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We have become so accustomed to having most of our needs met anytime we want, that we seldom stop to think about where all of the goods that we use come from.

Let's think about a typical day in the life of Carlos Martinez. Think of all of the goods that Carlos will use today.

Carlos gets up each morning from a mattress that may have been produced in Kansas and sheets that could have been produced in Great Britain.

He takes a shower and uses soap from Canada, dries with a towel from India, uses toothpaste from Chicago, deodorant from California, and cologne from France.

The heating element that cooks his breakfast was made in Taiwan.

Carlos' clothing was manufactured in Scotland and his shoes were made in Italy.

Before leaving for work, he watches the news on a television made in Japan, grabs his Swiss watch, and checks his schedule on his computer made in Singapore.

Then he jumps in his BMW made in Germany and drives to work while talking on his cellular phone manufactured in China.

Since Carlos is an American citizen, this means that the United States must do a tremendous amount of trading with other countries.

Why does the United States trade with other countries?

The answer is that frequently other countries have cheaper raw materials and labor that make the finished good less expensive than it would be if it were made here.

Add to this the innovations taking place in technology, and it is apparent that the entire world has become an economic system.

Even as you are reading this lesson, the international economic structure is changing.

It is important that you stay current on international economic issues and trends.

Optimizing resources has become the important factor in production.

This is why the part each country plays in production is unique.

Competition between countries may, and usually does, get down to who has the comparative advantage.

This advantage usually emerges from what began as an equality in specialization in the production of the good or service.

Do you remember our study of the Law of Comparative Advantage from the earlier lessons?

The Law of Comparative Advantage was developed by David Ricardo as a reaction to the economic proposals of Adam Smith.

The first economist to challenge the views of Smith was David Ricardo (1772-1823).

At the heart of the Ricardian system is the notion that economic growth must sooner or later be slowed down or stopped altogether.

Ricardo developed the "law of comparative costs (advantage)," which basically stated that countries that had the most efficient factors of production could produce goods.

The cost of growing wheat in Great Britain had risen rapidly because of limited farmland.

Ricardo believed that Great Britain would be better off to import the cheaper wheat from other countries that had more efficient factors of production.

In other words, regions and countries should do what they do best.

Do you recall the West, South and the North in the United States before the Civil War? Each of these regions specialized in certain products that they could produce more efficiently that the other sections.

Despite the advantage of trade, countries may tend to limit or discourage trade from outside of its own country.

The government may discourage trade by imposing a tariff, or a tax on imported goods.

Sometimes the government may limit the amount of a good imported or exported by setting a quota.

Trade can be further discouraged by an embargo.

In an embargo, a country stops all trade with another country.

Ships from that country are not allowed to dock.

In some instances, countries may adopt a policy of free trade.

One of the strongest arguments in favor of tariffs is to limit or restrict trade. American manufacturers could simply place higher prices on articles made in this country.

Free Trade: trade among nations in which all policy restrictions that may impede its flow of goods from one country to another is eliminated.

To comprehend international trade, an understanding of the political, cultural, and economic development of other countries is helpful.

Since this would involve a tremendous amount of detailed study, let's use a brief synopsis to illustrate the concept of international trade.

Let us go back and review the economic spectrum.

Now look at the graphic that follows.

This spectrum defines the various types of governments.

In our present-day world, three principal economic systems compete with capitalism, the economic model of the United States. They are socialism, communism, and a market socialism.

Each of these has developed a model explaining the logic of its own system.

Each must, like capitalism, concern itself with scarcity and allocation of resources.

In a socialist economy, the basic problems of scarcity and allocation of limited resources are solved by production for use or need rather than production for profit.

With most of the means of production owned and controlled collectively, usually by the government, production can be planned and distribution organized to assure fairness for all of the people.

Socialist theory believes that the basic economic questions should be answered by the government.

The socialist (communist) model was developed by Karl Marx.

Marx saw history not as a meaningless succession of events but a social change resulting from the struggle of classes.

Marx argued that all wealth, is produced by labor, with the other factors of production either passive or also the result of labor.

In other words, the factors of raw materials, capital, and management could not exist or be used without the labor of the workers.

Please reread this important page.

The factor of labor is what would give something its value.

Because workers are not paid the full value of what they produce, capitalists are able to accumulate this large amount of surplus value.

Surplus value in the opinion of Marx, is the difference between what the workers produce and what they earn.

As this process continues, the middle class disappears and society becomes divided between capitalists (the people who take advantage of the workers) and the workers.

Unlike most socialists, who believed in progress by peaceful evolution, Marx believed the transition from capitalism to communism would follow a particular pattern and would be accompanied by a violent revolution.

This revolution would take place in the following stages:

The first stage is marked by the workers' overthrow of capitalism, (business owners) and is followed by the seizure of the government.

The second stage is characterized by the establishment of a small centralized authority that will govern in the name of the workers.

In the third stage, the dictatorship of the proletariat is replaced by the establishment of a "socialist" society. The political state will still exist and will have considerable power. The economic production is to be controlled by the workers.

The fourth and highest stage is that of the true "communistic" society. Production will be in such abundance that work and payment will be made to everyone according to his/her need.

The communist economy seeks to end capitalism by revolution, whereas the socialists wish to do it through the ballot box.

In both economic systems of socialism and communism, the government will have a large influence on the economy but will differ on the amount of freedom the people have to choose what they want to buy.

The basic issue, therefore, both politically and economically is the degree of freedom allowed the individual. In the chart we can see the complete political spectrum as it moves from left to right.

At the extreme left, we see the complete freedom of the individual with the absence of any governmental control. Such a condition, the absence of government, is called anarchy.

At the extreme right, citizens have lost their freedom to a totalitarian government that has total control over every aspect of their lives. In an absolute monarchy there is rule by only one person.

In an oligarchy only a few people rule, whereas in a democracy the many rule. The political spectrum defines the extent of personal freedom the citizen has in relation to government authority.

In the above figure we see the economic spectrum. Here the difference lies in who decides the answers to the basic economic questions. What? How? and For whom?

Mixed capitalism, sometimes called welfare capitalism, favors decisions by consumers but allows for some central planning. As we move toward the left from mixed socialism, to socialism, to communism, central planning increases and reliance on the market mechanism declines.

At the extreme left, we see total central planning, where government makes almost all the decisions and consumers choices are given little attention.

Our economic spectrum is not complete unless we include the ownership of wealth. In the figures we also see complete private ownership on one side and complete collective ownership on the other. Although no countries have either of these extremes, classical capitalism calls for a maximum of private ownership and communism calls for a maximum of collective ownership, particularly of capital goods. Again we see the different degrees of stress on ownership of wealth given by mixed capitalism, mixed socialism, and socialism.

Let us now apply our knowledge of the political and economic systems to the area of international trade.

International trade may be the most efficient method for supplying demands; and yet, it may be purely political.

Sometimes it is difficult to know which, if either, of these concepts is correct.

It is best for an individual to be informed about international economics.

From 1950 to 1975 the United States ran a surplus in its foreign trade.

In other words, we exported more goods to other countries than they sent to America.

Since 1975, the United States has been running a trade deficit.

In 1995, the United States exported $584,742,000 and imported $743,445,000 worth of goods.

One major area of the U. S. trade deficit is in the sales of foreign automobiles.

Summary

There will always be trade controversies between the United States and other countries.

Please watch for stories about foreign trade from news sources.