International Trade

Check tags of clothing, bags, etc. Try to find something made in the US

Why Nations Trade Unequal distribution of resources prevents countries from producing everything citizens want and need Land, labor, and capital Ex. Fertile soil  agriculture Ex. Oil and natural gas  Sale of these Specialization  produce only certain goods and services Determined by land, labor, capital Better for countries to specialize in some products and trade for others

Absolute Advantage Absolute Advantage  ability to produce more of a given product using a given amount of resources Country A has absolute advantage of both food and clothing. Would Country A be better off as self-sufficient or trading?

Comparative Advantage Comparative Advantage ability to produce a product most efficiently given all the other products that could be produced Lowest Opportunity Cost Law of Comparative Advantage  idea that a nation is better off when it produces goods and services for which it has a comparative advantage Key to determining what a country should produce is OPPORTUNITY COST What you give up in order to produce a product The nation with the lowest opportunity cost has the comparative advantage

Country A has a comparative advantage in food Country A’s OC for each unit of food is ½ a unit of clothing Country B’s OC for each unit of food is 2 units of clothing Country A’s OC for each unit of clothing is 2 units of food Country B’s OC for each unit of clothing is ½ a unit of food Country A has a comparative advantage in food County B has a comparative advantage in clothing

Country A and B decide to trade 1 unit of food for 1 unit of clothing. If Country A decided it needs 3 units of clothing, it could take an entire day to make 3 units of clothing, or spend the day making food, trade 3 units of food for 3 units of clothing, and have three left over If Country B decided it needs 1 unit of food, it could spend an entire day making food, or it can produce 2 units of clothing, trade one unit for food, and have a unit of clothing left over Both are better off by trading

Comparative Advantage and Trade International trade leads to greater interdependence Export  good sent to another country ($1.280 trillion) Import  good brought in from another country ($1.948 trillion) United States is the world’s largest exporter and importer

Comparative Advantage and Trade International trade leads to greater interdependence Export  good sent to another country ($1.280 trillion) Import  good brought in from another country ($1.948 trillion) China is now the world’s largest exporter and importer

Trade Barriers Trade barrier  means of preventing a foreign product or service from freely entering a nation’s territory Import Quota  limit on quantity of a good imported Embargo ban on trade to another country

More trade barriers Tariff  tax on imported goods Standards  impose certain standards or regulations on products Can lead to trade war  cycle of increasing trade restrictions Limit supply  increase price

Arguments for protectionism Protectionism  use of trade barriers to protect a nation’s industry from foreign competition Protect infant industries  new industries need time to become efficient Industry lacks incentive to become efficient Difficult to take tariff away Protect industry essential to national defense Steel, oil etc.

International Cooperation Recent trend of increasing free trade Best way to pursue comparative advantage International free trade agreements  cooperation resulting in reduced trade barriers and tariffs European Union (EU)  trade organization made up of European Countries NAFTA  North American Free Trade Agreement - US, Canada, Mexico ASEAN  Association of Southeast Asian Nations

Measuring Trade Exchange Rate  value of foreign nation’s currency in terms of another nation’s currency Convert prices in one currency to prices in another currency Exchange Rates

Strong and Weak Currencies Appreciation  increase in the value of currency Nation’s products become more expensive for other countries Less exports Foreign products cheaper More imports Depreciation  decrease in the value of currency Nation’s products become less expensive for other countries More exports Foreign products more expensive Less imports

Strong and Weak Currencies If the dollar appreciates, is that good? It depends . . . When the dollar gets stronger, foreign goods become cheaper in America So, a stronger dollar is good for foreign businesses and American consumers!!!!

Strong and Weak Currencies If the dollar appreciates, is that good? However, American goods become more expensive in foreign countries So, a stronger dollar can actually harm American businesses that export

Strong and Weak Currencies What about if the dollar gets weaker?? Foreign goods will cost more, so you’ll pay more for many of the things you buy However, American goods will become cheaper in foreign countries, which means companies like Mohawk will actually see their exports go up

Example Exchange rate is 10 pesos to 1 dollar So, a shirt that costs 50 pesos to make in Mexico sales for 5 dollars in the US If, the dollar gets weaker, now the exchange rate is 10 pesos to 2 dollars The same shirt will now cost 10 dollars in the US Therefore, a weaker currency will harm consumers

Example Exchange rate is 10 pesos to 1 dollar A rug that cost Mohawk 100 dollars to make will sell for 1000 pesos in Mexico If, the dollar appreciates, and the exchange rate is now 20 pesos to 1 dollar Now the same rug will cost 2000 pesos in Mexico So, a stronger dollar, while good for us as consumers, will actually harm our business that have sales in foreign countries

Balance of Trade Balance of Trade  relationship between a nation’s imports and exports Balance of Payments  system of recording all of a country’s money transactions Trade Surplus  when a nation exports more than it imports Trade Deficit  when a nation exports less than it imports US trade deficit  over $450 billion $45-$50 billion each month