ch. 16: international trade

Ch. 16: International

TradeCIE3M1-01

M. Nicholson

International Trade Canadians have become accustomed to consuming goods & services from all parts of the world

Canada is part of a global trading system

sells its own goods & services to other countries (exports)

buys goods & services from other countries (imports)

Why Do Nations Trade?Absolute advantage – the ability of one person, region or country to produce a good or service at a lower cost than a competitor’s

Comparative advantage - the ability of one person, region or country to provide a good or service relatively more cheaply (i.e. lower opportunity cost) than a competitor

Gains from Trade Based on Comparative Advantage

Canada (10 wkr)12 tonnes 12 computers 1.0 computer 1.0 tonnes paperMexico (20 wkr)3 tonnes 9 computers 3.0 computers 0.33 tonnes paper

Paper Computersof 1 tonneof paper

of 1computer

Hypothetical OutputPer Worker

OpportunityCost

Why should Canada trade with Mexico if we have absolute advantage?

If Canada & Mexico do not trade how much Paper / Computer produced? Assume they split their workforce between Paper & Computers

Total Gains from Specialization

Canada (10 wkr) 60 tonnes 60 computers 120 tonnes 0 computersMexico (20 wkr)30 tonnes 90 computers 0 tonnes 180 computers

90 tonnes 150 computers 120 tonnes 180 computers

Paper Computers Paper Computers

Before Trade After Trade

Barriers To International Trade

Protective tariffs – taxes imposed on imported goods in order to raise the price and lower the quantity sold

Embargo – ban against the import or export of a good (e.g. cocaine)

Barriers To International Trade

Quotas – a restriction on the amount of foreign foods that may be imported

Red tape – government can use bureaucracy to delay or even prevent the importing of foreign goods

Arguments Against International Trade

Infant industry argument

Vital industries argument

Cheap foreign labour argument

Employment argument

International Trade And The Circular Flow

International Trade And The Circular Flow

domestic & international trade is similar both have specialization but currency exchange needed for international trade

Canada’s trade partners – biggest trading partner is USA with 80.3% of Canadian exports going there and 73% of imports coming from the USA

EU and Japan 2nd and 3rd most significant

International Trade And The Circular Flow

Visible and invisible trade – merchandise trade is visible, tangible goods whereas tourism, services, investment income and money transfers are not visible or tangible

Canadian merchandise trade trade surplus

Capital movements – purchase and sales of foreign and domestic bonds and stocks

International Trade And The Circular Flow

Balance of payments – is the summary of all the visible, invisible and capital transactions over a year

Balance of trade – difference between visible exports and imports (Bal Of Trade = Vis Exports – Vis Imports)

Balance of trade on current account - difference between visible and invisible exports and imports (Bal of Trade Cur Acct = Vis/Inv Exports – Vis/Inv Imports)

Exchange Rates Exchange rate is the price of one currency expressed in terms of another currency

Canadian = Foreign divide (e.g. $10 Cdn = ? £ 1 £ = $2 Cdn $10 ÷ $2 = 5 £ UK)

Foreign = Canadian multiple (e.g. 200 Jap = ? $ 1 ¥ = $0.01 Cdn 200¥ x $0.01 = $2 Cdn)

Flexible exchange rates – supply and demand for a currency determine its price relative to other currencies

Exchange Rates Fixed exchange rates – governments intervene in the foreign currency market to maintain the price of their currency relative to some other currency (e.g. US $)

Canada has had both types and now prefers a mixture of the two called a managed or dirty float

Exchange Rates

Causesa) British Exports ↑b) British Interest Rates ↑

Freer TradeSince WW 2 ended in 1945 countries realize increased international trade increases prosperity and helps prevent war

General Agreement on Trade and Tariffs (GATT) World Trade Organization (WTO)

European Union (EU) – most Western European countries

Freer Trade

Freer TradeAuto Pact of 1965 – great benefits to Canada through economies of scale lowering costs and increasing workers wages

Canada – U.S. Free Trade Agreement, 1987

North American Free Trade Agreement (NAFTA), January 1, 1994 – 363 million people, $6.25 trillion GDP (Canada / USA / Mexico)

NAFTA1. Canada – can sell telecommunications and

banking services, will buy manufactured goods

2. Mexico – great opportunity for economic prosperity, but fear the efficient USA producers and USA culture

3. United States – hope Mexico stabilizes and stops flow of illegal immigrants into America, but fear businesses will move to lax Mexico where costs are lower loss of USA jobs

Summary