ECONOMICS: PART 2

INTERNATIONAL TRADE

The unequal distribution of resources promotes a complex network of trade among countries.

ECONOMIC INDICATORS: TRADE

Every country in the world posses different types and quantities of resources.

When nations do not have all the resources and goods that they want, they usually establish a trading network.

In addition, countries may specialize in producing certain goods or services, rather than producing all the items they may need or desire.

ECONOMIC INDICATORS: TRADE

Exports/Imports

Items that countries have in abundance are sold to other countries. These are called exports.

Items that are in short supply are bought from other countries. These are called imports.

EXAMPLESWhat types of goods does the U.S. export the

most?capital goods, industrial supplies, raw materials, agriculture products, and automobiles

What types of goods does the U.S. import the most?crude oil, refined petroleum, automobiles, food and beverages, raw materials, and consumer goods

TRADE BALANCE

Why governments try to balance their countries imports and exports: If people buy too many foreign goods,

domestic businesses may loose profits and fail.

Excessive imports increases a country’s debt to other countries which weakens the economy.

SPECIALIZATION

The key to international trade is specialization.

Specialization is the idea of countries only making those products that they produce the most efficiently.

Absolute Advantage is a country’s ability to produce more of a given product than can another country

Comparative Advantage is a country’s ability to produce a given product relatively more efficiently than another country – or – production at a lower opportunity cost

Opportunity Cost is the value of the next-best alternative that must be given up when scarce resources are used for one purpose instead of another.

NOTE ON SPECIALIZATION

Even though one country may have an absolute advantage over another country in producing all concerned products it can still be beneficial for both countries to specialize and trade.

“Yard Work”

ECONOMIC INDICATORS: TRADE

Trade AlliancesBecause the international marketplace is interdependent, many countries create free-trade agreements or join international organizations to promote free-trade and the reduction of trade barriers.

EXAMPLES

WTO – World Trade Organization

World Bank

IMF - International Monetary Fund