Chapter+18-Summary

= = =Chapter 18=

Section 1

 * The two motivations for international trade are the fact that it is voluntary and that it creates wealth. International trade encourages individuals and businesses to specialize-to produce a limited number of goods and services-and leads to worldwide interdependence. Specialization may occur because of particular human or natural resources unique to a nation.
 * How a nation decides what to produce is determined by absolute and comparative advantage-two related economic concepts originally described by nineteenth-century economist David Ricardo. A nation has an absolute advantage in producing a certain good when it can do so with greater efficiency that can its trading partner. A nation's comparative advantage is determined by calculating where the largest absolute advantage occurs for each good.

Section 2

 * The money needed to carry on international trade is funneled through foreign exchange markets where one nation's currency is converted into another's. These markets also allow international business transactions. Once the value of one currency is established in relation to another, a foreign exchange rate has been established.
 * Since World War II, trading nations have used two foreign exchange systems: first, the adjustable-peg system-introduced at the Bretton Woods Conference in 1944-and later the floating, or flexible, system-established in 1971. The floating exchange rate allows the value of the currency to be determined by the laws of supply and demand and to change from one minute to the next.
 * Nations determine the strength of their international trade by measuring the balance of payments and the balance of trade. A balance of payments is an annual accounting record of transactions, and a balance of trade is a record of imports and exports.

Section 3

 * Economic and political factors sometimes lead nations to restrict international trade. Common trade barriers include tarrifs, import quotas, voluntary trade restrictions, and embargoes.
 * Nations are said to conduct free trade when international trade is not restricted by governments. Trade barriers sometimes are used to protect domestic industries. Arguments for both free trade and protectionism are based on infant industries, job protection, standard of living, specialization, national seccurity, and fairness.
 * In recent years, many nations have reduced trade barriers to increase international cooperation. Reciprocal trade agreements impose lower tarrifs on goods imported from nations that also reduce tariffs. Regional trade organizations are alliances based on the reduction of trade barriers between members of the alliance. Importand examples of international trade cooperation include the World Trade Organization (WTO) and the North American Free Trade Agreement (NAFTA).
 * Multinational corporations also increase international trade. Additionally, international joint ventures encourage cooperation among companies of different nations.