Chapter 17: International Trade Section 1:

Transcript:Chapter 17: International Trade Section 1::
Chapter 17: International Trade Section 1: Benefits and Issues of International Trade pgs. 510-519 Resource Distribution & Specialization A nation’s economic patterns are based on its unique combination of factors of production: natural resources, human capital, physical capital, and entrepreneurship. B/c each nation has certain resources and cannot produce everything it wants, individuals & businesses must decide what goods & services to focus on. The result is specialization, a situation that occurs when businesses produce a narrow range of products. Through this, businesses can increase profit—the driving force of world trade. Specialization also leads to economic interdependence, a situation in which producers in one nation depend on others to provide goods and services they don’t produce. David Ricardo: The Theory of Comparative Advantage Ricardo (1772-1823) was not an academic, he was a stockbroker. He earned over $100 million in today’s dollars. Ricardo became interested in economics when he read Adam Smith’s The Wealth of Nations in 1799. His greatest contribution to economies was an idea that became the backbone of free trade—comparative economics. He asserted that a trading nation should produce a certain product if it can do so at an opportunity cost lower than that of another trading nation. Trading in Opportunity Before Ricardo’s influence, the prevailing view on international trade was based on the idea of absolute advantage, the ability of one nation to make a product more efficiently than another. Ricardo changed this understanding to be known as the law of comparative advantage: countries gain when they produce items they are most efficient at producing and that have the lowest opportunity cost. Absolute Advantage Absolute advantage is the ability of one trading nation to make a product more efficiently than another trading nation. Some regions of nations have absolute advantage in producing certain products or services b/c or the uneven distribution of production factors. If a nation can make more iron ore and steel than another nation, then that country has an absolute advantage. Comparative Advantage Comparative advantage, in contrast, is the idea that a nation will specialize in what it can produce at a lower cost than any other nation. When determining comparative advantage, you look not for the absolute cost of a product, but for its opportunity cost. Lets say that Australia’s opportunity cost for one ton of steel is five tons of iron ore. But China’s opportunity cost for one ton of steel is