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The two motivations for international trade are the fact that it is voluntary and that it creates wealth. International trade encourages individuals and businesses to specialize - to produce a limited number of goods and services - and leads to worldwide interdependence. Specialization may occur because of particular human or national resources unique to a nation. How a nation decides what to produce is determined by absolute and comparative advantage. VIDEO OBJECTIVES - Explain how specialization encourages trade - Explain how absolute advantages can influence economic choices - Explain how comparative advantages can affect a nation's economy

The money needed to carry on international trade is funneled through foreign exchange markets where one nation's currency is converted into another's. These markets also allow international business transactions. Once the value of one currency is established in relation to another, a foreign exchange rate has been established. Since World War II, trading nations have used two foreign exchange systems: first, the adjustable-peg system and later the floating, or flexible, system. Nations determine the strength of their international trade by measuring the balance of payments and the balance of trade. VIDEO OBJECTIVES - Explain why foreign exchange rates are necessary - Describe how a nation determines its balance of payments - Explain the significance of the balance of trade