Financing Trade

Different nations have different currencies. The United States uses the dollar as its medium of exchange; Mexico, the peso; Britain* the pound; and Japan, the yen. If you travel outside the United States or invest in foreign business* you will want to knowT the cxchangc rate—what the price of your nation's currency is in terms of another nation's currency. Most of the wTorldrs nations use a flexible exchange rate

Protesting WTO Policies At an anti-WTO demonstration, protesters criticize the organization ior implementing policies that erode human rights and labor and environmental standards. What is the World Trade Organization?

Chapter 26 Comparing Economic Systems 569

system. Under this system, the forces of supply and demand are allowed to set the price of various currencies. Thus, a currency's pricc may changc each day.

The Balance of flrade

A currency's exchange rate can have an important effect on a nation's balance of trade. The balance of trade is the difference between the value of a nation's exports and its imports. If a nation's currency depreciates, or becomes "weak," the nation will likely export more goods because its products will become cheaper for other nations to buy. If a nation's currency appreciates in valuej or becomes "strong/' the amount of its exports will decline.

Trade Deficits and Surpluses

A country has a trade deficit whenever the value of the products it imports exceeds the value of the products it exports. It has a trade surplus whenever the value of its exports exceeds the value of its imports.

Effects of a Trade Deficit

What are the effects of a trade deficit? To illustrate, the large deficit in the United States's balance of payments in the late 1990s flooded the foreign exchange markets with dollars. The increase in the supply of dollars caused the dollar to lose some of its value. The weaker dollar caused unemployment in import industries as imports became more expensive, and it caused employment to rise in export industries as the prices of these goods became more competitive.

Eventually, under flexible exchange rates, trade deficits tend to automatically correct themselves through the pricc system. A strong currency generally leads to a dciicit in the balance of payment and a subsequent decline in the value of the currency. A weak currency tends to cause trade surpluses, which eventually pull up the value of the currency.

ifSEBSEHi Describing What is a trade deficit?

SECTION ASSESSMENT

Checking for Understanding

1. Key Terms Write a paragraph related to international trade using Lhe following key terms:

export, import, comparative advantage, free trade.

Reviewing Main Ideas

2. Explain How can a nation resLricL imports? Why would a nation wish to restrict its imports?

3. Describe What is the purpose of Lhe Norlh American Free Trade Agreement (NAFTA)? How is NAFTA different from the World Trade Organisation?

Critical Thinking

4. Evaluating Information What do you think is the single most important reason nations trade with one another? Explain your answer.

5. Cause and Effect On a diagram like lhe one below, explain how a quota on a good or service produced in your community might alTecL Lhe workers in a particular industry. Then explain how the same quota might affect consumers.

Quota

Quota

Wirkers

Consumers

6. Interpret Study the map of the European Union on page 567. How many countries are applying to join the Union? Is Italy part of Lhe EU? Is Romania?

it BE AN ACTIVE CITIZEN^

7. Research Find opinions about NAFTA on the Internet. Scan sev eral articles Lo idenLify which groups support NAFTA and which groups oppose it. Provide the reasons each group gives for its position.

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