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International Trade
Chapter 17
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ExportsGoods and services sold to other countries.
Countries export what they specialize in.
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ImportsGoods and services that one country buys from another country.
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It can be cheaper for a country to import a product than to manufacture it.
This is why we have absolute and comparative advantage.
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Absolute AdvantageThis is when a country can produce a product more efficiently than another country.
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ExampleHawaii has the perfect climate to grow pineapples.
Georgia does not have a great climate to grow pineapples.
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T/f, Hawaii has an absolute advantage over Georgia in growing pineapples.
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Comparative AdvantageAbility to produce a product relatively more efficiently, or at a lower opportunity cost.
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ExampleHawaii is great at producing pineapples, but they are also great at producing coconuts.
Puerto Rico is also great at producing pineapples and coconuts.
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Hawaii can produce pineapples and coconuts cheaper and easier than Puerto Rico.
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Hawaii can produce pineapples and coconuts at a lower opportunity cost than Puerto Rico can.
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Restricting Trade
TariffQuota
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TariffTax placed on imports to increase their price in the domestic market.
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2 TypesProtective tariff – tariff high
enough to protect less-efficient domestic industries.
Revenue tariff – tariff high enough to generate revenue for the government without actually prohibiting imports.
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QuotasKeeps foreign goods out of the country.
Can be as low as 0 to keep everything out.
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Need quotas because sometimes even high tariffs can’t keep certain foreign goods from being imported.
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ExamplesBush administration put a quota on steel.
This protected American steel jobs, but it made steel cost more.
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EmbargoCompletely restricts all trade with a particular country.
Involuntary
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Trade ProtectionProtectionists – favor trade barriers that protect domestic industries
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Free Traders – favor fewer or even no trade restrictions
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5 Arguments1. National Defense
2. Promoting Infant Industries
3. Protecting Domestic Jobs
4. Keeping the Money at Home
5. Balance of Payments
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National DefenseArgue that nations without trade barriers become too dependent on other nations.
Might need supplies for wartime and could be unable to get them.
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Infant IndustriesNew industries should be protected from foreign competition
Want trade barriers (for at least a short time)
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Domestic JobsTariffs and quotas protect domestic jobs from cheap foreign labor.
Most used argument.
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Keeping Money at HomeLimiting imports will keep American money in the United States.
Counter-argument: American money that goes abroad will come back anyways.
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Balance of PaymentsDifference between the money paid and received from other nations when they engage in international trade.
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WTOWorld Trade Organization
Created in 1974 by 23 countries
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Signed the GATT (General Agreement on Tariffs and Trade)
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WTO is an international agency that administers previous GATT trade agreements, settles trade disputes, organizes trade organizations, and provides technical assistance and training for developing countries.
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NAFTANorth American Free Trade Agreement
Between Mexico, Canada, and the U.S.
Proposed by Bush Sr. and finalized by Clinton in 1993
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Reduces tariffs among the 3 countries.
Helps ensure that we stay trading partners.
Example of free trade theory.
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Foreign ExchangeThe changing of foreign currencies when goods and services are bought and sold
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Exchange RateFix the price of one currency so you can compare it to another.
$1.00 (U.S. $) = .84 cents (Euro)
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Trade DeficitWhen the imports exceed the number of exports.
The U.S. has a trade deficit right now.
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Trade Surplus
When exports exceed imports.