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sg33 - Chapter 17 TRADING WITH THE WORLD Key Concepts...

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253 17 TRADING WITH THE WORLD* K e y C o n c e p t s Patterns and Trends in International Trade The goods and services we buy from producers in other nations are our imports ; the goods and services we sell to people in other nations are our exports . Most U.S. exports and imports are manufactured goods. Trade in goods accounts for most of U.S. international trade; trade in services (travel and transportation) accounts for the rest. Trade has accounted for an increasingly large fraction of total output in the United States. Net exports is the value of exports minus the value of imports. In 2003, the value of U.S. imports exceeded that of U.S. exports. The Gains from International Trade Comparative advantage is the factor that drives interna- tional trade. Countries can produce anywhere on their production possibility frontier ( PPF ) curve. Figure 17.1 shows a PPF for a nation producing at point a . The PPF’s slope is ( bushels of grain)/( cars), with meaning “change in.” The slope, which is 100 bushels of grain per automobile, equals the oppor- tunity cost of one more automobile at point a . A country has a comparative advantage in the pro- duction of a good if the country can produce it at a lower opportunity cost than any other country. A country can gain by buying the goods from other nations that the nations produce at the lowest opportu- *This is Chapter 33 in Economics . nity cost and selling the goods it produces at the lowest opportunity cost to the other countries. A nation gains from trade by specializing in produc- tion of goods for which it has a comparative advan- tage and trading for other goods. With international trade, a nation receives a higher relative price for the goods it exports and pays a lower relative price for the goods it imports. The terms of trade is the price of a nation’s imports. International trade allows all nations to consume outside their PPFs. The added consumption is the gains from trade. C h a p t e r
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2 5 4 C H A P T E R 1 7 ( 3 3 ) Some trade involves similar goods. There are two rea- sons for trade in similar goods: Diversified tastes — people demand many similar but slightly different products. Economies of scale — average total cost declines with output. A nation can specialize in the production of one of the similar goods and capture economies of scale by trading the good throughout the world. International Trade Restrictions Governments restrict trade to protect domestic indus- tries. The main methods used to restrict trade are: Tariffs — taxes on imported goods. Nontariff barrier — any action other than a tariff that restricts international trade. Today, U.S. tariffs are low compared to their historical levels. The General Agreement on Tariffs and Trade (GATT) is an international agreement designed to re- duce tariffs and increase international trade. The World Trade Organization , to which the United States belongs, requires that nations more closely obey GATT rules. The North American Free Trade Agreement
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