Globalization: Trade How does the global trade system work? To what extent is it a fair system?

Globalization: The process of the world becoming interconnected economically, politically and culturally. The process of the world becoming interconnected economically, politically and culturally.

Trade: Mini Peer Presentations Group 1: Definition & Why is trade necessary? Trade balance, surplus & deficit Group 1: Definition & Why is trade necessary? Trade balance, surplus & deficit Group 2: Problems faced by LEDC countries & trade imbalance Group 2: Problems faced by LEDC countries & trade imbalance Group 3: How is world trade divided? Examples of imports and exports Group 3: How is world trade divided? Examples of imports and exports Group 4: Protectionism & Free trade & Arguments for and against Group 4: Protectionism & Free trade & Arguments for and against Activity: Each group will present on their section – it is also really important to take notes throughout these presentations - this is all really crucial information or the semester exam Come up with 5 questions to make sure everyone has understood your presentation – you will ask these at the end

Presentation points to remember: Engage the audience Engage the audience No notes No notes Everyone in the group must participate Everyone in the group must participate Think of an interactive and imaginative way to get the information across Think of an interactive and imaginative way to get the information across Ask 5 questions to check that the audience have understood Ask 5 questions to check that the audience have understood

Trade defined: “The exchange of goods and services for money” “The exchange of goods and services for money” Discuss with a partner why trade is necessary Discuss with a partner why trade is necessary

Why trade is necessary ? No country is self sufficient in the full range of raw materials that are needed by its inhabitants. To try to achieve this, countries must trade with each other. No country is self sufficient in the full range of raw materials that are needed by its inhabitants. To try to achieve this, countries must trade with each other. Trade is the flow of commodities from producers to consumers, and it is important in the development of a country. Trade is the flow of commodities from producers to consumers, and it is important in the development of a country. Countries that trade with other countries are said to be interdependent Countries that trade with other countries are said to be interdependent

If the value of a countries exports is more than its imports it has a trade surplus and if the value of the imports is more than the exports then it is a deficit If the value of a countries exports is more than its imports it has a trade surplus and if the value of the imports is more than the exports then it is a deficit Trade balance is the difference in value between a countries imports and exports Trade balance is the difference in value between a countries imports and exports Activity: Work out the trade balance for countries A, B, C & D, and state whether they have a trade surplus or deficit Activity: Work out the trade balance for countries A, B, C & D, and state whether they have a trade surplus or deficit 1) Country A exports $560 billion worth of goods to its trading partners each year. In return it imports $290 billion worth of goods each year. Calculate the trade balance of this country. __________________________ Calculate the trade balance of this country. __________________________ What sort of balance of trade will this country have?____________________ What sort of balance of trade will this country have?____________________ 2) Country B exports $200 billion worth of goods to its trading partners each year. In return it imports $290 billion worth of goods each year. Calculate the trade balance of this country. __________________________ Calculate the trade balance of this country. __________________________ What sort of balance of trade will this country have?____________________ What sort of balance of trade will this country have?____________________ 3) Country C exports $720 billion worth of goods to its trading partners each year. In return it imports $400 billion worth of goods each year. Calculate the trade balance of this country. __________________________ Calculate the trade balance of this country. __________________________ What sort of balance of trade will this country have?____________________ What sort of balance of trade will this country have?____________________ Trade Surplus & Deficit

Trade deficits & surpluses Trade deficits – does it damage a countries economy? Trade deficits – does it damage a countries economy? The successful American business man and investor Warren Buffett was quoted in the Associated Press (January 20, 2006) as saying: The successful American business man and investor Warren Buffett was quoted in the Associated Press (January 20, 2006) as saying: "The U.S trade deficit is a bigger threat to the domestic economy than either the federal budget deficit or consumer debt and could lead to political turmoil... Right now, the rest of the world owns $3 trillion more of us than we own of them." "The U.S trade deficit is a bigger threat to the domestic economy than either the federal budget deficit or consumer debt and could lead to political turmoil... Right now, the rest of the world owns $3 trillion more of us than we own of them." If a country has a deficit – then it is paying other countries a lot of money for imported products - then those countries can use that money to buy shares in companies from the country they have traded with – this is what Buffett is concerned about. If a country has a deficit – then it is paying other countries a lot of money for imported products - then those countries can use that money to buy shares in companies from the country they have traded with – this is what Buffett is concerned about.

According to the economist, John Maynard Keynes - "If the economic relationships between nations are not, by one means or another, brought fairly close to balance, then there is no set of financial arrangements that can rescue the world from the impoverishing results of chaos." According to the economist, John Maynard Keynes - "If the economic relationships between nations are not, by one means or another, brought fairly close to balance, then there is no set of financial arrangements that can rescue the world from the impoverishing results of chaos." Trading relationships should be balanced……

Difficulties faced by LEDCs in the world trade system..

What are the trade problems for LEDCs? Countries that relay on one product can be a problem because prices and demand for these products fluctuate annually – and the price paid for these commodities is often fixed by MEDCs Countries that relay on one product can be a problem because prices and demand for these products fluctuate annually – and the price paid for these commodities is often fixed by MEDCs Overproduction or a world recession can also impact prices of these goods, also stocks of that particular commodity (e.g. a mineral) can also become exhausted Overproduction or a world recession can also impact prices of these goods, also stocks of that particular commodity (e.g. a mineral) can also become exhausted Most exports are bought by large TNC’s (transnational corporations) who often don’t practice fair trade, and very little of the profits go back to the producers (Fair trade – advocates paying TNCs paying higher prices to producers for their products) Most exports are bought by large TNC’s (transnational corporations) who often don’t practice fair trade, and very little of the profits go back to the producers (Fair trade – advocates paying TNCs paying higher prices to producers for their products)

Reasons for imbalance of trade between MEDC and LEDC counties LEDCS are most often not selling high value finished products, but the raw materials– there is very little value added to the good through secondary sector industry (manufacturing the goods adds value – and this often takes place in the developed world) LEDCS are most often not selling high value finished products, but the raw materials– there is very little value added to the good through secondary sector industry (manufacturing the goods adds value – and this often takes place in the developed world) MEDCs have most of the high tech industries – (industries based on information generation and sharing), and possess the skills and technology to develop high value products. MEDCs have most of the high tech industries – (industries based on information generation and sharing), and possess the skills and technology to develop high value products. In LEDCs trade is hindered by poor infrastructure – e.g. poor internal transport networks. In LEDCs trade is hindered by poor infrastructure – e.g. poor internal transport networks.

Who has the largest share of the worlds trade? What does this tell us about the nature of the world trade system?

Examples of countries imports and exports You can clearly see that Sierra Leone – an LEDC really relies on the export of minerals, whereas MEDCs exports and imports are more similar to each other

Protectionism: Tariffs & Quotas Tariffs are taxes or custom duties paid on imports. The exporter has to pay a percentage of the value of the goods to the importer. Tariffs are taxes or custom duties paid on imports. The exporter has to pay a percentage of the value of the goods to the importer. Tariffs can be used to raise money, and they increase the price of imported goods in order to make them more expensive, and less competitive Tariffs can be used to raise money, and they increase the price of imported goods in order to make them more expensive, and less competitive Tariffs increase the costs of imports (they may be imposed to by countries to encourage a trade balance) or protect home made products Tariffs increase the costs of imports (they may be imposed to by countries to encourage a trade balance) or protect home made products Quotas limit the amount of goods that can be imported. Import quotas tend to restricted to primary goods so they work against LEDCs Quotas limit the amount of goods that can be imported. Import quotas tend to restricted to primary goods so they work against LEDCs These both go against free trade and can lead to smuggling and corruption. These both go against free trade and can lead to smuggling and corruption.

Trading Blocks Nations belonging to a mutual trade pact and agree to give each other reduced trade tariffs while imposing trade barriers and restrictions to nonmember nations. Nations belonging to a mutual trade pact and agree to give each other reduced trade tariffs while imposing trade barriers and restrictions to nonmember nations. Some trade blocks such as the EU have also developed close political ties, as well as a common currency, the Euro. Some trade blocks such as the EU have also developed close political ties, as well as a common currency, the Euro. Within these trading blocks countries trade with each other freely. This makes for a large market, increasing the number of customers for businesses, and strengthen the alliances between those nations. Within these trading blocks countries trade with each other freely. This makes for a large market, increasing the number of customers for businesses, and strengthen the alliances between those nations. An alliance is an agreement between two or more parties, made in order to advance common goals and to secure common interests. An alliance is an agreement between two or more parties, made in order to advance common goals and to secure common interests.

Trading Blocks Make sure you know some of these trading blocks!

Free Trade: Arguments for and Against Arguments for free tradeArguments against free trade Definition of Free trade: “Trade between nations without protective customs tariffs and quotas.” Definition of Free trade: “Trade between nations without protective customs tariffs and quotas.” 1) It's important to protect the economy of your country (Protectionism)– free trade can mean that products will be bought from overseas rather than made at home – damaging the domestic economy 2) Free trade does not mean fair trade- and countries producing primary products often don’t benefit as much as the countries manufacturing them 3) Exploitation of workers can occur, as companies strive to produce goods at the most competitive prices. 1)It will deliver the greatest Good to the greatest amount of people (the utilitarian argument) 2) Countries that depend on each other for trade, rarely go to war ( this is called the Dell Theory of Conflict Prevention) 3) Countries can develop through Trading- exporting what they have, And importing what they don’t have (Theory of Comparative Advantage)

The world is spiky! Check out the distribution of indicators throughout the world: Check out the distribution of indicators throughout the world: E:\CURRENT\IB Psych\IB Psy G 12 08_09\comparitive E:\CURRENT\IB Psych\IB Psy G 12 08_09\comparitive E:\CURRENT\IB Psych\IB Psy G 12 08_09\comparitive E:\CURRENT\IB Psych\IB Psy G 12 08_09\comparitive The%20World%20is%20Spiky.pdf The%20World%20is%20Spiky.pdf The%20World%20is%20Spiky.pdf The%20World%20is%20Spiky.pdf

Quick Quiz 1) Why can trade deficits be a big problem for nations? 2) What did John Maynard Keynes say about the importance trade balance? 3) Who has the largest share of the worlds trade? 4) What are tariffs? 5) What are quotas? 6) What are trading blocks? 7) Identify three trade blocks 8) Identify two arguments in support of free trade and three arguments against free trade