Europe s Ame Specialization, Trade Barriers, & Currency Exchange
STANDARDS: SS6E8 Analyze the benefits of and barriers to voluntary trade in Europe. a. Explain how specialization encourages trade between countries. b. Compare and contrast different types of trade barriers such as tariffs, quotas, and embargoes. c. Explain why international trade requires a system for exchanging currencies between nations.
Voluntary trade occurs when different countries choose to engage in the exchange of goods with one another. Countries trade goods because no country has all the resources necessary to produce every single thing its people need. Voluntary trade is good for countries because it lets a country sell its own resources and buy the resources it needs.
Because countries cannot produce all of the goods/services that they need, they must specialize in what they do best. Specialization is an efficient way to work, and the cost of items produced is lower. It increases trade because a country can get what it needs at the lowest cost when produced by someone who specializes in producing that item.
For example, Italy is home to highly skilled industrial workers, engineers, and scientists. The country also has many industrial factories. As a result, Italy specializes in the manufacturing of automobiles. Brain Wrinkles
Ferrari Assembly Line in Italy
Trade barriers are natural or man-made obstacles to voluntary trade. Natural trade barriers include mountain ranges, deserts, rainforests, or lack of access to bodies of water. In Europe, the Alps make it difficult for northern Italy to trade with Switzerland. The countries are building tunnels through the mountains to help make trade easier. Political trade barriers are policies passed by a government to regulate trade. Brain Wrinkles
Italian Alps
Trade is an important part of every country s economy. However, countries sometimes set up trade barriers to restrict trade because they want to produce their own goods and sell them in their own country. To limit or control trade, countries set up trade barriers, such as tariffs, quotas, and trade embargoes.
Tariffs are taxes placed on imported goods. Tariffs are used to protect a country s own businesses from foreign competition. The added tax makes an imported good more expensive, thus encouraging the country s consumers to buy domestically produced items.
When countries outside of the European Union want to sell their goods in the EU, they must pay tariffs. This makes the non-eu products more expensive than the products made by EU members. Which would you buy? Example: If a US company wants to export fruit to a country in the EU, the US company must pay a tariff which makes US fruit more expensive. Brain Wrinkles
Quotas are restrictions on the amount of a good that can be imported into a country. They are used to prevent too much of a good from entering a country. When there is too much of a good, prices fall and businesses don t make a profit. Quotas limits the amount of goods available, which causes prices to rise. They help protect a country s own businesses from foreign competition. Brain Wrinkles
The European Union places a quota on the amount of steel that can be imported from certain countries. The effect is similar to a tariff, because it makes steel from those countries harder to get, and more expensive. This helps steel producers within EU sell more steel.
Embargoes are a political barrier to trade. In an embargo, a nation forbids trade with another country. Refusing to trade with another country is a way to hurt it economically.
Recently, the European Union began placing embargoes on the sale of certain weapons and other technologies to Iran. This was done because the countries of the EU suspected Iran was trying to build nuclear bombs. EU countries hope that the embargo will make it difficult for Iran to build this type of weapon.
Currency is something that is assigned value and can be used to purchase goods and services in a market. Because countries have different forms of currency, international trade requires a system for exchanging currencies between nations. Money from one country must be converted into the currency of another country to pay for goods in that country.
What the currency of a nation is worth in terms of another country s currency is called the exchange rate. For example, an exchange rate of 58.27 Russian rubles to the US dollar means that 58.27 Russian rubles are worth the same as 1 US dollar. Foreign exchange makes it easier to trade all around the world.
Nation Currency Exchange Rate Against US Dollar Switzerland Swiss Franc.97 Russia Russian Ruble 58.27 Denmark Danish Krone 6.66 United Kingdom British Pound.78 European Union Euro.89
When a nation s economy changes, so does the value of its currency. Because of this, exchange rates are constantly changing.