Economics Reflections

Chapter 17: International Trade

Why Nations Trade
An unequal distribution of resources stimulated the need for trade between countries. Many
natural resources are only found in certain regions and most trade is largely based upon the
natural resources that a nation has. Human and physical capital also influence the goods and
services that can be traded. Geographic location also determines the economic activities of a
nation and this unequal resource distribution produces the need for trade to obtain the goods that
they do not have. I think that no nation can be completely self-sufficient though the U.S. has an
advantage because of the various geographical differences in the country. Nations decide what
they will trade due to the concepts of absolute advantage and comparative advantage. A nation
has an absolute advantage when it can produce more of a product using its given resources than
another nation can. Comparative advantage helps nations decide what they will produce and
what they will trade for depending on the opportunity cost. A nation will have a comparative
advantage in a product that it can produce most efficiently with its given resources when given
all the products that it could produce. I think that a nation will do better if it produces products in
which it has a comparative advantage as it can focus its resources on certain items and import
those items for those it does not have. Changes in employment can also result from international
trade and specialization as workers are sometimes no longer needed or jobs are relocated or need
special training. Trade, however, gives nations a greater variety of goods to consume while
allowing them to specialize in producing specific products.
Trade Barriers and Agreements
Trade must also be regulated by countries to protect their industries from foreign competition,
but their is no government that directly regulates world trade. Many countries, however have
trade barriers that restrict trade which include import quotas, voluntary export restraints, and
tariffs. I think that is important for countries to regulate their trade so that they are not dependent
upon a foreign market and so that they can ensure that new industries, jobs, and national security
are protected. First, import quotas limit the amount of a product that can be imported. Second,
voluntary export restraints are self-imposed limitations on the amount of products that are
exported to another country. Finally, there are tariffs which are taxes on imported goods.
However, trade limitations can also lead to trade wars and increased prices on foreign goods.
Then, ,any countries have established international free trade agreements such as the World
Trade Organization, European Union, NAFTA, MERCOSUR, APEC, and more. These help
countries trade more freely with each one and I think that countries should try to reduce trade
barriers, but still have some in place to protect national security and their economies.
Measuring Trade
International trade results in the need to exchange one nation's currency for another when
wanting to purchase a foreign good. This is because each nation does not use the same type of
currency and each type of currency holds different values in relation to another currency. The
value of a nation's currency in relation to another nation's currency is the foreign exchange rate.
These exchange rates change daily and show what one U.S. dollar is worth in foreign currency. I
think that exchange rates are important to know when planning trips to a foreign country and for
purchasing goods from a foreign country. Economist will often use the terms strong or weak
currencies to describe the value of s currency. An increase in a currency's value is called

appreciation and a decrease in called depreciation. Also, companies use the foreign exchange
market that consists of about 2,000 banks that facilitate the buying and selling of foreign
currencies. Then, many countries use either a fixed exchange-rate system or a flexible exchangerate system. In a fixed exchange countries try to keep the value of their currencies constant
against one another. I think that this system is difficult to maintain as countries must maintain
similar economic policies and one country's economy would easily affect the others. The nations
in Europe are an example of a fixed exchange using the euro, but now Greece may have to drop
out of the euro system due to financial trouble. A flexible exchange is more practical and allows
countries more growth and is used by countries such as the U.S. and Japan. Finally, countries try
to maintain a balance of trade and not have any trade surpluses or trade deficits.