Resource Distribution

• Chapter 17

• Chapter 17, Section 1

Resource Distribution

• The factors of production are not evenly distributed throughout the world
• Human capital is more skilled in nations with higher literacy rates
• Physical capital is deeper in some nations
• Better machinery
• Infrastructure is better

Resource Distribution

• The unequal distribution of resources encourages nations to specialize
• Although some countries could be self sufficient, it is to their advantage to specialize...why?

Absolute and Comparative Advantage

• Absolute advantage...when one nation can produce a good at a lower cost than another
• Comparative advantage...the ability for a nation to produce at a lower opportunity cost
• The nation with the lowest opportunity cost should specialize in that product
• Known as the law of comparative advantage

International Trade

• Since some countries may have a comparative advantage over others, it makes sense for them to trade
• The US and trade
• The US is the largest importer and one of the top three exporters of goods (Germany and China)

US Exports

• The US is among the top three exporters in the world
• Flips with Germany and China
• China current leader (since 2009)

US Imports

• We are also one of the largest importers.
• In total, we import more than we export
• We have a trade deficit

Trade on Employment

• International trade has caused many changes and trends in employment
• Due to comparative advantage, workers need to gain certain skills in order to find employment

• Chapter 17, Section 2

Free Trade?

• Many people argue that governments should regulate trade in order to protect industries and jobs from foreign competition
• This is known as protectionism
• Many nations set up trade barriers in order to provide protectionism

Trade Barriers

• Trade barriers...trade restrictions that prevent foreign products or services from freely entering a nation’s territory
• Import quotas...limits on the amount that can be imported
• Voluntary Export Restraints...self imposed export restraint (hopes to avoid import quotas

Trade Barriers

• Tariffs...taxes on imported goods
• Customs duty
• Used to encourage purchasing of domestic products
• Other Trade Barriers
• Licenses
• Standards of production

Effects of Trade Barriers

• Increased prices for foreign goods
• Trade Wars
• When countries institute restrictions on each other
• Usually leads to poor trade for both countries

Arguments for Protectionism

• Protects jobs
• Protects infant industries
• Protects national security

International Trade Agreements

• Recent trends are encouraging free trade…why?
• Raises living standards
• Encourages world peace
• Promotes competition
• International Free Trade Agreements
• Cooperation of two or more countries to reduce trade barriers

World Trade Organization

• GATT...general agreement on tariffs and trade...founded in 1948
• WTO…a worldwide organization whose goal is freer global trade and lower tariffs...founded in 1995 to ensure GATT
• Acts as a referee for trade agreements

Free Trade Zones

• Areas established by countries to reduce or eliminate trade barriers
• Two such Organizations
• European Union (EU)
• North American Free Trade Agreement (NAFTA)

European Union

• Regional trade organization made up of 27 member nations
• Essentially developed a single market (EEC...European Economic Community) in Europe
• Goal is to create a single economy that rivals the US
• Currently the largest trading partner of the US
• Canada and Mexico are next

• http://europa.eu.int/euro/

EU

NAFTA

• Created to eliminate all tariffs and barriers in the region (Canada, Mexico, US)
• Ratified in 1994
• Although there has been much controversy, NAFTA has increased trade between the three nations

• Chapter 17, Section 3

Exchange Rates

• Value of a foreign nation’s currency in terms of the home nation’s currency
• Exchange rates fluctuate on a daily basis with the strength and weakness of a nation’s currency
• Based on supply and demand for currency

Strength of Currency

• Appreciation...increase in the value of currency
• When a currency appreciates, exports decline
• Products are more expensive
• Depreciation...decrease in the value of currency
• When a currency depreciates, exports rise
• Products become cheaper

Exchange Rate Systems

• Fixed Exchange Rate System...governments try to keep their currency constant with another
• Known as pegging currency
• China
• Flexible Exchange Rate System...exchange rate is determined by supply and demand and it fluctuates
• Used by most major currencies today

Balance of Trade

• Trade surplus...export more than you import
• Trade deficit...import more than you export
• Balance of trade...relationship between exports and imports