Money in a Global World
What does trade look like in a global setting?
Countries trade with other countries to make it possible for people to get the goods they need. Efficiency is one main goal, and making a profit is another.
Many years ago, people lived in small groups. They grew and hunted their own food, made their own clothes, and built their own homes and goods. The materials they used and the goods they produced often depended on where they lived. A group living near the ocean caught a lot of their food by fishing, while a group living near forests trapped and hunted animals for food and used pelts to make clothing and blankets.
Members of a group often became skilled at producing cloth, tools, or other items that another group might not have. As groups traveled and interacted with their neighbors, they came in contact with even more groups. They discovered that some communities were able to grow different crops or make different tools and clothing. People who had lived near the ocean and eaten mainly fish might have been amazed at the taste of venison from the deer hunted by people who lived in the forest.
Through trade, each group could enjoy what the other produced. Every group had access to more products. People gained more knowledge. They learned how other groups made goods or grew crops. No longer did they have to produce everything they needed themselves. Instead, they could create whatever they were skilled at making and trade for other goods they needed. How do you think this changed individual lives?
As transportation improved, people traveled farther and faster. Ships sailed around the globe, so more opportunities to trade arose. As travel became easier and easier to accomplish, the distance between the people who produced goods and those who purchased them increased more and more.
WHAT IS GLOBAL TRADE?
In its simplest form, trade is buying and selling goods or services. One person sells something that another person buys. You might make a T-shirt that you sell to your neighbor across the street. That’s trade! Now, what if you sold a T-shirt to a person in Argentina? That’s global trade.
Global trade occurs when one person sells something that another person in a different country buys. Another way to say this is one country exports (sells) goods that another country imports (buys).
Before money came into use, people exchanged goods and services through bartering. Bartering is an agreement to trade a certain quantity of a good or service in exchange for another good or service. In this system, the bartered goods have the same estimated value.
Large, industrialized countries tend to export a much wider variety of products than less-developed countries.
The Volkswagen Beetle is a German-made car that is very popular in the United States.
Sometimes, people export goods because they can produce a product at a cost that allows them to compete on a global stage. For example, some countries are able to easily produce large amounts of agricultural products, such as coffee in Columbia or cocoa in Cote d’Ivoire. Other countries have large amounts of natural resources, such as oil or iron ore. These countries export their goods to other countries that need them.
Countries also export goods because they might be able to charge higher prices abroad than they can at home. People in wealthier nations can spend more money on goods such as food and clothing, while people in developing nations don’t have the money to spend on what they consider luxuries. What are some things you buy that a kid in a developing nation couldn’t afford?
In some cases, they might not have the items in their home country. People in Pennsylvania cannot grow bananas or coffee beans in their backyards. To get these goods, they buy bananas from Ecuador and coffee from Brazil.
Countries might import goods because another country makes better or cheaper products. China is one of the world’s leading electronic equipment manufacturers. A company in China might be able to make and export electronics much more cheaply than a U.S. company can make them. As a result, the Chinese company can sell at a lower price.
People in the United States buy Chinese electronics because they are less expensive. Do you have a smart phone or a tablet? How much did it cost? Where was it made?
Countries also import essential goods that they cannot produce enough of themselves to meet their needs at a reasonable price. Oil is an essential good in the United States. In 2016, the country imported approximately 10.1 million barrels of petroleum per day from about 70 countries, according to the U.S. Energy Information Administration.1
DISCONTINUED
The United States has almost entirely stopped producing some goods because foreign producers can make these goods faster, more cheaply, and often better. Many types of clothing can be manufactured more cheaply in foreign countries, such as China and India, because they have a lower cost of labor. In fact, the United States imports nearly all of its clothes, 97.5 percent according to the American Apparel & Footwear Association. The United States has also stopped making some electronic equipment, because foreign competitors can make them more efficiently.
In 2016, China was the top textile exporter.
Exports help the United States and other industrialized countries maintain high levels of employment. Lots of workers are needed to produce the goods that are exported.
To learn more about trade specialization, check out this Crash Course video. How does global trade make lives better in the countries that trade? What are some of the problems with international trade?
Crash Course economics #2
TRADE SPECIALIZATION
The cost of producing goods varies by country. It might cost $10 to build a chair in one country and $12 to build the same chair in another country. Production costs vary because of several key factors in the production process—labor, equipment and technology, land, and natural resources. These differences influence which goods countries import and export.
Some countries, especially in developing areas of the world, have many low-skill workers who are willing to work for lower wages. Goods that require a lot of low-skill labor can be produced more cheaply in these countries.
In contrast, the production of some goods requires expensive equipment and technology, also known as capital. In developing countries, capital is scarce and expensive. In wealthy countries such as the United States, capital is more common and less expensive. Therefore, it makes sense for companies in the United States to produce goods that require a lot of capital. The top exports of the United States include commercial aircraft, industrial machines, semiconductors, chemicals, and petroleum products.2
Countries usually benefit by specializing in producing goods that their available labor, capital, land, and resources allow them to produce most efficiently and cheaply. They trade these goods for products made in other countries.
The Boeing Everett Plant in Everett, Washington, where the company assembles wide-body Boeing airplanes
credit: Maurice King
In some cases, a country might be better than other countries at producing all of the products they are able to manufacture. For example, U.S. companies might be able to produce both tables and computers more efficiently and cheaply than foreign competitors. However, instead of making both, the U.S. companies will often specialize in producing computers, which they can make with the greatest efficiency and cost advantages. This is called the theory of comparative advantage.
According to the theory, all countries benefit from trading with one another regardless of how efficiently they can produce any one type of good. When countries specialize in the products in which they have the greatest efficiencies and cost advantages, everyone benefits. Everyone can buy one another’s best products.
In 2016, the total U.S. trade deficit was $503 billion. The United States imported $2.712 trillion in goods and services and exported $2.209 trillion.3
In reality, trade specialization does not always work the way the theory of comparative advantage would predict. In the real world, no country specializes in the production of only a single product! Also, all countries produce some goods that another country could produce more efficiently. Italy might be able to produce shoes more efficiently than Mexico. Yet if Italian shoe makers cannot find Mexican buyers or cannot transport the shoes cheaply to Mexico, they might not sell the shoes in Mexico. In this case, Mexican companies would continue to make shoes locally.
SUPPLY AND DEMAND
Imagine it’s a hot day and a team of construction workers is laying the foundation for the new middle school in your town. You know the workers are going to be thirsty, so you bring 30 cups of lemonade to sell for $1 each. But there are 60 construction workers. There’s not enough lemonade to go around. Are you tempted to charge more money? Those sweating workers might be willing to pay $2 for a cup of cold lemonade. Maybe even $3!
The laws of supply and demand affect all trade, including global trade. Supply is the quantity of goods that people have to sell at a particular price. Demand is the quantity of goods people are willing to buy at a particular price. In a perfect world, supply and demand would be equal. Sellers have the exact quantity of goods that buyers want to buy at a certain price. When supply and demand are not equal, the price of goods can change.
Let’s consider another scenario. Assume the price of a table is $200. At that price, those who make the table, the producers, are willing to make 100 tables because they can sell them and make a good profit.
But what if buyers are only willing to purchase 50 tables at the $200 price? To get rid of the remaining 50 tables, the producer lowers the price to $70. At the new price, buyers are willing to purchase the remaining 50 tables. In this example, supply was greater than demand. It caused the price of the table to drop.
Sometimes, demand is greater than supply. The table maker again makes 100 tables to sell at $200. This time, 150 people want to buy the tables. There are more buyers than tables available. Some of the buyers offer $225 to the table maker, who accepts the offer and sells all of the tables at the higher price. In this case, demand was greater than supply and caused the table’s price to rise.
TRADE IMBALANCES
A trade balance is the difference between exports and imports. Exports produce income for a country and add to the trade balance. Imports send money to foreign countries to pay for goods and services, reducing the trade balance.
When a country exports more than it imports, it has a trade surplus. When it imports more than it exports, a trade deficit exists. In a perfect world, two countries would buy and sell an equal amount of products from each other. They would have a trade balance. This rarely happens in the real world. Often, one country sells more goods to another country than it buys in return. When this occurs, a trade imbalance exists. Sometimes, a trade imbalance occurs because one country can produce goods more cheaply than another country. Often, this happens because the cost of labor is lower in the country that is selling.
VOCAB LAB 
Write down what you think each word means. What root words can you find to help you? What does the context of the word tell you?
barter, capital, comparative advantage, currency, deficit, efficiency, profit, export, import, labor, supply and demand, surplus, and trade imbalance.
Compare your definitions with those of your friends or classmates. Did you all come up with the same meanings? Turn to the text and glossary if you need help.
A trade imbalance might also occur because of the value of each country’s currency. At any point in time, a country’s currency has a value in the global market. This value determines how much a unit of the currency can buy. When a currency has a high value, it can buy more goods. It is also more desired in the global market.
How does this affect global trade imbalances? If the U.S. dollar is worth more than the Japanese yen in the global market, then Japanese businesses will receive fewer U.S. dollars for their products. This causes the prices of Japanese products to fall for U.S. customers, so they will buy more Japanese goods. In Japan, however, U.S. businesses will need to charge more Japanese yen for their goods. This causes the price of American-made goods in Japan to rise. The Japanese people will buy fewer U.S. goods because of the higher prices.
Globalization has changed the way the global community does business. In communities from Alaska to Shanghai, global trade has opened doors to new goods, people, and ideas. Through trade, people from different cultures and parts of the world can connect more than ever.
•What is the theory of competitive advantage and how does it affect global trade?
•What are some of the benefits and drawbacks of being fully reliant on another country for certain products?
•How is a trade imbalance created and should countries try to keep the imbalance small?
WHY DO PEOPLE TRADE?
Trade is the exchange of goods and services. In this activity, you will investigate and explore the reasons why people and countries trade.
•Why do people trade? Write down all of the reasons why people might trade.
•To test your hypotheses on why people trade, set up a trading experiment. Recruit your classmates, friends, or family to be trading partners. Each person gets a paper bag with some small items inside, such as candies, gum, pencils, erasers, granola bars, stickers, and more. Some bags will have more of one item, others will have more of another item. Some bags may hold only one type of item. The trading partners can keep whatever they have in their bag at the end of the trading session.
•Divide your group into two subgroups. For the first round of trading, each person can trade only with people in their subgroup. Allow participants up to 10 minutes to make their trades.
•At the end of the trading round, how many participants made at least one trade? Why did they trade? Do they believe that they are better or worse off after trading? Why? Why did some participants decide not to trade? How did the trade restriction affect trade?
•Open a second round of trading. This time, there are no restrictions. How many participants traded this time? How did eliminating the trade restrictions affect trade? Why did participants trade? Do they believe they are better or worse off after trading? Why?
To investigate more, design a trading scenario where some people have a greater number of items and more valuable items than others. How does this impact trade? Does each person still benefit from trade? How does this example apply to trade between wealthy and poor nations?
WHO IS RESPONSIBLE FOR WORKER SAFETY?
In today’s global economy, companies often set up factories in areas with the lowest costs. With some of the lowest wages in the world, Bangladesh has attracted many Western companies, particularly in clothing manufacturing, called the garment industry.
Many American companies, including Walmart and the Gap, have contracted with Bangladesh garment factories to produce clothing.
•Safety standards in Bangladesh garment factories are not the same as standards in the United States. This has been highlighted by numerous disasters. You can read about these tragedies at the following websites.
•“Building Collapse in Bangladesh Leaves Scores Dead”
Savar Building Bangladesh 2013
•“Horrific Fire Revealed a Gap in Safety for Global Brands”
Fire safety global brands
•Some companies have had different responses to the working conditions in Bangladesh. Learn more about their response.
•“Some Retailers Rethink Role in Bangladesh”
Retailers rethink Bangladesh
•Should a company withdraw from a country where safety standards are not met or should it stay and try to improve working conditions for the local workers? Choose a side and research your position. Then, write a persuasive essay explaining your position or debate a classmate who has taken the opposite position.
To investigate more, look at some of the tags on your clothing. Where are your clothes made? Do you as a consumer have any responsibility for workers in other countries who make the clothes you wear? If yes, what can you do?
