Economics: Today and Tomorrow © 2012Chapter 18:
Trading With Other NationsChapter OverviewsSection 1: The Benefits of World Trade
Countries benefit from trade because each nation has a different combination of the four factors of production. Benefit comes when each produces the goods and services that it can produce most efficiently. A country has an absolute advantage when it can produce more output per unit of input than can another country. Comparative advantage is the ability of a country to produce a product at a lower opportunity cost than another country. Section 2: Financing World Trade
Under a system of fixed exchange rates, national governments used to set the value of their currencies relative to other currencies. Most of the world’s nations turned to a flexible exchange rate system where supply and demand determine currency values. A currency's exchange rate can have an important effect on a nation's balance of trade, or the difference between the value of exports and the value of imports. The United States has had a negative balance of trade since the 1970s. Section 3: Restrictions on World Trade
Tariffs, quotas, and embargoes are the three major barriers to world trade. A tariff is a tax on imports. A quota is a limit on imports. An embargo is a complete restriction on imports or exports. Protectionists and free-trade supporters argue over the value of free trade. The World Trade Organization (WTO) is the world's largest trade agreement. Other regional trade agreements include the North American Free Trade Agreement, (NAFTA), the Central American Free Trade Agreement (CAFTA), and the European Union (EU).  | 
