International Trade Chapter 17

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International TradeChapter 17
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Resource Distribution and Trade

• Each country of the world possesses different
  types and quantities of land, labor, and capital
  resources.
• By specializing in the production of certain
  goods and services, nations can use their
  resources more efficiently.
• Specialization and trade can benefit all nations.
  Open competition benefits everyone

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How do nations benefit from trade?Absolute and
Comparative Advantage

• A person or nation has an absolute advantage when
  it can produce a particular good at a lower cost
  than another person or nation.

• Comparative advantage is the ability of one
  person or nation to produce a good at a lower
  opportunity cost than that of another person or
  nation.

The law of comparative advantage states that
nations are better off when they produce goods
and services for which they have a comparative
advantage in supplying.
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Kate has an absolute advantage because she
produces more of both items
  T-shirts Birdhouses
Kate 6 2
Carl 1 1
For Kate 1 birdhouse 3 T-shirts For Carl 1
birdhouse 1 T-shirt Carl should give up making
T-shirts
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Carl has a comparative advantage in birdhouses
  Opportunity cost for T-shirts Opportunity cost for Birdhouses
Kate 1/3 Birdhouses 3 T-shirts
Carl 1 1
For Kate 1 T-shirt 1/3 BirdhouseFor Carl 1
T-shirt 1 Birdhouse
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  T-shirts Birdhouses
Kate 6 2
Carl 1 1
  Opportunity cost for T-shirts Opportunity cost for Birdhouses
Kate 1/3 Birdhouses 3 T-shirts
Carl 1 1
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Imports and Exports of the United States
America is the worlds richest country and
largest importer. In 2012, the US bought US2.334
trillion worth of imported products. That total
is up by 7.8 since 2008.
Worlds richest country the USA placed second in
exporting during 2012. America shipped US1.55
trillion worth of goods around the globe, up by
18.9 since 2008.
The United States main trading partners are
Canada and Mexico (NAFTA)
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Goods and Services Deficit Increased in January
2014
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WHAT DOES UNITED STATES EXPORT?
                                                  
                                                  
                                               
                                      
                                      
                                      
                                      
                                      
1  Refined Petroleum 82,435,395,393.78 6.0
2  Cars 45,942,140,263.17 3.3
3  Integrated Circuits 38,076,490,687.79 2.8
4  Packaged Medicaments 33,799,228,734.32 2.5
5  Vehicle Parts 32,383,388,802.49 2.4
6  Gas Turbines 31,237,354,054.65 2.3
7  Planes, Helicopters, and/or Spacecraft 30,570,688,728.76 2.2
8  Gold 24,386,901,730.26 1.8
9  Medical Instruments 22,582,804,575.53 1.6
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1  Crude Petroleum 316,662,798,759.68 15
2  Refined Petroleum 157,852,991,937.77 7.4
3  Digital Disk Drives 63,389,526,637.83 3.0
4  Integrated Circuits 55,700,511,530.66 2.6
5  Cars 46,784,971,542.74 2.2
6  Packaged Medicaments 34,320,314,631.01 1.6
7  Vehicle Parts 33,298,328,830.08 1.6
8  Gas Turbines 31,575,835,632.49 1.5
9  Planes, Helicopters, and/or Spacecraft 30,171,487,686.30 1.4
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Trade and Employment

• Workers who lose their jobs due to specialization
  face three options
• Unemployment Inability to adapt and find a new
  job
• Relocation Moving to where current skills meet
  current jobs
• Retraining Gaining new human capital to meet the
  demands of specialized labor markets

As nations begin to specialize in certain goods,
dramatic changes in the nations employment
patterns also occur.
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What Are Trade Barriers?
A trade barrier is a means of preventing a
foreign product or service from freely entering a
nations territory.

• Import Quotas
• An import quota is a limit on the amount of a
  good that can be imported.
• Voluntary Export Restraints
• A voluntary export restraint (VER) is a
  self-imposed limitation on the number of products
  shipped to a certain country.
• Tariffs
• A tariff is a tax on imported goods, such as a
  customs duty.
• Other Barriers to Trade
• Other barriers to trade include high government
  licensing fees and costly product standards.
• Subsidies lowers the cost of production

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• Closed v. Open Economies
• Closed economy- does not engage in trade or
  other economic interaction with other countries.
  Very rare.
• Open economy- free and unfettered trade. Also
  rare.
• Most economies give protection to certain
  domestic industries.
• Interdependence- All nations need to trade with
  other nations to get natural resources.

• The Effects of Trade Restrictions
• Increased Prices for Foreign Goods
• Tariffs and other trade barriers increase the
  cost of imported products, making domestic
  products more competitive.
• Although manufacturers of many products may
  benefit from trade barriers, consumers can lose
  out.
• Trade Wars
• When one country restricts imports, its trading
  partner may impose its own retaliatory
  restrictions.

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Arguments for Protectionism
Protectionism is the use of trade barriers to
protect a nations industries from foreign
competition.

• Protecting Jobs
• Protectionism shelters workers in industries that
  would be hurt by specialization and trade.
• Protecting Infant Industries
• Protectionist policies protect new industries in
  the early stages of development.
• Safeguarding National Security
• Certain industries may require protection from
  foreign competition because their products are
  essential to the defense of the United States.

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• Balance of Trade
• When a nation exports more than it imports, it
  has a trade surplus.
• When a nation imports more than it exports, it
  creates a trade deficit.
• The relationship between a nations imports and
  its exports is called its balance of trade.

• The United States Trade Deficit
• The Trade Deficit
• The United States has run a trade deficit since
  the early 1970s.
• Why the Trade Deficit?
• Imports of foreign oil as well as Americans
  enjoyment of imported goods account in part for
  the large American trade deficit.
• Reducing the Trade Deficit
• Quotas and other trade barriers can be used to
  raise prices of foreign-made goods and urge
  consumers to buy domestic goods.

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International Cooperation

• Recent trends have been toward lowering trade
  barriers and increasing trade through
  international trade agreements.
• In 1948, the General Agreement on Tariffs and
  Trade (GATT) was established to reduce tariffs
  and expand world trade.
• In 1995, the World Trade Organization (WTO) was
  founded to ensure compliance with GATT, to
  negotiate new trade agreements, and to resolve
  trade disputes.

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Global Trade Agreements
Many nations have formed regional trade
organizations. These trade organizations
establish free-trade zones, or regions where a
group of countries has agreed to reduce trade
barriers among themselves.
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• Balance of payments- the value of all money
  coming into a country minus all of the money
  going out.
• 2 Parts of balance of payments
• Current account- includes all trading of goods
  and services and any money or aid that the US
  gives to foreign countries
• Capital account- investments by foreigners in the
  US and US investments abroad.

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Exchange Rates and International Markets

• An increase in the value of a currency is called
  appreciation.
• A decrease in the value of a currency is called
  depreciation.
• Multinational firms convert currencies on the
  foreign exchange market, a network of about 2,000
  banks and other financial institutions.

The value of a foreign nations currency in
relation to your own currency is called the
exchange rate.
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Types of Exchange Rate Systems

• Fixed Exchange-Rate Systems
• A currency system in which governments try to
  keep the values of their currencies constant
  against one another is called a fixed
  exchange-rate system.

• Flexible Exchange-Rate Systems
• Flexible exchange-rate systems allow the exchange
  rate to be determined by supply and demand.

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Exchange Rates

• Exchange rates move up and down as a reflection
  of the worth of a nations currency in comparison
  to another.
• What will happen if the demand for U.S. products
  increases?
• More U.S. dollars needed to buy goods. Increase
  in demand causes the dollar to appreciate or
  strengthen.
• What would be the effect on prices?
• US goods would be relatively more expensive for
  others.
• US consumers could purchase goods from other
  countries more cheaply.

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• Currency appreciation- a countrys currency is
  able to buy more units of another nations
  currency.
• Consequences
• Consumers of foreign goods will benefit because
  they can buy more foreign goods with the same
  amount of currency.
• Producers who sell a lot to foreign buyers will
  have trouble because their products will be
  relatively more expensive for foreign customers.
• Therefore it is not good for a nation to have too
  much currency appreciation because this will
  reduce the countrys exports. If a country were
  experiencing a deficit they might activate
  devaluation or depreciation of currency on
  purpose.

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• Currency depreciation- if a currency depreciates
  it is able to buy fewer units of foreign currency
  than previously.
• Consequences
• The effects are opposite of appreciation.
  Exporters will be better off because more foreign
  buyers will purchase their products. However,
  consumers cannot buy as much of a foreign product
  as before.
• If the US wanted to increase net exports or
  decrease the trade deficit they could depreciate
  the U.S. dollar, this would encourage foreign
  consumers to purchase more US products and US
  consumers will purchase fewer foreign goods.