Chapter 17 – International Trade

Section One – Absolute and Comparative Advantage i. Different people, regions and nations specialize in certain economic activities - Texas (oil and cattle) - Wisconsin (cheese, brats and beer) - Florida (Oranges) The U.S. and International Trade i. Exports – What we sell to other nations ii Imports – what we buy from other nations iii. Nation’s trade because they believe they are getting more in return for what they are giving up

The Basis for Trade a. Absolute Advantage i. A country has an absolute advantage when it can produce a product more efficiently than another country can b. Comparative Advantage i. When a country has the ability to produce at a lower opportunity cost than another nation ii. Everyone will be better off when each nation produces they do relatively the best.

The Gains from Trade i. Specialization and trade increases total world output - Coal Iron to Columbia for Coffee - Military Aircraft to Saudi Arabia for Oil - Mining Equipment to China for Electronics

Section Two – Barriers to International Trade I. Restricting International Trade a. Tariffs i. Protective Tariff – a tariff high enough to protect less-efficient domestic industries. ii. Revenue Tariff – a tariff high enough to generate revenue for the government without prohibiting imports. - chief source of government revenue until 1913 b. Quotas i. Limit products entering the country - keep prices high enough to protect domestic producers c. Other Barriers i. Health inspections on food ii. Import licenses

Arguments for Protection (Protection or Free Trade?) a. National Defense i. Want to make sure you can produce critical supplies at home in wartime ii. Trouble deciding which industries need to be protected b. Promoting Infant Industries i. New industries need to gain strength and experience ii. People accept this argument as long as barriers are eventually removed c. Protecting Domestic Jobs i. Keep jobs at home ii. Some argue that these companies need to modernize - the economy is less efficient

d. Keeping Money at Home i. Protectionists argue that free trade sense our money abroad ii. Free traders argue the money usually comes back again in the form of those nations buying our goods e. Helping the Balance of Payments i. Protectionists want import restrictions to improve our trade balance ii. Dollars returned to the U.S. for our goods stimulates jobs/production

III. The Free Trade Movement a. Tariffs During the Great Depression i. Smoot-Hawley Tariff Act of 1930 forced prices to rise as high as 70% - Other nations retaliated and trade ground to a halt ii. The policy was reversed in 1934 if other countries agreed to do the same b. The World Trade Organization i. An international agency that settles trade disputes between nations ii. Provides technical assistance and training for developing nations c. NAFTA i. Reduces tariffs in North America ii. Trade between the nations has grown dramatically since it was passed iii. Some jobs were lost to Mexico

Section Three – Financing and Trade Deficits Financing International Trade a. Foreign Exchange I. Currencies used to facilitate international trade ii. Exchange rate is the price of one country’s currency in terms of another b. Fixed Exchange Rates i. Popular when the world was on the gold standard ii. America got off the gold standard completely in 1971 with the Bretton Woods Agreement

c. Flexible Exchange Rates i. Supply and demand establish the value of each currency which creates it’s exchange rate ii. Weak U.S. dollars encourage exports iii. Strong U.S. dollars encourage imports

II. Trade Deficits and Surpluses a. The International Value of the Dollar i. trade-weighted value of the dollar b. The Effect of a Trade Deficit i. Continued negative trade balances will reduce the value of the dollar ii. Positive trade balances increase the value of the dollar iii. Tend to balance out with flexible exchange rates iii. Employment can shift between export and import industries