Chap17 Fundamental Economic Concepts

As you read this unit, learn how the study ofeconomics helps answer the following questions:

Why do imported goods sometimescost more than domesticallyproduced goods?

Why did capitalism triumph overcommunism?

How do population growth rates on the other side of the world affect you?

CHAPTER 17

International TradeCHAPTER 18

Comparative Economic SystemsCHAPTER 19

Developing CountriesCHAPTER 20

Global Economic Challenges

464 UNIT 5 INTERNATIONAL AND GLOBAL ECONOMICS

To learn more about global economics through infor-mation, activities, and links to other sites, visit theEconomics: Principles and Practices Web site atepp.glencoe.com

International trade—boththe importing and export-ing of goods—is essentialto the U.S. economy.

http://epp.glencoe.com

Look at the labels on

your clothes, in your

shoes, on food products you

buy, or even on the car you

drive—and you see why

international trade is important

to everyone. In Chapter 17, you

will learn about the role

international trade plays in the

American economy. To learn

more about global commerce,

view the Chapter 24 video

lesson:

International Trade

Chapter Overview Visit the Economics: Principlesand Practices Web site at epp.glencoe.com andclick on Chapter 17—Chapter Overviews to pre-view chapter information.

Tourism is an important partof the global economy.


Absolute and Comparative Advantage

Main IdeaNations trade according to the theory of comparativeadvantage.

Reading StrategyGraphic Organizer As you read the section, completegraphic organizers similar to the ones below by defin-ing each term and providing an example of each.

Key Terms exports, imports, absolute advantage, comparativeadvantage

ObjectivesAfter studying this section, you will be able to:1. Explain the importance of international trade

in today’s economy.2. Describe the basis for international trade.3. Explain why total world output increases when

countries specialize to engage in trade.

Applying Economic ConceptsComparative Advantage When you do the choresaround the house, you are probably better at somethan others. Read to find out how the concept ofcomparative advantage helps everyone become more productive.

Comparativeadvantage

Definition

Example

Absoluteadvantage

Definition

Example

Cover Story

Human Cost of Arms Race“Every gun that is made,

every warship launched, every

rocket fired, signifies in the

final sense a theft from those

who hunger and are not fed,

those who are cold and are not

clothed.”Who said this? No, it wasn’t

a pacifist like Gandhi or Martin

Luther King. It was General

Dwight David Eisenhower, the supreme commander

of all allied forces in . . . World War II–and later the

President of the United States. . . .

[T]he New York Times . . . [recently reported]

that India will spend at least $100 billion on defense in

the coming decade. 100 billion . . . dollars! How

many children could be fed in that amount, how many

sick people given relief, how many schools built, how

many wells dug?—The Progressive Magazine, May 9, 2003

Does the arms racecost too much?

T he key to trade—whether among people, states,or countries—is specialization. Some peoplespecialize in cutting hair. Others specialize in

fixing computers. These people exchange their serv-ices for money, which they then use to buy the spe-cialized goods and services they need from others.

Different regions of a country specialize in cer-tain economic activities in much the same way.New York, for example, is a center of the U.S.financial industry, and Detroit specializes in auto-mobiles. The Midwest and High Plains areas areknown for wheat farming. Texas is recognized foroil and cattle, while Florida and California arefamous for citrus fruit. All of these states tradewith one another so that people in one area canconsume the goods and services that workers inother areas offer.

If you want to find out what a country special-izes in, look at its exports—the goods and servicesthat it produces and then sells to other nations.

CHAPTER 17: INTERNATIONAL TRADE 467

467_GLENEPP 11/5/03 7:41 PM 67

The U.S. and International TradeInternational trade is important to allnations, even a country as large as the

United States. Most of the products exchangedare goods, although services, such as insuranceand banking, are being bought and sold inincreasing numbers.

In 2003, imports—goods and services that onecountry buys from other countries—amounted toabout $1,590 billion. This number corresponds tonearly $5,460 for every person in the country, andit has grown steadily over the years.

Figure 17.1 shows the merchandise trade patternsfor the United States and the rest of the world. Aslarge as these numbers are, they would be even

bigger if we counted the value of services in addi-tion to the merchandise, or goods, shown in the fig-ure. The sheer volume of trade between nations ofsuch different geographic, political, and religiouscharacteristics is proof that trade is beneficial.

In fact, nations trade for the same reasons thatindividuals do—they trade because they believe thatthe products they receive are worth more than theproducts they give up.

Without international trade, many productswould not be available on the world market.Bananas, for example, would not leave Honduras,nor would coffee beans leave Colombia or Brazil.Some people may think of international trade as away to obtain exotic products, but trade is much

E C O N O M I C SA T A G L A N C EE C O N O M I C SA T A G L A N C E Figure 17.1Figure 17.1

Using ChartsUsing Charts The United States exports merchandise (goods) all over the world. The biggest trade imbalance is with Japan, followed by Western Europe and Canada. Which single area of the world trades the most with the United States?

United States Merchandise Trade by Area

$127

$56

$219

$171

$241

$20

$60

$306$473$16

$13

IN BILLIONSOF DOLLARS

United States $ billions % of GDPImportsExportsTrade Deficit

$1,146719427

11%7%4%

$163

Japan Western EuropeCanada

OPEC MembersIraqLibyaAlgeriaVenezuelaIndonesiaNigeriaUnited Arab EmiratesSaudi ArabiaQatarKuwaitIran

Rest of the world

Western Europe

Source: Economic Report of the President, 2003

AustraliaNew ZealandSouth Africa

Visit epp.glencoe.com and click onTextbook Updates—Chapter 17 foran update of the data.


468_GLENEPP 11/5/03 7:43 PM Page 468


more than that. Many imports are necessities, suchas crude oil, clothing, and shoes. In the UnitedStates, many minerals, metals, and raw materialsthat are not available must be imported.

The Basis for TradeIn many cases, it may be cheaper for a coun-try to import a product than to manufacture

it. This becomes clear when we examine the differ-ence between absolute and comparative advantage.

Absolute Advantage A country has an absolute advantage when it

can produce a product more efficiently (i.e., withgreater output per unit of input) than can anothercountry. Consider, for example, the hypotheticalcase of two countries—Alpha and Beta—which arethe same size in terms of area, population, and cap-ital stock. Only their climate and soil fertilities dif-fer. In each country, only two crops can begrown—coffee and cashew nuts.

Figure 17.2 shows the production possibilitiesfrontiers for Alpha and Beta. Note that if bothcountries devote all of their efforts to producingcoffee, Alpha could produce 40 million pounds andBeta six million—giving Alpha an absolute advan-tage in the coffee production. However, if bothcountries devote all their efforts to the productionof cashew nuts, Alpha could produce eight millionpounds and Beta six million. Alpha, then, also hasan absolute advantage in the production of cashewnuts because it can produce more than Beta.

For years, people thought that absolute advantagewas the basis for trade because it enabled a countryto produce enough of a good to consume domesti-cally while leaving some for export. However, theconcept of absolute advantage did not explain howa country with a large output like Alpha couldtrade with a country having a smaller output likeBeta—and yet have both countries benefit from theexchange.

Comparative Advantage Even when one country enjoys an absolute

advantage in the production of all goods—as in thecase of Alpha above—trade between it and another


Using GraphsUsing Graphs If Alpha and Beta each specializes in the product it can produce relatively more efficiently, total output for both countries goes up. After specialization, each country would trade its surplus production with its neighbor. Does Alpha or Beta have a comparative advantage in the production of coffee?

The Gains From Trade

40

20 a

84

Coff

ee

Cashew Nuts

Alpha

0

After specialization

Before specialization

Alpha’s opportunity costof production:

8 cashews = 40 coffee,or 1 cashew = 5 coffee

65

1 6

Coff

ee

Cashew Nuts

Beta

0

After specialization

Beta’s opportunity cost:6 cashews = 6 coffee,

or 1 cashew = 1 coffee,Beta is the lower costcashew nut producer.

Total OutputBefore Specializing

CoffeeAlpha Beta

20 + = 255Cashews 4 + = 51

Total OutputAfter Specializing

CoffeeAlpha Beta

40 + = 400Cashews 0 + = 66

a’

Beforespecialization

(Coffee and nuts measured in pounds)

bb’


country is still beneficial. This happens whenever acountry has a comparative advantage—the abilityto produce a product relatively more efficiently, orat a lower opportunity cost.

To illustrate, because Alpha can produce either40 pounds of coffee or 8 pounds of cashew nuts,the opportunity cost of producing 1 pound ofcashew nuts is 5 pounds of coffee (40 pounds ofcoffee divided by 8). At the same time, Beta’sopportunity cost of producing 1 pound of cashewnuts is 1 pound of coffee (6 pounds of coffeedivided by 6). Clearly, Beta is the lower-cost pro-ducer of cashew nuts because its opportunity costof producing 1 pound of nuts is 1 pound of coffee—whereas Alpha would have to give up 5 pounds ofcoffee to produce the same amount of cashews.

If Beta has a comparative advantage in produc-ing cashews, then Alpha must have a comparativeadvantage in coffee production. Indeed, if we tryto find each country’s opportunity cost of pro-ducing coffee, we would find that Alpha’s oppor-tunity cost of producing 1 pound of coffee is 1/5of a pound of cashews (8 pounds of cashewsdivided by 40). Using the same computations,Beta’s opportunity cost is 1 pound of cashews (6pounds of cashews divided by 6). Alpha, then, hasa comparative advantage in coffee production,because its opportunity cost of production islower than Beta’s.

The Gains From TradeThe concept of comparative advantage isbased on the assumption that everyone will be

better off producing the products they produce rela-tively best. This applies to individuals, companies,states, and regions as well as to nations. The finalresult is that specialization and trade increases totalworld output, just as in the case of Alpha and Beta.

This explains the nature of trade between theUnited States and a country such as Colombia. TheUnited States has excellent supplies of iron andcoal. It also has the capital and the labor that areneeded to produce tractors and farm machineryefficiently. Colombia, in contrast, does not have asmuch capital or skilled labor. It does, however,have the land, labor, and climate to produce coffeeefficiently. Because the United States has a com-parative advantage in the production of farmmachinery, it will trade these products forColombian coffee. Because Colombia has a com-parative advantage in the production of coffee, itwill export coffee and import farm equipment.

For similar reasons, a country like Saudi Arabiaproduces more crude oil than it can consume—enabling it to export the surplus. The UnitedStates, in turn, produces more military aircraft thanit consumes—allowing it to sell aircraft to SaudiArabia in exchange for oil.

Checking for Understanding 1. Main Idea What does the theory of compara-

tive advantage offer as a guideline to countries?

2. Key Terms Define exports, imports, absoluteadvantage, comparative advantage.

3. Explain why international trade is importantin today’s economy.

4. Explain the concepts of absolute advantageand comparative advantage.

5. Explain why total world output increases ascountries specialize to engage in trade.

Applying Economic Concepts6. Comparative Advantage If you were to open

a business with two of your best friends, howwould you divide the work to be done?Would your decisions regarding who doeswhat reflect comparative advantage? Explain.

7. Making Generalizations Do you know of aproduct for which your state has a compar-ative advantage? Explain how this mightaffect trade with another state.

Practice and assess key social studies skills withthe Glencoe Skillbuilder Interactive Workbook,Level 2.


Marketing Savvy:

Bill Gates(1955–)

One unavoidable fact about Bill Gates, cofounder of Microsoft,is that with a net worth of billionsof dollars, he is one of the richestmen in the world.

Gates is matter-of-fact aboutthe reason for his wealth. “Oursuccess,” he says, “is based ononly one thing: good products.It’s not very complicated.” To hismany critics, however, the story isnot so simple.

A TEENAGE WIZARD

While in high school, Gatesdesigned a class scheduling pro-gram so that he could take courseswith the prettiest girls in his school.He also started Traf-O-Data, acomputer traffic analysis company.

At age 19, Gates dropped out of Harvard University to pursuehis interest in computers. He andhis friend Paul Allen developed acondensed operating-system lan-guage, which they licensed to acomputer manufacturer. Based onthis success, Gates and Allenestablished Microsoft Corporation in 1975.

INTO THE B IG LEAGUES

In 1980 computer industrygiant IBM asked Gates to developan operating system for its newpersonal computer. Gates boughtan operating system from a smallcompany, revamped it, andlicensed it to IBM. The systemwas called MS-DOS, forMicrosoft Disk Operating System.The key fact is that Gates licensedMS-DOS to IBM—he didn’t sell itto them. Because he retainedownership of MS-DOS, he wasable to market it to other compa-nies. In 1981 IBM unveiled itsPC, setting off the personal com-puter boom. MS-DOS becamethe dominant operating system inthe market, and propelled Gatesto wealth.

When Microsoft went public in1986, Gates, who owned 45 percentof the company, became a million-aire several hundred times over.

CONTROVERSIAL SUCCESS

By 1993 Microsoft operatingsystems ran nearly 90 percent ofthe world’s PCs. Much of Gates’ssuccess came from his unique com-bination of technological expertiseand an understanding of the com-puter needs of the average user.But not everyone attributes Gates’ssuccess to know-how and market-ing. Many view Gates’s Microsoftas an industry bully, forcing would-be competitors out of the market.In fact, the Justice Department andmany states have pursued antitrustlegislation against Microsoft.

Examining the Profile1. Predicting Consequences How

might the Microsoft story have beendifferent if Gates had sold MS-DOS toIBM rather than licensing it?

2. For Further Research Report thecurrent status of the lawsuits againstMicrosoft.


Barriers to International Trade

Main IdeaTariffs and quotas are two restrictions on interna-tional trade.

Reading StrategyGraphic Organizer As you read the section, completea graphic organizer similar to the one below bydescribing the differences between a tariff and aquota.

Key Terms tariff, quota, protective tariff, revenue tariff, dump-ing, protectionists, free traders, infant industries

argument, balance of payments, most favored nation clause, World Trade Organization (WTO), North American Free Trade Agreement (NAFTA)

ObjectivesAfter studying this section, you will be able to:1. Explain how international trade can be restricted

to protect special interests.2. Cite the main argument used in support of

protection.3. Relate the history of the free trade movement.

Applying Economic ConceptsQuotas Do you think the prices of some goods aretoo high? Read to find out how international tradecan help keep some prices low.

DifferencesTariff/Quota

A lthough international trade can bring manybenefits, some people object to it because itcan displace selected industries and groups

of workers in the United States. The European banon American hormone-treated beef discussed inthe cover story is just one example of attempts torestrict trade.

Restricting International TradeHistorically, trade has been restricted intwo major ways. One is through a tariff—a

tax placed on imports to increase their price in thedomestic market. The other is with a quota—alimit placed on the quantities of a product thatcan be imported.

Tariffs Governments levy two kinds of tariffs—protec-

tive and revenue. A protective tariff is a tariff highenough to protect less-efficient domestic industries.Suppose, for example, that it costs $1 to produce amechanical pencil in the United States. The exact

Cover Story

US Gets Go-Ahead for European

SanctionsThe World Trade

Organization yesterday

authorized the US to

impose trade sanctions

on European Union

goods in retaliation

for the EU’s ban on

hormone-treated beef.

From July 29, the US will impose punitive 100 per-

cent duties on imports from the EU, including delica-

cies such as foie gras, truffles, and Roquefort cheese

as well as beef, pork, canned tomatoes and mustard.

US officials said last week the sanctions, worth a

total of $116.8 [million] would target goods from

France, Germany, Italy and Denmark as these were

the countries most influential in preserving the 10-

year-old beef hormone ban.

—The Financial Times, July 27, 1999

French delicacies subject to

U.S. duties

472

same product, however, can be imported for 35 centsfrom another country. If a tariff of 95 cents is placedon each imported pencil, the cost climbs to $1.30—more than the cost of the American-made one. Theresult is that a domestic industry is protected frombeing undersold by a foreign one.

The revenue tariff is a tariff high enough to gen-erate revenue for the government without actuallyprohibiting imports. If the tariff on importedmechanical pencils were 40 cents, the price of theimports would be 75 cents, or 25 cents less than theAmerican-made ones. As long as the two productsare identical, people would prefer the importedone because it was less expensive—so the tariffwould raise revenue rather than protect domesticproducers from foreign competition.

Traditionally, tariffs were used more for revenuesthan for protection. Before the Civil War, tariffswere the chief source of revenue for the federal gov-ernment. From the Civil War to 1913, tariffs pro-vided about one-half of the government’s totalrevenue. In 1913 the federal income tax was passed,which gave the government a new and more lucra-tive source of revenue. Modern tariffs—also calledcustoms duties—only account for a small portion oftotal government revenue, as shown in Figure 9.4on page 232.

Quotas Foreign goods sometimes cost so little that

even a high tariff on them may not protect thedomestic market. In such cases, the governmentcan use a quota to keep foreign goods out of the

country. Quotas can even be set as low as zero tokeep a product from ever entering the country.More typically, quotas are used to reduce the totalsupply of a product to keep prices high for domes-tic producers.

In 1981, for example, domestic automobile pro-ducers faced intense competition from lower-priced Japanese automobiles. Rather than lowertheir own prices, domestic manufacturers wantedPresident Ronald Reagan to establish import quo-tas on Japanese cars. The Reagan administrationtold the Japanese to voluntarily restrict autoexports, and they reluctantly agreed. As a result,Americans had fewer cars from which to choose,and the prices of all cars were higher than theywould otherwise have been.

During the Bush administration, “voluntary”import quotas were imposed on steel. The quotasprotected jobs in the domestic steel industry, but atthe cost of higher steel prices for the rest of thecountry. A trade crisis emerged in mid-1997 when

INFOBYTEINFOBYTE

The Trade Balance This term refers to the dif-ference between exports and imports. In theUnited States, we continue to import more thanwe export and are therefore experiencing a tradedeficit. Because international trade is significant toGDP forecasts, this Department of Commerce sta-tistic is important. The standard release time isaround the 22nd of each month.

Protectionism

Jobs These citizens are protesting the loss ofmanufacturing jobs in the face of competitionfrom other countries. What is the purpose of aprotective tariff?


charges of dumping, or selling products abroad atless than it cost to produce them at home, werelevied against Japan and Russia.

Other Barriers Tariffs and quotas are not the only barriers

to trade. Many imported foods are subject tohealth inspections far more rigorous than thosegiven to domestic foods. For years this tactic wasused to keep beef grown in Argentina out of theUnited States. Another tactic is to require a licenseto import. If the government is slow to grant thelicense, or if the license fees are too high, interna-tional trade is restricted. Other nations also usehealth issues to restrict trade. Several Europeancountries, for example, refuse to import geneticallyaltered crops.

Nationalism and culture often play a role inthese debates, with Europeans frequently claimingthat they prefer regional and traditional foods togenetically altered ones. While these may or maynot be legitimate arguments, they do restrict trade.

Arguments for ProtectionFreer international trade has been a subject ofdebate for many years. Some people, known

as protectionists, favor trade barriers that protectdomestic industries. Others, known as free traders,favor fewer or even no trade restrictions. The debatebetween the two groups usually centers on the fivearguments for protection discussed below.

National Defense The first argument for trade barriers centers on

national defense. Protectionists argue that with-out trade barriers, a country could become sospecialized that it would end up becoming toodependent on other countries.

During wartime, protectionists argue, a countrymight not be able to get critical supplies such as oiland weapons. As a result, even some smaller coun-tries such as Israel and South Africa have developedlarge armaments industries for such crises. Theywant to be sure they will have a domestic supply ifhostilities break out or other countries imposeeconomic boycotts.

Free traders admit that national security is acompelling argument for trade barriers. Theybelieve, however, that the advantages of having areliable source of domestic supply must beweighed against the disadvantages that the supplywill be smaller and possibly less efficient than itwould be with free trade. The political problem ofdeciding which industries are critical to nationaldefense and which are not must also be consid-ered. At one time, the steel, auto, ceramic, andelectronics industries all have argued that they arecritical to national defense and so should receiveprotection.

Promoting Infant Industries The infant industries argument—the belief that

new or emerging industries should be protectedfrom foreign competition—is also used to justifytrade barriers. Protectionists claim that theseindustries need to gain strength and experiencebefore they can compete against developed indus-tries in other countries. Trade barriers would givethem the time they need to develop. If infant

Adam Smith’s Wealth of Nations supplied powerfularguments for free trade. In the early 1800s, British economist David Ricardo expanded on Smith’s ideasby observing that it pays to specialize and trade,even if a potential trading partner is more produc-tive in all economic activities. His work was vital indeveloping the idea of comparative advantage as anargument in support of free trade.

According to Ricardo’s theory, a country does nothave to be the best at anything to gain from trade.If a country is relatively better at making ProductA than Product B, it makes sense to put moreresources into Product A and to trade Product A topay for imports of Product B. Benefits come fromspecializing in those economic activities which, atworld prices, the country is relatively better at,even though it may not possess an absolute advan-tage in them. The two countries can both gainfrom trade, provided that they trade along thelines of comparative advantage.


industries compete against foreign in-dustries too soon, they argue, theymight fail.

Many people are willing to acceptthe infant industries argument, butonly if protection will eventually beremoved so that the industry is forcedto compete on its own. The problem isthat industries used to having someprotection are normally unwilling togive it up—making for difficult politicaldecisions later on.

To illustrate, some Latin Americancountries have used tariffs to protecttheir own infant automobile industries,with tariffs as high as several hundredpercent. In some cases, the tariff raisedthe price of used American-made carsto more than double the cost of newones in the United States. In spite ofthis protection, no country in LatinAmerica has been able to produce acompetitive product on its own. Tomake matters worse, governments havecome to rely on the revenue suppliedby tariffs, so prices for automobilesremain high for their citizens.

Protecting Domestic Jobs A third argument—and one used most often—is

that tariffs and quotas protect domestic jobs fromcheap foreign labor. Workers in the shoe industry,for example, have protested the import of lower-cost Italian, Spanish, and Brazilian shoes. Garmentworkers have opposed the import of lower-costKorean, Chinese, and Indian clothing. Steelworkershave blocked foreign-made cars from companyparking lots to show their displeasure with the foreign-made steel used in producing the cars.

In the short run, protectionist measures providetemporary protection for domestic jobs. This isespecially attractive to people who want to work inthe communities where they grew up. In the longrun, however, industries that find it hard to com-pete today will find it even harder to compete in thefuture unless they change the way they are doingthings. As a result, most free traders believe that it is

best not to interfere, and thereby keep pressure onthreatened industries to modernize and improve.

When inefficient industries are protected, theeconomy produces less and the standard of livinggoes down. Because of unnecessarily high prices,people buy less of everything, including thosegoods produced by protected industries. If pricesget too high, substitute products will be found andprotected jobs will still be lost. Free traders arguethat the profit-and-loss system is one of the majorfeatures of the American economy. Profits rewardthe efficient and hard working, while losses elimi-nate the inefficient and weak.

Keeping the Money at Home Another argument for trade barriers claims that

limiting imports will keep American money in theUnited States instead of allowing it to go abroad.Free traders, however, point out that the Americandollars that go abroad generally come back again.

International Trade

Expansion With the great expansion of trade, many U.S.companies set up operations in other countries. Protectionistsfavor trade barriers that protect domestic industries. What isthe assumption behind the infant industries argument?


The Japanese, for example, use the dollars theyreceive for their automobiles to buy American cotton, soybeans, and airplanes. These purchasesbenefit American workers in those industries.

The same is true of the dollars used to buy oilfrom the Middle East. The money comes back tothe United States when oil-wealthy foreigners buyAmerican-made oil technology. Keeping themoney home also hurts those American industriesthat depend on exports for their jobs.

Helping the Balance of Payments Another argument involves the balance of

payments—the difference between the money acountry pays out to, and receives from, other nationswhen it engages in international trade. Protectionistsargue that restrictions on imports help the balance ofpayments by restricting the amount of imports.

What protectionists overlook, however, is thatthe dollars return to the United States to stimulate

employment in other industries. As a result, mosteconomists do not believe that interfering with freetrade can be justified on the grounds of helping thebalance of payments.

The Free Trade MovementThe use of trade barriers to protect domesticindustries and jobs works only if other coun-

tries do not retaliate with their own trade barriers.If they do, all countries suffer because they haveneither the benefits of efficient production noraccess to less costly products and raw materialsfrom other nations.

Tariffs During the Great Depression In 1930 the United States passed the Smoot-

Hawley Tariff, one of the most restrictive tariffs inhistory. It set import duties so high that the price

THE ART OFCOMMUNICATIONWith the globalization of business, it is necessaryto understand and to adjust to the communica-tion style of other cultures.

Only in the Germanic countries will the peoplebe as eager to get down to business as in theUnited States of America. Almost anywhere else inthe world, but especially in Asian and Latin coun-tries, it’s important to first get to know the personwith whom you’re dealing to build a bond of trust.Three f’s of business in Asian cultures are family,friends and favors. If you’re not part of anextended Asian family or if you don’t have closeAsian chums from your school days, find the time todevelop a friendship with a well-connected inter-mediary [agent]. Relationships, once formed, arelong lasting bonds of loyalty that must berespected. . . .

Space is one of those seemingly inconsequentialaspects of human interaction that can have majorconsequences elsewhere. The American personalbubble of space is much greater than that of anArab or a Russian, but smaller than that of a Briton.Infringing upon another’s personal space or inad-vertently backing away when someone enters yourbubble can send unintended negative messages.Touching someone—a hand on the forearm, an armaround the shoulder, or a pat on the back—is one ofthe easiest ways to violate personal space.

—Etiquette International

1. Analyzing Information What does thewriter mean by “space”? Explain the con-cept in your own words.

2. Summarizing Information What does itmean to say that “the American bubble ofspace is much greater than that of an Arabor Russian”?

3. Drawing Conclusions Why is it importantto understand the values of another cul-ture when doing business?

Critical Thinking


of many imported goods rose nearly 70 percent.When other countries did the same, internationaltrade nearly came to a halt.

Before long, most countries realized that hightariffs hurt more than they helped. As a result, in1934 the United States passed the Reciprocal TradeAgreements Act, which allowed it to reduce tariffsup to 50 percent if other countries agreed to do thesame. The act also contained a most favorednation clause—a provision allowing a country toreceive the same tariff reduction that the UnitedStates negotiates with a third country.

Suppose, for example, that the United States andChina have a trade agreement with a most favorednation clause. If the United States then negotiates atariff reduction with a third country, the reductionwould also apply to China. This clause is veryimportant to China, because its goods will then sellat an even lower price in the American market.

The World Trade Organization In 1947, 23 countries signed the General

Agreement on Tariffs and Trade (GATT). TheGATT extended tariff concessions and worked to

do away with import quotas. Later, the TradeExpansion Act of 1962 gave the president of theUnited States the power to negotiate further tariffreductions. As a result of this legislation, more than100 countries had agreed to reduce the average levelof tariffs by the early 1990s.

More recently, the GATT was replaced by theWorld Trade Organization (WTO)—an internationalagency that administers previous GATT trade agree-ments, settles trade disputes between governments,organizes trade negotiations, and provides technicalassistance and training for developing countries. Asyou read in the cover story, the WTO agreed thatEurope was discriminating against the United Statesby banning hormone-treated beef. While the WTOnormally opposes retaliatory measures, it approvedthe U.S. measures because the European Unionignored earlier WTO demands to drop Americanbeef restrictions.

Because so many countries have been willing toreduce tariffs and quotas under GATT and theWTO, international trade is flourishing. Tariffs thatonce nearly doubled the price of many goods nowincrease prices by a small percentage, while othertariffs have been dropped altogether. As a result,

Trade

Protectionism vs. Free Trade Freetraders argue that reducing tariffs andquotas allows consumers to choosefrom a variety of both domestic and foreign products. What arguments doprotectionists use in support of traderestrictions?



Using MapsUsing Maps The North American Free Trade Agreement (NAFTA) makes up the second largest free-trade area in the world, after the European Union. After NAFTA was implemented, trade between the three nations began to grow by 10 to 15 percent annually. Do imports or exports comprise the larger portion of Mexico’s trade with Canada and the United States?

The North American Free Trade Agreement

CANADAPopulation 32.2 million

GDP $954 billion

UNITED STATESPopulation 291.0 million

GDP $10.8 trillion

MEXICOPopulation 104.9 million

GDP $920 billion

THE NORTH AMERICANFREE TRADE AREA, 2003Population 428.1 million

GDP $12.7 trillionTwo-Way Trade $652 billion

U.S. exports to Canada $175 billionU.S. imports from Canada $220 billion

U.S.-CANADA TRADE

Canadian exports to Mexico $1.4 billionCanadian imports from Mexico $8.6 billion

CANADIAN-MEXICAN TRADE

U.S. exports to Mexico $110 billionU.S. imports from Mexico $137 billion

U.S.-MEXICO TRADE

Source: CIA World Factbook, 2003 and Author’s Estimates

Visit epp.glencoe.com and click onTextbook Updates—Chapter 17 foran update of the data.


478_GLENEPP 11/5/03 7:49 PM Page 478


stores are able to offer a wide variety of industrialand consumer goods from all over the world.

NAFTA The North American Free Trade Agreement

(NAFTA) is an agreement to liberalize free trade byreducing tariffs among three major trading partners:Canada, Mexico, and the United States. It was pro-posed by the Bush administration and concluded bythe Clinton administration in 1993.

Before NAFTA, United States goods enteringMexico faced an average tariff of 10 percent. Atthe same time, approximately half of the goodsentering the United States from Mexico were duty-free, while the other half faced an average tax ofonly 4 percent. Exceptions did exist, however. A32 percent tariff on brooms imported fromMexico protected approximately 3,000 broommakers in southern Illinois.

Free trade is good in general, but it is not pain-less. NAFTA was controversial specifically becausesome workers would be displaced when trade barri-ers were lowered. Opponents predicted that somehigh-paid American jobs would be lost to Mexico—including those held by broom makers who will

find their protective tariff reduced to zero over a15-year period. Proponents predicted that tradeamong all three nations would increase dramati-cally, stimulating growth and bringing a wider vari-ety of lower-cost goods to everyone, protectionistsand free traders alike.

The case for freer trade is a classic case of cost-benefit analysis. Some of the costs and benefitsidentified during the NAFTA debate actuallyoccurred, but not to the extent originally pre-dicted. Trade among the three countries has growndramatically since NAFTA was created. In the end,freer trade allowed the NAFTA partners to capital-ize on their comparative advantages for everyone’sbenefit.

Checking for Understanding 1. Main Idea Explain why protectionists favor

tariffs and quotas.

2. Key Terms Define tariff, quota, protective tariff, revenue tariff, dumping, protectionists,free traders, infant industries argument, balance of payments, most favored nationclause, World Trade Organization (WTO),North American Free Trade Agreement(NAFTA).

3. Describe three barriers to international trade.

4. List five arguments that are commonly usedto support the protectionist argument.

5. Identify two attempts to facilitate the growthof international trade.

Applying Economic Concepts 6. Quotas Explain how a quota on a good or

service produced in your community can pro-tect the jobs in a particular industry. Thenexplain how the same quota might be harm-ful to consumers.


7. Drawing Conclusions If you were a mem-ber of Congress approached by a delegationof autoworkers seeking additional tariff orquota protection, how would you respond?Defend your response.

8. Analyzing Information Explain the infantindustries argument.

Student Web Activity Visit the Economics: Principlesand Practices Web site at epp.glencoe.com and clickon Chapter 17—Student Web Activities for an activ-ity on the World Trade Organization.



The embargo hasn’t worked, so why persist? That’s the message of a new lobbying effort, which says the travel banis costing U.S. jobs.

The TravelIndustry’s Pushto Unlock Cuba

Politicians who favor a change in U.S. policytoward Cuba are getting new ammunition fromthe travel industry. . . . The industry argues thatthe island nation is a potential source of sorelyneeded revenues that would boost both thetravel business and the U.S. economy. . . .

Just 90 miles from the coast of Florida, Cubawas a popular destination for U.S. travelersbefore Fidel Castro seized power on New Year’sEve, 1959. Castro imposed socialism and forgeda cozy relationship with the Soviet Union, whichprompted the U.S. government to restrict traveland trade in 1963 in the hope of ousting the dictator. . . .

. . . The Association of Travel-RelatedIndustry Professionals (ATRIP), formed lastJune, is heading the lobbying efforts to lift thetravel ban. The industry’s argument: Easingrestrictions could boost the U.S. economy in thelong term by as much as $1.6 billion annuallyand create as many as 23,000 new jobs . . . U.S.businesses that stand to gain the most are air-lines, cruise ships, tour operators, travel agents,and American-owned or operated hotels. . . .

Indeed, even if proponents succeed in gettingthe House and Senate to lift the travel ban,President Bush has threatened to veto the meas-ure, and overriding the veto would require a two-thirds vote from both houses of Congress. . . . Itcould still be a while before Americans can say,“Havana great time in Cuba.”—Reprinted from August 27, 2003 issue of Business Week, by special

permission, copyright © 2003 by The McGraw-Hill Companies, Inc.

Examining the Newsclip1. Analyzing Information Why is the travel industry push-

ing for an end to embargo on Cuba?

2. Analyzing Information According to the Association of Travel-Related Industry Professionals, how much moneywould easing restrictions on Cuba bring to the U.S. economy?

N e w s c l i p

Historic Site in Cuba


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Financing and Trade Deficits

Main IdeaA long-lasting trade deficit affects the value of anation’s currency and the price and volume of itsexports and imports.

Reading StrategyGraphic Organizer As you read the section, completea graphic organizer similar to the one below bydescribing the effects of a long-lasting trade deficit.

Key Termsforeign exchange, foreign exchange rate, fixedexchange rate, flexible exchange rate, trade deficit,trade surplus, trade-weighted value of the dollar

ObjectivesAfter studying this section, you will be able to:1. Explain how foreign currency is used in trade.2. Describe the problem of a trade deficit and the

main solution to the problem.

Applying Economic ConceptsForeign Exchange Do you have any souvenir foreigncurrency such as pesos, pounds, or yen? Read to findout how this foreign exchange is used to financeinternational trade.

Cause:Trade deficit

Effect

Effect

Effect

Cover Story

Quaking Beforethe Fed

No place has more to fear

from every twitch of U.S.

monetary policy than Hong

Kong. Its currency is rigidly

pegged to the U.S. dollar,

and when U.S. interest rates

go up, Hong Kong’s must

follow. With the economy in its worst recession in

half a century, Hong Kong can ill afford higher rates,

although the Federal Reserve is now leaning in that

direction. . . .[In Hong Kong, the] grinding process of deflation

continues. Property prices are down about 50% from

their mid-1997 peak . . . the government expects

consumer prices to fall 2.5% for all of 1999 . . . real

interest rates [are] more than 8% . . . the benchmark

Hang Seng stock index is . . . 26% below its August

1997, peak, and higher interest rates could knock [the

current modest] recovery off track.

—Business Week, June 21, 1999

Boeing 747 flies overKowloon peninsula

T rade between nations is similar to exchangebetween individuals. The major differenceis that each country has its own monetary

system, which makes the exchange more compli-cated. The value of some currencies, like theHong Kong dollar in the cover story, is tied to thevalue of the U.S. dollar in the hope of simplifyinginternational trade.

Financing International TradeScenarios like the following occur every dayacross the globe. A clothing firm in the

United States wants to import business suits from acompany in Great Britain. Because the British firmpays its bills in a currency called “pound sterling,”it wants to receive payment in sterling. Therefore,the American firm must exchange its dollars forBritish pounds.

Foreign Exchange In the field of international finance, foreign

exchange—foreign currencies used to facilitateinternational trade—are bought and sold in the


foreign exchange market. This market includesbanks that help secure foreign currencies forimporters, as well as banks that accept foreign cur-rencies from exporters.

Suppose that one pound sterling, £1, is equal to$1.58. If the business suits are valued at £1,000 inLondon, the American importer can go to anAmerican bank and buy a £1,000 check for $1,580plus a small service charge. The American firm thenpays the British merchant, and the suits are imported.

American exporters sometimes accept foreigncurrency or checks written on foreign banks fortheir goods. They deposit the payments in theirown banks, which helps the American banking sys-tem build a supply of foreign currency. This cur-rency then can be sold to American firms that wantto import goods from other countries. As a result,both the importer and the exporter end up with thecurrency they need.

The foreign exchange rate is the price of onecountry’s currency in terms of another country’s cur-rency. The rate can be quoted in terms of the UnitedStates dollar equivalent, as in $1.58 = £1, or in termsof foreign currency per United States dollar, as in£0.6329 = $1. The rate is reported both ways, asshown in the foreign currency listings in Figure 17.4.

Fixed Exchange Rates Today, two major kinds of exchange rates exist—

fixed and flexible. For most of the 1900s, the worlddepended on fixed exchange rates—a system underwhich the price of one currency is fixed in terms ofanother so that the rate does not change.

Fixed exchange rates were popular when the worldwas on a gold standard. Gold served as the commondenominator that allowed comparisons of curren-cies, and it also kept exchange rates in line. For exam-ple, suppose that a country allowed its money supplyto grow too fast and that some of the money wasspent on imports. Under a gold standard, the coun-tries receiving the currency had the right to demandthat it be converted into gold. Because no countrywanted to lose its gold, each country worked to keepits money supply from growing too fast.


Reading the Financial Page Exchange rates are set according to the demand and supply of different types of money. About how many Japanese yen equals one U.S. dollar?

Reading the Financial Page Exchange rates are set according to the demand and supply of different types of money. About how many Japanese yen equal one U.S. dollar?

Foreign Exchange Rates

Argentina (Peso).......Australia (Dollar) ......Britain (Pound) ........Canada (Dollar) ........Chile (Peso).............China (Renminbi) .....Czech. Rep. (Koruna) Commercial rate......Equador (US Dollar)...Israel (Shekel)..........Japan (Yen).............Mexico (Peso) Floating rate..........Poland (Zolty)Russia (Ruble)..........South Korea (Won)....Taiwan (Dollar).........Euro........................

0.34570.65601.58000.7160

0.0014220.1208

0.03431.00000.2251

0.008454

0.09220.2546.03439

0.00084810.029161.1139

U.S. $equiv.

2.89271.52440.63291.3966703.238.2781

29.1551.00004.4425118.29

10.84133.927729.081

1179.1134.2940.8977

Currencyper U.S. $

Exchange RatesAugust 19, 2003

Country


Economic Espionage Economic espionage is increasing as tradegrows between countries. Economic espionageis the stealing of technology secrets. In order tobe competitive, many countries are tempted tosteal the secrets of another to avoid paying thehigh costs of research and development. Faxmachines, cellular phones, and the Internetmake it easier than ever to commit economicespionage.

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This practice worked until the early 1960s whenthe United States developed a huge appetite forimports. During that time, it bought large quantitiesof foreign goods with dollars. At first, foreign coun-tries willingly held dollars because they wereacceptable as an international currency, so only aportion of these dollars came back when othercountries bought American exports.

As dollars began to pile up in the rest of theworld, many countries wondered if the UnitedStates could honor its promise that the dollar was“as good as gold.” Eventually France and severalother countries started redeeming their dollars,which drained U.S. gold reserves. As a result,President Richard Nixon announced that theUnited States would no longer redeem foreign-held dollars for gold in 1971. This action savedthe gold stock, but it also angered many foreigngovernments that were planning to cash theirAmerican dollars into gold.

Flexible Exchange Rates When the United States stopped redeeming for-

eign-held dollars for gold, the world monetary sys-tem went to a floating or flexible rate system.Under flexible exchange rates, also known asfloating exchange rates, the forces of supply anddemand establish the value of one country’s cur-rency in terms of another country’s currency.

Figure 17.5 shows how flexible exchange rateswork. In 1971, for example, the price of the dollarwas four German marks (DM) as shown in Panel A.Alternatively, we could say that the price of oneDM was $0.25 as shown in Panel B.

Suppose now that an American car dealerwanted to purchase Volkswagens that could bebought for 12,000 DMs in Germany. To obtain asingle car, the American importer would have tosell $3,000 in the foreign exchange market toobtain the 12,000 DMs needed to buy the


Using GraphsUsing Graphs The value of foreign exchange, like the value of most other products, is determined by supply and demand. When investors sell one currency to buy another, what happens to the value of the currency that is sold?

Flexible Exchange Rates

4 DM

2 DM

Pric

e of

a $

in D

Ms

Quantity of $

DS

S1

S1SD

$.50

$.25Pric

e of

a D

M in

$Quantity of DMs

DS

SD

D1

D1

AA The Foreign Exchange Market for Dollars BB The Foreign Exchange Market for Marks


Volkswagen. This would simultaneously increasethe supply of dollars shown in Panel A and thedemand for DM in Panel B. Eventually the con-tinuing American demand for foreign productswould push the value of the dollar down to 2DM, and its reciprocal, the price of the DM, upto $0.50.

When the dollar reaches 2 DMs, the price of theVolkswagen is much less competitive. This isbecause the importer now has to pay $6,000 toobtain the 12,000 DMs needed to purchase the car.Excessive imports thus cause the value of the dol-lar to decline, making imports cost more.

This may be bad news for U.S. importers, but it isgood news for exporters. A German firm that boughtAmerican soybeans at $6 a bushel before 1971, forexample, would have paid 24 DMs for each bushel.After the value of the dollar fell, it had to pay only12 DMs for each bushel. As a result, soybeans werecheaper, and more could be sold abroad.

The system of flexible exchange rates hasworked relatively well. More importantly, the

switch to flexible rates did not interrupt thegrowth in international trade as many people hadfeared. More countries trade with one anothertoday than ever before.

Trade Deficits and SurplusesA country has a trade deficit whenever thevalue of the products it imports exceeds the

value of the products it exports. It has a trade surpluswhenever the value of its exports exceeds the value ofits imports. Each is dependent on the internationalvalue of its currency.

The International Value of the Dollar Ever since the dollar started to float in 1971, the

Federal Reserve System has kept a statistic thatmeasures the international value of the dollar.Called the trade-weighted value of the dollar, it isan index showing the strength of the dollar againsta group of foreign currencies. When the index falls,the dollar is weak in relation to other currencies.When the index rises, the dollar is strong.

When the dollar reached strong levels in 1985,foreign goods became less expensive, andAmerican exports became more costly for the restof the world. As a result, imports rose, exports fell,and the United States suffered record trade deficitsin 1986 and 1987. The value of the dollar remainedrelatively stable throughout the early 1990s, andthen rose late in the decade when the rest of theworld, especially countries in Asia, experienced aneconomic downturn. The stronger dollar led toanother record trade deficit in early 2001.

The Effect of a Trade Deficit A persistent trade imbalance tends to reduce the

value of a country’s currency on foreign exchangemarkets. The devalued currency then causes a chainreaction that affects income and employment inthat country’s industries.

To illustrate, the large deficit in the United Statesbalance of payments in the mid-1980s and late1990s flooded the foreign exchange markets withdollars. An increase in the supply of dollars, asillustrated by the supply and demand curves inFigure 17.5, causes the dollar to lose some of its

Sociologists study the develop-ment, interaction, and behav-ior of organized groups as wellas various social, religious, andbusiness organizations.

The WorkSociologists may work for thegovernment, universities andcolleges, and in private busi-ness. Duties include gatheringfirsthand information from

people. They prepare reports to be used in comparativestudies of similar programs in other communities.Sociologists derive conclusions about the effectiveness ofprograms that can lead to formulating policy.

QualificationsSociologists must be skilled in research and analysis andpossess the ability to communicate ideas clearly. A mas-ter’s degree in sociology is a requirement.

484

Sociologist

value. The weaker dollar causes unemployment torise in import industries as imports become moreexpensive, and it causes unemployment to godown in export industries as their goods becomemore competitive.

Eventually the dollar will get strong again as for-eigners sell their currency in order to buy dollars—thereby reversing the patterns of unemployment.As the dollar gets stronger, export industries willhave a more difficult time and import industrieswill begin to recover. The economy may adjustslowly to changes in the value of the dollar, but theadjustments do take place.

As a result, the shift in employment betweenimport and export industries is one of the biggestproblems with a trade deficit. In the automobileindustry, for example, Japanese cars once under-cut the price of cars being produced in Detroit,causing severe unemployment for both domesticautoworkers and domestic car dealerships. As theJapanese yen rose against the dollar in the early1990s, however, the price of Japanese carsincreased, making domestic automobiles moreattractive and restoring some of the employmentin that industry.

Under flexible exchange rates, trade deficitstend to automatically correct themselves throughthe price system. A strong currency generally leadsto a deficit in the balance of payments and a sub-sequent decline in the value of the currency. A

weak currency tends to cause trade surpluses,which eventually pull up the value of the currency.As a result, the United States and many othercountries no longer design economic policies justto improve their trade position.

Checking for Understanding 1. Main Idea What is the relationship between

the international value of the dollar andforeign trade?

2. Key Terms Define foreign exchange, foreignexchange rate, fixed exchange rate, flexibleexchange rate, trade deficit, trade surplus,trade-weighted value of the dollar.

3. Describe how foreign exchange is used in trade.

4. Explain how trade deficits correct themselvesunder flexible exchange rates.

Applying Economic Concepts 5. Foreign Exchange How does a weak

American dollar affect you as a consumer?How does a strong dollar affect you?

6. Making Generalizations How do exchangerates influence international trade?

7. Making Comparisons Explain the differencebetween a fixed exchange rate and a flexi-ble exchange rate.


The Global Economy

Value of Currency Exchange When the valueof the dollar goes up, American exports godown and imports rise. What causes the valueof the dollar to fluctuate?



Drawing Inferences and ConclusionsTo infer means to evaluate information and arrive at a conclusion. When youmake inferences, you “read between the lines,” or draw conclusions that arenot stated directly in the text. You must use the available facts and your ownknowledge and experience to form a judgment or opinion about the material.

manufactured goods. Beginning in the 1860s, Northernindustrial interests in control of the government passed highprotective tariffs to prevent foreign competition fromthreatening our young industries. With some fluctuations,these tariffs remained high until the 1930s, when PresidentFranklin Roosevelt tried to increase trade by lowering tariffsand encouraging our trading partners to do the same.

When World War II ended, the United States knew itwould be necessary to help Europe rebuild its economy. Thegovernment did this through the Marshall Plan, whichprovided the resources needed to reconstruct Europeaneconomies. Along with other nations, the United States setup a World Bank for Reconstruction and Developmentfrom which all nations could borrow. The United Statesalso led the development of the International MonetaryFund, so that nations could borrow foreign currencies inshort-term loans in order to trade. Finally, the UnitedStates helped organize the General Agreement on Tariffsand Trade (GATT). Under this agreement, nations meetregularly to discuss mutual tariff policies.

1. What events does the writer describe?

2. What facts are presented?

3. What can you infer about the effects of the MarshallPlan on relations between the United States andEurope today?

4. What conclusion can you make about U.S. tradepolicy?

Learning the SkillUse the following steps to help draw inferences

and make conclusions:

• Read carefully for stated facts and ideas.

• Summarize the information and list the impor-tant facts.

• Apply related information that you may alreadyknow to make inferences.

• Use your knowledge and insight to develop someconclusions about these facts.

Practicing the SkillRead the passage below, then answer the

questions that follow.

From its beginnings until the mid-1860s, theUnited States encouraged trade with other nations,protecting only a few industries from foreigncompetition. We encouraged the world to buyAmerican agricultural products and traded for

Study the statistics in Figure 17.1 on page 468.From the data, what can you infer about U.S. tradewith Canada? Why does this relationship exist?

International flags, airport display

Practice and assess key social studies skills with theGlencoe Skillbuilder Interactive Workbook, Level 2.


S e c t i o n 1

Absolute and ComparativeAdvantage (pages 467–470)

• The United States isextensively involvedin international trade,with the averageAmerican spendingmore than $4,200 peryear for imports inthe form of goodsand services.

• Absolute advantage means that a country can pro-duce more of a good than another country can.

• The basis for trade today is comparative advantage.If people and countries specialize in the things theyproduce relatively more efficiently, and if theyengage in trade to secure the things they do not produce, then total world output will increase.

S e c t i o n 2

Barriers to International Trade(pages 472–479)

• Barriers to trade include tariffs, quotas, licensing,health certifications, and voluntary quotas, all ofwhich have been used to restrict the free flow ofproducts.

• Protectionists support trade barriers on the groundsof national defense, infant industries, protectingdomestic jobs, keeping the money at home, andhelping the balance of payments.

• Free traders believe that all of these arguments areflawed, with the possible exception of the infantindustries argument.

• High tariffs were one of the causes of the GreatDepression, although the world has moved towardfreer trade since then.

• The most favored nation clause is important tomany countries because it gives them the same tariffreductions that the United States negotiates withother trading nations.

• The GATT was established in 1947 and has evolvedinto the World Trade Organization (WTO), whichadministers GATT agreements, pro-motes freer trade, and helpssettle disputes between gov-ernments.

• The North AmericanFree Trade Agreement(NAFTA) will eventu-ally remove all tradebarriers among Canada,Mexico, and the UnitedStates.

S e c t i o n 3

Financing and Trade Deficits (pages 481–485)

• Foreign exchange is the lifeblood of internationaltrade; its value is determined in foreign exchangemarkets where currencies are bought and sold.

• Most countries use a system of floating or flexibleexchange rates, meaning that supply and demanddetermine the currency’s value.

• Some smaller countries also use a system of fixedexchange rates, which ties the value of their currencyto a major currency like the U.S. dollar.

• The large trade deficits in the United States in themid-1980s were partially caused by a strong dollar,resulting in unemployment in the export industries;the country would have had a trade surplus if thevalue of its exports had exceeded the value of itsimports.

• Because deficits tend to be self-correcting, mostnations no longer design economic policies just to improve the balance of payments.


Identifying Key TermsFor each of the pairs of terms below, write a sentence or shortparagraph showing how the two are related.

1. absolute advantagecomparative advantage

2. balance of paymentstrade deficit

3. balance of paymentsflexible exchange rates

4. trade deficittrade surplus

5. foreign exchangeflexible exchange rates

6. protectionistinfant industries

7. protective tariffrevenue tariff

8. tariffquota

9. trade deficittrade-weighted value of the dollar

Reviewing the FactsSection 1 (pages 467–470)

1. Describe the extent of United States involvementin world trade.

2. Describe a case in which the United States mighthave an absolute advantage over another country in the production of a good.

3. Explain how applying comparative advantage makestrade between countries of different sizes possible.

Section 2 (pages 472–479)

4. Name three barriers to international trade.

5. Describe five protectionist arguments.

6. Describe the role of the WTO in the free trademovement.

Section 3 (pages 481–485)

7. Differentiate between fixed and flexible exchangerates.

8. Explain how deficits can be self-correcting whencurrency values are flexible.

Thinking Critically1. Drawing Conclusions Do you favor protection

as a national trade policy? Why or why not?

2. Making Comparisons What is the differencebetween a protective tariff and a revenue tariff? Usea graphic organizer similar to the one below to helpyou organize your answer.

3. Analyzing Information Some people feel theUnited States should return to a system of fixedexchange rates. Defend or oppose this view. Citeexamples to support your position.

4. Understanding Cause and Effect Does the protec-tion of inefficient industries hurt an economy? Why or why not?

5. Making Comparisons How might the issue of protectionism differ for a worker and a consumer?Use examples to support your argument.

Self-Check Quiz Visit the Economics: Principlesand Practices Web site at epp.glencoe.com andclick on Chapter 17—Self-Check Quizzes to pre-pare for the chapter test.

Protective Revenue

Tariffs



Applying Economic Concepts1. Comparative Advantage Think of a project you

recently completed with a friend. How could youhave completed the project more efficiently, apply-ing the principle of comparative advantage?Explain.

2. Quotas You have just started a business manufac-turing toothbrushes. Would you favor a quota onimported toothbrushes? Why or why not?

3. Foreign Exchange Explain how doubling the$400 tax-free limit on goods brought in fromabroad by American citizens would affect the balance of payments.

4. Interdependence How does the lack of certain rawmaterials force nations to become interdependent?

Math PracticeSuppose you are planning a trip to Russia and planto bring $500 in spending money. If the exchangerates in Figure 17.4 prevail at the time of yourdeparture, how many rubles would you have afteryou exchanged your dollars for rubles? If you spent5,000 rubles while you were there, and if you con-verted the rest of the rubles back to dollars when youcame home, how many dollars would you have?

Thinking Like an Economist Assume that the country is running a large tradedeficit. What predictions would you make aboutfuture changes in the value of the dollar in the for-eign exchange markets. Would these developmentsbe a matter of concern?

Technology SkillUsing E-Mail During the course of one day, make anote of at least 10 manufactured items you handle,such as your clothing and the cafeteria trays used in

your school. Find out where each item is produced,and make a log of the items, noting whether each isdomestic or foreign made.

Next, write a persuasive argument explaining youropinion on international trade. In writing a persua-sive argument, it is important to state the issueclearly and to give your position on it.

Use the evidence you gathered in your log notes tosupport your position and to refute any opposingposition. Use other sources to identify evidence thatwill help you establish your claim. Conclude yourargument by restating your position and summingup the evidence.

Finally, e-mail your argument to the editor of a news-paper or magazine. One day soon, you may see yourargument in print!

Drawing Inferences and Conclusions Readthe following passage about U.S. trade withother nations. Use the stated facts and yourown knowledge to answer the questions thatfollow.

In the early 1980s, American producers foundit increasingly difficult to sell their productsto other countries. At least part of this prob-lem was the result of the high value of thedollar. To buy American products, foreignnations must trade their currency for dollars.When the dollar’s value is too high, foreignnations receive fewer dollars in exchange fortheir money. Beginning in the mid-1980s, thevalue of the dollar declined in relation to for-eign currencies. That was like putting Ameri-can products on sale to foreign buyers. U.S.exports increased sharply.

1. What is the main topic of the passage?

2. What facts are presented?

3. From this passage, what can you inferabout fluctuations in U.S. trade?

4. What fact(s) or observations helped youmake this inference?



Chap17 Fundamental Economic Concepts

Education

Transcript of Chap17 Fundamental Economic Concepts