international trade
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International Trade. Chapter 17. Facts about Int. Trade. The world trades due to necessity The key to trade is Specialization US is a highly specialized country: New York: Financial hub Florida (S.E.) & California: citrus & fruits, wine Midwest & high plains: farming - PowerPoint PPT PresentationTRANSCRIPT
International Trade
Chapter 17
Facts about Int. Trade
0The world trades due to necessity0The key to trade is Specialization0US is a highly specialized country:
0 New York: Financial hub0 Florida (S.E.) & California: citrus & fruits, wine0 Midwest & high plains: farming0 Detroit: auto industry0 Northwest: Tech based0 Texas & southwest: oil & cattle
Facts about int. trade cont..
0 If you want to see what your country specializes in, just look at their exports
0So, why trade?0 Because we believe what we get far exceeds the value of
what we give up in return!0 Without Int. trade, many products we use would not be
available0Ex. Banana, coffee, shoes, clothing, oil etc…
0 In many cases, it is cheaper for a country to import than to manufacture
Absolute v. Comparative advantage!
0Absolute adv.: when all factors of production are running effectively who is out producing who0 If US wanted to and put all resources towards being the
#1 exporter of bananas, could they do it?0Comparative adv.: which country can produce any
product with the lowest opportunity cost0 At what cost could US become the #1 exporter of
bananas? Is it worth it? Something else we do better where we give up less?
0 http://www.youtube.com/watch?v=Vvfzaq72wd0`
Abs. v comp. adv. Cont.
0The assumption here is:0 Everyone will be better off producing the product they
produce relatively best0 It will increase total world output
Restrictions on Trade!
Trade Restrictions
0Trade can be restricted in three main ways:0 1. Embargo: a full trade blockage (Cuba, Iran, N. Korea)0 2. Tariffs: a tax placed on imports; increases the price of
foreign good vs. domestic good (protection)0 3. Quotas: a limit placed on quantities of products that
can be imported (if good really cheap, tariff not helping)
Who in favor/against trade restrictions?
0Protectionists (restrict trade): favor trade barriers to protect domestic businesses/jobs
0Free-Traders (open trade): favor fewer or no trade restrictions
0Main arguments:01. National Defense02. Promoting infant industries03. Protecting domestic jobs04. Keeping the money @ home05. Balance of payments0 http://www.youtube.com/watch?v=65UcSx_LrZI (Free Trade Agreement)
The Move Towards Free-Trade
0 Result of: Smoot-Hawley Tariff Act of 1930s shutting down all trade causing tensions & eventually WWII
0 Reason: we would have less conflict, tension and can be friendlier towards each other, help each other
0 Reciprocal Trade Act: passed by US lowering tariffs over 50% if other countries did as well0 GATT: (General Agreement on Tariffs & Trade, 1947): give assistance, lower
barriers, less tension more friendliness0 WTO: (World Trade Organization, 1991) updated GATT with courts for
dispute & Tech assistance0 NAFTA (North American Free Trade Agreement, 1993): Mexico, USA &
Canada, lowered barriers, lost jobs0 EU (European Union, 1993) 27 countries, one currency, no barriers,
friendliness!0 http://www.youtube.com/watch?v=O37yJBFRrfg (EU explained)
Exchange Rate & Trade
0Trade between countries like people, but different currency makes it challenging due to some with less value, some with more
0The country you trade with wants its money in its home currency:0 A. Foreign Exchange: currencies from trading countries
are bought & sold in the foreign exchange market0 B. Foreign exchange rate: the price of one country’s
currency in terms of another country’s currency0For example: 1 British Pound = $1.58 or 0.6329 Pound = $10http://www.youtube.com/watch?v=xwtgByffoUw (exc r)
Imbalance of Trade
0The Flexible Exchange Rate: 0 Defined: Rate on currency is based on supply & demand
0The more demand for your currency the higher the value and vice versa
0 What does this mean toward trade?0When country X exports more to us than we export to them
they get more of our currency than us of theirs, making their supply of $ exceed demand, driving value down & vice versa!
Imbalance of Trade
0 Trade deficit vs. surplus:0 Trade deficit: when value of goods imported exceeds value of goods
exported (unfavorable, drag on GDP!)0 Trade Surplus: when value of exports exceeds imports (favorable,
what every country wants)0 Ramifications of Trade-Deficit:
0 1. Makes value of your currency go down0 2. causes unemployment to go up in industries involved in exporting
trade0 3. But helps out industries involved in importing of goods0 4. Eventually things will reverse as other currencies rise in value
making their goods more expensive and American products cheaper etc.
Move Towards Free-Trade
03. North American Free Trade Agreement (NAFTA) 1993:0 Open up trade between Mexico, US, Canada0 It lead to loss of some industries and jobs due to cheaper
competition
Move Towards Free-Trade
04. European Union (EU) 1993:0 Economic & political union of 27 member mainly
European countries0 Lowering most trade restrictions0 A huge market with one currency (Euro) to make trade
easier for all members
Move Towards Free-Trade
01. General Agreement on Tariffs & Trade (GATT) 1947: 0 Signed by 23 countries0 It extended tariff reductions & do away with import
quotas0 Way of bringing countries together for prosperity & not
war!
Move Towards Free-Trade
02. World Trade Organization (WTO) 1991:0 Updated GATT after 44 years0 Carries out all GATT agreements, but also:
0Settles trade disputes between governments0Organizes trade negotiations0Provide technical assistance to developing countries
Who in favor/against trade restrictions? Cont.
0 2. Promoting infant industries:0 Protectionists: new or emerging business have to be protected against foreign
trade0 Free-Traders: only if eventually removed
0 3. Protecting domestic jobs:0 Protectionists: not letting businesses out source to other parts of world0 Free-Traders: not to interfere, survival of fittest should make economy efficient
0 4. Keeping the money at home:0 Protectionists: invest in made in the USA and money stays at home0 Free-Traders: money comes back as those countries get things they need from
America0 5. Balance of payments:
0 Protectionists: make imports fall and exports rise good for GDP0 Free-Traders: however, money coming back will stop and hurt other US industries