Topic 10: Trade, Development, & Globalization

Why do Americans buy so many goods from overseas? Wouldn’t it make more sense to produce everything we need ourselves? Answer lies in factor of production & scarcity.

10.1 Why Nations Trade Factors of Production

10.1 Why Nations Trade Factors of Production

Why Nations Trade 10.1 Because we can't produce all goods with our limited resources, we as a country need to obtain them somehow. Trade What factors determine what countries produce?

Natural Resources

Capital & Labor

Capital & Labor

Unequal Resource Distribution

Specialization & Trade Unequal distribution of resources creates a need for specialization. Nations produce only certain goods & services Then through trade they export g&s they make to another country for sale & import g&s bought from another country

Absolute & Comparative Advantage What if a country had the resources and means to be self-sufficient. Why trade? ...Because trade makes everyone better off Absolute advantage: when a person or nation can produce more of a given product than another person or nation Comparative advantage: when a person or nation can produce a product more efficiently

Absolute Advantage Who has an absolute advantage in producing t-shirts? Who has an absolute advantage in producing birdhouses? Who should make what? To answer that, look at comparative advantage.

Comparative Advantage Law of comparative advantage: a nation is better off when it produces goods & services for which it has a comparative advantage Then use the money they earn selling it to buy the things that can’t produce as efficiently After trade, both parties are better off.

Comparative Advantage After trade, both parties are better off.

Growing Interdependence There is a shared need of countries for the resources, goods, services, labor, & knowledge supplied by other countries When one country hurts/grows it affects other economies as well

US & its Trading Partners The US exports more goods than any other country except China US excels in technologically sophisticated goods (software, chemicals, & medical testing supplies) US cultural exports dominate as well

US & its Trading Partners US is world’s top importing country Specialization has a huge impact on employment (can be positive or negative)

10.2 Trade Barriers & Agreements A trade barrier (trade restriction) is a means of preventing a foreign product or service from freely entering a nation’s territory Tariffs: tax on imported goods Customs duties Quotas: import quotas place a limit on the amount of a good that can be imported Many are now illegal under international trade laws Sanctions: actions a nation (or group of nations) may take to punish or pressure another nation Ex. 1960, Cuba trade embargo Other barriers Government may require licenses Health, safety, environmental regulations https://www.youtube.com/watch?v=blvxPshCDe4

Effects of Trade Barriers Higher prices for foreign goods This can help domestic producers compete with foreign firms Consumers can lose out Trade Wars Barriers might fuel international conflict Trade wars are cycles of escalating trade barriers 1930, Congress passed Smoot-Hawley Act, raised average tariff rate to 50% … Countries responded by raising tariffs on American goods This trade war decreased foreign trade and worsened the depression

Protectionism The use of trade barriers to shield domestic industries from foreign competition Arguments for Protectionism Protects jobs Protects infant industries Safeguard national security If war breaks out, US needs an uninterrupted supply of steel, energy, etc.

Founded in 1995 with the goal of making world trade more free Trade Agreements Free Trade (opposite of protectionism) Lowering or eliminating trade barriers between nations Argue that free trade is the best way to pursue comparative advantage, raise living standards, & further cooperation World trade Organization (WTO) Founded in 1995 with the goal of making world trade more free

European Union (EU) Slowly developed over decades Eliminates tariffs & trade restrictions 19 of 28 members use the euro (Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain) The Euro makes the movement of goods & people more efficient BUT economic troubles in one country can cause the value to depreciate

10.3 Exchange Rate & Trade International trade is more complex than trading within your country because of different currencies Exchange rate: the value of a nation’s currency in relation to a foreign currency Changes constantly Appreciation: an increase in the value of a currency Depreciation: A decrease in the value of a currency (weakening)

10.4 Development The process by which a nation improves the economic, political, & social well-being of its people Developed Nations: high average material well-being Less Developed Countries: low levels of material well-being Newly Industrialized Countries: has made great progress towards developing their economies

Indicators of Development Per capita GDP Energy use Workforce Agricultural work? Sustenance farming? Consumer goods Social indicators Literacy rate Life expectancy Infant mortality rate

Literacy Rates

Life Expectancy

Infant Mortality Rate Per 1000 births

10.5 Growth, Resources, & Development Things like illiteracy & poor nutrition hinder development Population growth can also be a serious problem

Foreign Investment Building infrastructure, providing services, & creating technology & industry all require lots of money Developing countries acquire money through: Internal financing Foreign investment Borrowing & debt Foreign Aid

10.7 Globalization Interconnection of producers, consumers, & financial systems around the world Middle Ages: Asian spice trade Exploration: Columbus Imperialism Today, happening at much quicker pace

Challenges of Globalization “Arguing against globalization is like arguing against the laws of gravity.” Closely linked financial markets 2007,2008 US financial mortgage crisis caused trouble globally

https://www.youtube.com/watch?v=xPD477FuqtY