(chap 23)

A comparative advantage is the principle that a country benefits from specializing in the production at which it is relatively most effective.  An absolute advantage is when one country can produce a good more efficiently than another country. Thus the USA has a comparative advantage in producing computers because of its high tech industries and good educational system. An equatorial country would have an absolute advantage over the USA in the production of bananas because their climate is compatible to the growing of bananas whereas the USA only has a few locations wherein bananas can grow. Opportunity costs suggests that a country cannot produce with efficiency all that it needs, thus international trade enables each country to produce its most efficient products and trade for the others.

Free trade between nations suggests that trade will occur according to market forces. However, this is rarely the case. Nations will frequently impose tariffs and quota in order to limit imports in order to protect domestic industries. A tariff is tax imposed on an import. A quota is a limit on the number of goods that can be imported. There are several reason for protectionism: national security (a product we need to make for ourselves and not be dependent on others), infant industry (cannot compete against more mature foreign companies), diversified economy (not all eggs in the same basket), domestic wages (protect own workers). Promoters of free trade suggest (1) that protectionism only raise prices for consumers, (2) protectionism interferes with supply and demand (market forces), (3) protectionist policies are difficult to reverse.

Revenue tariffs do not seek to protect domestic industries as much as they seek to raise revenues for the government. For example, a tariff on bananas would not protect USA interests, because we have no banana industry to speak of. It would only serve to raise revenue for the government.

The gold standard was the means by which nations determined trade surpluses and trade deficits. If a certain nation had owed money (deficit) to another, the amount was determined by the value of gold. This system was abandoned by 1944 with the Bretton Woods Agreement of 1944.  This agreement made the dollar a key currency in the world. The IMF, International Monetary Fund was also established which oversaw the world trade. The Exchange Rate is the rate at which currency between countries is traded.
 

NAFTA - North American Free Trade Agreement
 USA, Mexico, Canada agree to have free trade in 1993.

APEC - Asia Pacific Economic Cooperation
In 1989, 21 nations agreed to pursue Pacific Ocean economic cooperation including the USA.