International Trade Why Do Nations Trade

International Trade

Why Do Nations Trade? ► ► ► 1. 2. 3. Nations trade for the same reason individuals trade— Out of self-interest. What they trade is determined by: Specialization—nations, like people, produce only certain goods and services. Specialization is determined by… Natural resources Human capital Physical capital

International Trade International trade, which is voluntary, creates wealth for a country. Without international trade, each country would be forced to consume only the goods and services it produces within its own borders. Switzerland, for example, would never get to drink coffee.

Absolute Advantage A country has an absolute advantage over another country in trade when it can simply produce more of a product than another nation. ► China can produce more rice than the US… ► So, China has an absolute advantage in rice production. ► Large nations usually have an absolute advantage over small nations in the production of EVERYTHING. ► So, why do large nations trade with small nations? ►

Comparative Advantage ► ► ► ► ► Honduras cannot produce as many T-shirts as the US… The US has an absolute advantage in T-shirt production. So, why does the US import T-shirts from Honduras? Because it is CHEAPER for Honduras to manufacture Tshirts than it is for the US. Why? Honduras has cheaper labor, and fewer regulations… On pollution standards, work hours, benefits, child labor, safety standards, etc. So, Honduras has the COMPARATIVE advantage in Tshirts… Because they can make them CHEAPER than the US. A country should always IMPORT a product if another nation has the comparative advantage.

Which of the following would be most likely to lead to a nation developing comparative advantage in the production of computer software? A. ) the establishment of high import tax rates that discourages foreign competition. B. ) the development of a highly skilled and technologically advanced workforce. C. ) the construction of thousands of automobile factories. D. ) the election of a multi-lingual President who supports foreign trade.

Which nation is most likely to enjoy the absolute advantage in terms of corn production? A. ) the US. B. ) Japan. C. ) Belgium. D. ) Australia.

The US as Importer & Exporter The US is usually the leading exporter in the world… Automobiles, computer software, medical equipment and entertainment are our top exports. The US is also the world’s largest importer— Clothing, food, toys, furniture and oil are some of our top imports. Every year we import an average of $2. 74 trillion.

The Balance of Trade/Balance of Payments Is the difference between a nation’s imports and exports. When the U. S. exports more than it imports it has a trade surplus. When the U. S. imports more than it exports it has a trade deficit. The US has posted a trade deficit since the 1960’s. Do not confuse BALANCE of TRADE with… BALANCE OF PAYMENTS—The difference between ALL MONEY flowing out of the US vs. ALL MONEY flowing in.

In 1958, US exports were valued at $430 billion and US imports were valued at $230 billion. In 1958, therefore, the US ran a. . . A. ) trade deficit. B. ) trade surplus. C. ) trade balance.

Marjorie, a US citizen, travels to Mexico and eats a burrito at a roadside stand. This purchase would be reflected in the US‘… A. ) balance of trade. B. ) balance of payments. C. ) trade surplus. D. ) trade deficit.

Protectionism ► ► ► ► ► Oftentimes, the government is “persuaded” to establish polices… That keep foreign products OUT of the United States. This policy is called “PROTECTIONISM”. Who is “Protected”? … DOMESTIC PRODUCERS. Name a DOMESTIC auto company: GM/Ford/Chrysler… Who might they want to be “protected” from? Toyota/Honda/Nissan, etc.

Trade Barriers: Quotas Governments use TRADE BARRIERS… To keep foreign products out of the country. There are three primary trade barriers… 1. Trade Quotas—LIMIT quantities of foreign products allowed into a country.

Trade Barriers: Tariffs A tariff is a TAX on IMPORTS. A 10% tariff on a $20, 000 imported Toyota… Would raise the cost to $22, 000. Who would SUPPORT such a tax? GM/Ford/Chrysler… Who is HARMED by such a tax? ALL CAR BUYERS.

Trade Barriers: Embargo—A government ban on all trade with a foreign nation. n The Foreign Assistance Act of 1961 banned all trade with Cuba. n The act also imposes penalties on any country that trades with Cuba. n

Due to the trade embargo, Cuban streets are a “time warp” with many automobiles dating from the 1950’s.

In order to encourage New Balance to continue to make their shoes at factories in Massachusetts, the US Congress has undertaken to "protect" the company by taking steps to make foreign-made athletic shoes more expensive. An additional tax on such shoes would be considered a. . . A. ) quota. B. ) tariff. C. ) embargo. D. ) limit.

Arguments For Protectionism The primary argument of protectionism centers on JOBS— They argue that if the US keeps foreign products OUT of the country… American consumers will be forced to buy products that are… MADE IN THE USA… By AMERICAN workers, instead of foreigners.

The Arguments AGAINST Protectionism Free Traders (those who oppose protectionism)… Focus on the power of COMPETITION— Competition results in: LOWER PRICES…and… HIGHER QUALITY. Both of which increase our OVERALL standard of living.

Government policies like protectionism create winners and losers. Who would be the winners associated with protectionist policies? A. ) American manufacturers. B. ) American importers. C. ) American consumers. D. ) American service providers.

International Agreements World Trade Organization—est. 1995, negotiates agreements & resolves disputes. The European Union—est. 1957, coordinates the economic policies of 27 nations… Many EU nations use a common currency, called the Euro.

ASEAN Is the ASSOCIATION of SOUTHEAST ASIAN NATIONS… And was formed by Indonesia, Malaysia, the Philippines and Thailand… And whose goal is to promote SECURITY… Cultural integration… And FREE TRADE between member nations.

NAFTA Is the NORTH AMERICAN FREE TRADE AGREEMENT… ► Its goal is to create an economic “ United States of North America”… ► By eliminating trade barriers between the US, Canada and Mexico. ► So far, 70% of all tariffs have between the three countries have been cancelled. ►

The Results of NAFTA n n n Before NAFTA, high tariffs made Mexican products EXPENSIVE… And this kept American factories in business. With the cancellation of tariffs, however, Mexican-made products became MUCH CHEAPER… So American factories began to close down… And reopen in Mexico… Resulting in the loss of hundreds of thousands of manufacturing jobs in the US.

The Results of NAFTA ► ► ► When NAFTA was established, US EXPORTS to Mexico exploded… The US unemployment rate dropped… And wages increased. This indicates that as low-paid factory jobs disappeared… They were replaced by high-skilled, higher-paying jobs.

Free trade agreements like NAFTA and ASEAN also create winners and losers. In terms of NAFTA, who were the losers? A. ) highly-skilled American workers. B. ) middle-class American consumers. C. ) the US higher-education industry. D. ) low-skilled American workers.

Because there are hundreds of currencies in the world… So we need a way to convert one currency into another. A Foreign Exchange Market is a market for buying and selling currency. Once the value of one currency is determined in relation to another, a foreign exchange rate for the two has been established. The Value of Currency

Foreign Exchange Rates In the U. S. the foreign exchange rates are expressed in two ways: 1. How many foreign units= one US dollar. 2. How many dollars= one foreign unit Example: If one dollar equals. 50 British Pounds… …then one British Pound equals… $2. 00

Devaluation & Appreciation When one nation’s currency decreases in value relative to another, devaluation has occurred. When one nation’s currency increases in value relative to another, appreciation has occurred.

On Monday, $1 buys 2 euros. On Friday, $1 buys 1. 5 euros. Between Monday and Friday, the euro. . . A. ) appreciated relative to the dollar. B. ) depreciated relative to the dollar. C. ) remained static relative to the dollar.

Why Has the Dollar’s Value Fallen? The primary reason is due to our current trade deficit… We’re buying more from the rest of the world than they’re buying from us. As long as that goes on, we're shipping to other countries pictures of American presidents on little bits of paper and they're sending us automobiles and T-shirts… At some point they don't want any more of our pictures of American presidents… And when people DON’T WANT an item… What happens to that item’s value? IT DROPS!

Why the Weak Dollar is Bad News ► ► ► Americans are COMPLETELY dependent on foreign products… When the dollar is WEAK, we need MORE DOLLARS to buy foreign products. For example, the price of a barrel of oil was $26 in 2002… The same barrel costs $107 today. One of the PRIMARY REASONS for the increase in oil prices is the decline in the value of the dollar.

Why is a Weak Dollar Good for American Businesses? Say a German manufacturer has 300, 000 euros and wants to buy some new $300, 000 Caterpillar bulldozers… ► And the exchange rate is one dollar = one euro. ► He takes his 300, 000 euros and exchanges them for dollars—how many dollars does he get? ► ► How many bulldozers can he buy? ►$300, 000 ►One bulldozer. ►$600, 000 Now say the exchange rate is two dollars = one euro… ► How many dollars does he ► get for 300, 000 euros? ► Two bulldozers. ► How many bulldozers can he buy?