National Content Standards Addressed:

Standard 5 - Voluntary exchange occurs only when all participating parties expect to gain. This is true for trade among individuals or organizations within a nation and usually among individuals or organizations in different nations.

Standard 6 - When individuals, regions, and actions specialize in what they can produce at lowest cost and then trade with others, both production and consumption increase.

Standard 7 - Markets exist when buyers and sellers interact. This interaction determines market prices and thereby allocates scarce goods and services.

Lesson Objectives (5)

1. Although the transactions are more complex, the essential characteristics of international trade are identical to those of domestic trade.
   • Trade agreements, the rights and regulations that govern trade, are made by nations, but nations don’t trade; individuals do.
   • Voluntary trade will not occur unless both parties anticipate that they will benefit from the exchange.

2. As in domestic trade, voluntary international trade encourages specialization and interdependence.
   • Increased international trade means greater production overall, greater specialization in production at lower cost, and higher average welfare for the citizens of both trading nations.

3. Trade protection policies have consequences (both costs and benefits) throughout the economy: for consumers, for workers in protected industries, and for workers in other industries.
   • The "trade costs jobs" argument is shortsighted, tending to focus on how trade impacts import-competing industries and to ignore the impact on export-producing industries.
   • NAFTA and GATT are examples of international agreements to reduce barriers to trade among nations.

4. Currency exchange rates result from supply-demand decisions.
   • Currency exchange rates reflect the expected relative purchasing power of national currencies; that is, they are determined by the supply of and demand for the currencies at home and by foreigners.
   • The subjective term "weak dollar" is sometimes used to indicate a perceived low demand for U.S. dollars relative to the demand for other currencies.
   • The subjective term "strong dollar" is sometimes used to indicate a perceived high demand for U.S. dollars relative to the demand for other currencies.

5. The "balance of trade" usually refers to the difference between a nation’s merchandise exports and its merchandise imports; as such it is only one component of a nation’s "balance of payments."
   • A trade deficit exists when the value of merchandise and services imported exceeds the value of merchandise and services exported.
   • A trade surplus exists when the value of merchandise and services exported exceeds the value of merchandise and services imported.
   • A deficit or surplus in merchandise and services will be exactly balanced by a surplus or deficit in financial assets.
   • When all exchanges (merchandise, services, and capital) are taken into account, financial flows always balance.

Teaching and Discussion Ideas:

Sample Interactive Discussion Problems:

1. Evaluate the following argument: "When the United States has international political disagreements with nations like South Africa, North Korea, or China, it is counterproductive to impose sanctions and cut off trading relations with the offending nation. Our interest, and indeed our long-term goals of fostering peace, democracy, and human rights, would be much better served if, instead, we did everything in our power to increase trade."

Sample Small Group Discussion Problems:

2. Suppose that, in exasperation over never-ending trade negotiations, the United States unilaterally removes ALL barriers to trade with Japan; (all tariffs, all duties, all quotas, all reciprocal agreements), and declares all our markets open to Japanese products, regardless of whether or not the Japanese follow suit.
   • Analyze the market for a specific product, predicting both short and long-term effects and the consequences for both an individual U.S. businessman and for the economy as a whole.
   • Do the same for a Japanese businessman and the Japanese economy.
   • Follow the chain of cause-and-effect as far as you can.

Definitions

Balance of payments - A record of all the financial transactions between a country and the rest of the world in a given year. It includes, in addition to the balance of trade, all other foreign exchange, such as the selling or purchase of bonds, stock, land, buildings, and businesses.

Balance of trade - A deficit or surplus in a country's merchandise trade with other nations; a comparison of the value of total exports to the value of imports.

Comparative advantage - The advantage in production of a good or service held by the producer whose relative opportunity cost of producing that good is lower than his trading partner's.

Exchange rate - The price of one country's currency in terms of another.

Exports - Goods, services, and resources produced in one country and sold to individuals and firms in another country.

Imports - Purchases by individuals and firms in one country of goods, services, and resources produced in another.

Voluntary trade - Exchange in which both parties choose to participate because they anticipate benefits.

Copyright © 1999 Foundation for Teaching Economics
Permission granted to copy for classroom use.