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Section 1 Why Nations Trade

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Objectives

After studying this section you will be able to:

1. Analyze the locations of resources and evaluate the significance of these locations.
2. Explain the concepts of absolute and comparative advantage and apply the concept of comparative advantage to explain why and how countries trade.
3. Analyze the impact of U.S. imports and exports on the United States and its trading partners.
4. Describe the effects of trade on employment.

Section Focus

International trade is based on resources that one country needs and another can provide. Each country in the world possesses different resources. By specializing in the production of certain goods and services, nations can use their resources more efficiently. Specialization and trade can benefit all nations.

Key Terms

• absolute advantage
• comparative advantage
• law of comparative advantage
• export
• import

Have you logged on to a computer today? Ridden in a car or bus? Bought a new sweatshirt or jacket? Chances are these items all have one thing in common. They—or some of their components—were likely made outside the United States.

We know that the United States produces many products, such as jeans, machinery, and some types of computers. We don't, however, produce most of the world's video game systems or VCRs. Why? The answer lies with resources and their distribution. The unequal distribution of resources prevents countries from producing everything their citizens need and want. This is also why we trade.

Resource Distribution

As you read in Chapter 1, the resources that are used to make goods and services are called the factors of production. They include natural resources (land), human resources (labor), and capital resources.

Natural Resources

As you have read, natural resources include those materials found in nature that people use to make goods and provide services. Natural resources include arable land (land that can be farmed), mineral deposits, oil and gas deposits, water, and raw materials like timber.

It is easy to see why a region with fertile soil, such as the central United States, is likely to have an economy based on agriculture. Similarly, you can predict that a region with large oil and natural gas reserves—such as Southwest Asia—is likely to have an economy based on income from the sale of these resources.

Natural resources, as well as climate and location, help determine what goods and services an economy produces. They are not, however, the only influences.

Many items of clothing are traded internationally.

Human Capital

You learned in Chapter 1 that human capital is the knowledge and skills gained by a worker through education and experience. Every job requires some human capital. To be a surgeon you must learn about anatomy and acquire surgical skills. To be a taxi driver, you must know the layout of the city streets.

How do you measure the amount of human capital available in a country? One measure is the literacy rate, or percentage of people over 15 who can read and write. A country with a high literacy rate is likely to have an educated, skilled work force.

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