Pre-Reading
Pre-Reading Activity
Discuss the following questions with a partner.
- What does the U.S. import? Why do they import those things instead of making them?
- What does the U.S. export? Why do other countries buy these American products?
- International trade is often complicated. What makes international trade complicated? What are some obstacles that companies need to overcome?
Reading 3: Why Nations Trade [1]
Why Nations Trade
One might argue that the best way to protect workers and the domestic economy is to stop trading with other nations. Then the whole circular flow of inputs and outputs would stay within our borders. But if we decided to do that, how would we get resources like coffee beans? Most countries simply can’t produce everything they need, and they can’t manufacture some products, such as steel and most clothing, at the low costs they’ve become accustomed to. The fact is that nations—like people—are good at producing different things: you may be better at programming a computer than repairing a car. In that case, you benefit by “exporting” your computer skills and “importing” the car repairs you need from a good mechanic. Economists refer to specialization like this as advantage.
Absolute Advantage
A country has an absolute advantage when it can produce and sell a product at a lower cost than any other country or when it is the only country that can provide a product. China is known for having an absolute advantage in most manufacturing. The United States, for example, has an absolute advantage in reusable spacecraft and other high-tech items.
The United States does not have the proper climate for growing coffee, and Brazil lacks the technology to develop air traffic control systems. Both countries would gain by exchanging air traffic control systems for coffee.
Comparative Advantage
Even if the United States had an absolute advantage in both coffee and air traffic control systems, it should still specialize and engage in trade. Why? The reason is the principle of comparative advantage, which says that each country should specialize. When they do, they can focus on things they can produce inexpensively or easily and import the other products. This specialization ensures more things will be produced globally and at lower prices.
For example, India and Vietnam have a comparative advantage in producing clothing because of lower labor costs. Japan has long held a comparative advantage in consumer electronics because of technological expertise. The United States has an advantage in computer software, airplanes, some agricultural products, heavy machinery, and jet engines.
Thus, comparative advantage acts as a stimulus to trade. When nations allow their citizens to trade whatever goods and services they choose without government regulation, free trade exists. Free trade is the policy of permitting the people and businesses of a country to buy and sell where they please without restrictions. The opposite of free trade is prote