, increased factory efficiency, automobiles, computers, cell phones

Birdland Land: landlocked country (surrounded entirely by land), wheat, gold, polluted rivers

Labor: wireless and computer savvy workers, innovative solar panel and alternative energy technology

Capital: cell phones, computer factories, modern air transport

Needs: food, manufacturers for alternative technology

Brightland Land: rural country with few cities, small farms, cotton, vegetables

Labor: mostly rural farmers, few educated workers

Capital: rudimentary (simple) farming equipment for processing farm products (e.g., cotton gins for processing cotton fibers for textile use), unpaved roads

Needs: cell phones, medicines

Hunland Land: landlocked country with abundant oil reserves, vacation destinations

Labor: workers with skills and experience in the oil, transportation, travel, and tourism industries

Capital: oil wells, modern transport system, hotels

Needs: building materials, food, new industries to replace oil when it is exhausted, tourists

Mooland Land: tropical island country with abundant fish, plants with healing properties, fruits

Labor: medical scientists, fisherfolk, island farmers

Capital: boats, ports, fish-processing plants

Needs: energy sources, manufacturing facilities for medicines



Shuland Land: forested and farming country with abundant wood, wheat, vegetables, coal, diamonds

Labor: farmers, foresters, coal miners

Capital: farming equipment, forestry equipment, coal mines

Needs: medicines, help reducing air pollution from burning coal




Assessment Criteria: Memo to the PresidentStudent Name:______________________________________________________________

Date:_______________________________________________________________________

Using the following criteria, assess whether the student met each one.

Met Partially Met

Didn’t Meet

The memo thoughtfully considers the country’s trade issues. □ □ □The memo clearly communicates the benefits of free trade. □ □ □The memo displays understanding of protectionist measures and their effects. □ □ □The memo carefully considers the factors of production. □ □ □The tone of the memo is professional. □ □ □The memo is neat, legible, and presentable, and uses proper spelling and grammar. □ □ □

Additional Comments:

_____________________________________________________________________________

_____________________________________________________________________________

_____________________________________________________________________________

_____________________________________________________________________________




Key Vocabulary: International TradeTerm Definition

absolute advantage When a firm can produce a particular good more efficiently than any other firm.

barter Trading one product or service for another without using money.

bilateral Involving two parties, usually countries.

capital Any form of wealth used to produce more wealth; a factor of production. Capital includes manufacturing equipment and other types of equipment that are not expended in the production process.

comparative advantage When a firm can produce a good at a lower opportunity cost than another firm.

dumping When a product for import is priced below its cost of production.

export A product sent to another country for sale.

export subsidy Governmental financial support to an industry to help it stay competitive.

factors of production The resources a firm has available to produce goods and services; in economic theory these resources are defined as land, labor, and capital.

General Agreement on Tariffs and Trade (GATT)

An agreement in effect from 1948 to 1994 that aimed to help world economic recovery after World War II by reducing the very high barriers to international trade.

import A good or service brought into another country.

import restriction A government policy, such as a tariff or a quota, that restricts or competitively disadvantages imports.

labor Work done by people; a factor of production.

land Includes acres of ground and natural resources like oil or minerals; a factor of production.

money A medium that can be exchanged for goods and services and is used as a measure of their values on the market.

multilateral Participated in by three or more parties, usually the governments of different countries.



Term Definition

opportunity cost The true cost of something, which includes what has to be given up in order to obtain it.

protectionism Government policy and laws restricting international trade.

specialization When firms in a country concentrate on producing a product they have advantages producing, allowing these firms, and the country in which they are located, to become the most efficient producers of the product. Government regulations often contribute to specialization.

trade The exchange of goods or services between two or more parties.

trade agreement A treaty or pact that governments of two or more countries enter into to reduce barriers to international trade.

trade balance The difference in value over a period of time of a country's imports and exports.

trade deficit When the value of a country’s imports is greater than the value of its exports. Also refers to when a company’s expenditures to produce a product or service exceed its revenues from selling it.

trade surplus When the value of a country’s exports is greater than the value of its imports.

World Trade Organization (WTO)

Organization that succeeded GATT and was founded to further reduce international trade barriers.




Bibliography: International TradeThe following sources were used in the preparation of this lesson and may be useful for your reference or as classroom resources. We check and update the URLs annually to ensure that they continue to be useful.

PrintCzinkota, Michael R., et al. Fundamentals of International Business. Mason, Ohio: South-Western, 2004.

Hill, Charles W. L. Global Business Today. New York: McGraw-Hill, 2006.

Online“Comparative Advantage.” Wikipedia, http://en.wikipedia.org/wiki/Comparative_advantage (accessed May 11, 2016).

“The Desert Island Trading Game.” Desert Island Game, http://desertislandgame.com/ (accessed May 11, 2016).

“Economics A‒Z Terms Beginning with A.” Economist, http://www.economist.com/economics-a-to-z (accessed May 11, 2016).

“Factors of Production—the Economic Lowdown Podcast Series, Episode 2,” Federal Reserve Bank of St. Louis, https://www.stlouisfed.org/education/economic-lowdown-podcast-series/episode-2-factors-of-production (accessed May 11, 2016).

“January 2016 Trade Gap is $45.7 Billion,” U.S. Department of Commerce Bureau of Economic Analysis, https://blog.bea.gov/category/trade-deficit/ (accessed May 11, 2016).

Johnson, Paul M. “A Glossary of Political Economy Terms.” Auburn University, http://www.auburn.edu/~johnspm/gloss/specialization (accessed May 11, 2016).

Kliegman, Julie. “Obama Says U.S. Produces More Oil Than It Imports for First Time in Nearly 20 Years,” Politifact, http://www.politifact.com/truth-o-meter/statements/2014/jan/17/barack-obama/obama-says-us-produces-more-oil-it-imports-first-t/ (accessed May 11, 2016).

Krugman, Paul. “Ricardo’s Difficult Idea”, http://web.mit.edu/krugman/www/ricardo.htm (accessed May 11, 2016).

“List of Free Trade Agreements.” Wikipedia, http://en.wikipedia.org/wiki/List_of_free_trade_agreements (accessed May 11, 2016).

Sloman, John. “The International Trade Game.” Economics Network, http://www.economicsnetwork.ac.uk/showcase/sloman_game.htm (accessed May 11, 2016).

“Top US Exports to the World.” World’s Richest Countries, http://www.worldsrichestcountries.com/top_us_exports.html (accessed May 11, 2016)

“Top US Imports from the World.” World’s Richest Countries, http://www.worldsrichestcountries.com/top_us_imports.html (accessed May 11, 2016)

“Trade.” Nobelprize.org, http://nobelprize.org/educational_games/economics/trade/ (accessed May 11, 2016).

“Trading Around the World.” IMF, http://www.imf.org/external/np/exr/center/students/trade/index.htm (accessed May 11, 2016).


http://www.imf.org/external/np/exr/center/students/trade/index.htm

http://nobelprize.org/educational_games/economics/trade/

http://www.worldsrichestcountries.com/top_us_imports.html

http://www.worldsrichestcountries.com/top_us_exports.html

http://www.economicsnetwork.ac.uk/showcase/sloman_game.htm

http://en.wikipedia.org/wiki/List_of_free_trade_agreements

http://web.mit.edu/krugman/www/ricardo.htm

http://www.politifact.com/truth-o-meter/statements/2014/jan/17/barack-obama/obama-says-us-produces-more-oil-it-imports

http://www.politifact.com/truth-o-meter/statements/2014/jan/17/barack-obama/obama-says-us-produces-more-oil-it-imports

http://www.auburn.edu/~johnspm/gloss/specialization

https://blog.bea.gov/category/trade-deficit/

https://www.stlouisfed.org/education/economic-lowdown-podcast-series/episode-2-factors-of-production

https://www.stlouisfed.org/education/economic-lowdown-podcast-series/episode-2-factors-of-production

http://www.economist.com/economics-a-to-z%20

http://desertislandgame.com/

http://en.wikipedia.org/wiki/Comparative_advantage


“U.S. Census Bureau, U.S. Bureau of Economic Analysis News.” US Bureau of Economic Analysis, http://www.bea.gov/newsreleases/international/trade/2013/pdf/trad1212.pdf (accessed May 11, 2016).


http://www.bea.gov/newsreleases/international/trade/2013/pdf/trad1212.pdf

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