International Trade Chapter 16 Nations trade for the same reasons that people do– they believe that the products they receive are worth more than the products they give up. International trade is partially responsible for the wide variety of goods & services we consume. 2/24/2019

Why Nations Trade Specialization Produce things they make best Exports – products sold to other countries Imports – products bought from other countries First…some trade takes place because countries lake goods at home And exchange those products for the things that other people do best. States also specialize based on the resources they have. International trade is important to all nations. Most of the products that countries exchange are goods. However, trade in services (i.e. banking) is increasing. 2/24/2019

Basis for trade Absolute advantage Production possibilities frontier When you can produce more of a product than another country Production possibilities frontier Diagram showing the maximum combinations of goods & services an economy can produce when all resources are fully employed Comparative advantage Ability to produce a product relatively more efficiently (lower opportunity cost) When a country can produce more of a product than another country. 1a. Diagram showing different combinations of products produced with the resources in its possession. 2. Ability to produce a product relatively more efficiently, or at a lower opportunity cost. 3. Everyone will be better off specializing in the products they produce best. 2/24/2019

Restricting International Trade (16.2) Tariffs – Tax placed on imports Protective tariff – protect domestic companies Revenue tariff – raise revenue for government Quota – limit on amount that can be imported Other barriers Tax placed on an imported product 1a. Tax on an imported product designed to protect less-efficient domestic producers. 1b. Tariff that is high enough to generate revenue for the government w/o actually prohibiting imports. Traditionally, tariffs were used more for revenues than for protection. Main problem is that tariffs permit domestic companies to raise their prices too as long as they don’t exceed to price of the import. This hurts the customer in the form of higher prices. 2. Limit on the amount of a good that is allowed into a country. Quotas are used to reduce the total supply of a product to keep prices high for domestic producers to increase profits. 3. i.e. health inspections for food…license to import (if govt. is slow to grant a license or the license fees are too high, int. trade is restricted.) 2/24/2019

Arguments for protection Free traders – prefer fewer or even no trade restrictions Protectionists – want to protect domestic producers Aiding national defense Promoting infant industries Protecting domestic jobs Keeping the money at home Helping the balance of payments National pride Person who wants to protect domestic producers against foreign competition with tariffs, quotas, & other trade barriers Prefer fewer or even no trade restrictions 4. New or emerging industries should be protected from foreign competition. They need to gain strength & experience before they can compete against established industries in other countries. 7. Difference between money paid to, & received from, other nations in trade 2/24/2019

Free Trade Movement Tariffs during the Great Depression Prices of imports rose up to 70% Most favored nation clause- allows a country to enjoy the same tariff reductions the U.S. negotiates with any third country World Trade Organization (WTO) North American Free Trade Agreement (NAFTA) 2. International agency that administers trade agreements, settles trade disputes between governments, & provides technical assistance & training for developing countries. 3. Agreement signed in 1993 to reduce tariffs & increase trade among the U.S., Canada, & Mexico Pros – Trade among the 3 countries increased, Each country can focus on their comparative advantage. Cons – higher unemployment in the U.S. 2/24/2019

Financing International Trade (16.3) Foreign exchange rate Price of one country’s currency in terms of another country’s currency Fixed exchange rates System under which the values of currencies are fixed in relation to one another. For most of the 1900’s, the world used this system. Flexible (floating) exchange rates System that relies on supply & demand to determine the value of one currency in terms of another. 2/24/2019

Trade Deficits & Surpluses When import spending exceeds export spending Surplus When export spending exceeds import spending Trade-weighted value of dollar An index displaying the strength of the dollar against a group of major foreign currencies. Effect of a trade deficit Makes U.S. exports cheaper and imports more expensive. Strong vs. weak dollar Stronger currency leads to a deficit & weak currency leads to a surplus. 2/24/2019

Transition to Capitalism 17.3 Capitalism – economic system in which private citizens own & use factors of production in order to generate profits. When an economy becomes large, capitalism is the most efficient way to organize production and provide the necessary economic incentives. 2/24/2019

Problems of Transition Why capitalism? Privatization Vouchers Loss of political power Underestimating the costs Responding to new incentives Capitalism is the most powerful engine for generating wealth the world has ever seen. Conversion of state-owned factories and other property to private ownership. 2a. Certificate that could be used to purchase government-owned property during privatization. 3. The Communist party has lost power as many countries have made the change to capitalism. 4. The costs can hinder or even prevent a country’s successful transition. 5. New countries to capitalism have to learn how to make decisions on their own, take the initiative, interpret prices, and fend for themselves in free markets. 2/24/2019

Countries in transition Russia Five-Year Plan Gosplan Collectivization perestroika China Great Leap Forward Latin America isolationism Eastern Europe Solidarity Black market 1a. Comprehensive, centralized economic plan used by the former Soviet Union to coordinate the development of industry & agriculture. 1b. Central authority in the former Soviet Union that devised & directed Five-Year plans 1c. Forced common ownership of all agricultural, industrial, & trading enterprises used to boost output 1d. Restructuring of the Soviet economy introduced by Mikhail Gorbachev in 1985. 2. Ambitious five-year plan forced farmers off their land to live & work on large, state-owned farms. 3. National policy of not interacting with other countries 4. Many of the Eastern European countries from the former Soviet bloc are now members of the European Union 4a. Independent Polish labor union founded in 1980 4b. In Hungary they had a thriving “black market” where entrepreneurs & merchants sold goods illegally. 2/24/2019

Other Faces of Capitalism Japan South Korea Singapore Taiwan Sweden Japan has a very successful capitalist economy because of their loyal & dedicated workforce along with their ability to develop new technologies. After the Korean War, South Korea broke off from North Korea and rebuilt its country. They have the highest population density (# of people per square mile) in the world. Today, they are a major producer of consumer & electronic goods such as home appliances & televisions. They have also become a leading producer of automobiles. Very small island nation but they offer significant tax breaks, government subsidies, & government-sponsored training of employees which has attracted many multi-national companies to Signapore. Planning has always been a feature of the Taiwanese economy, with the government trying to identify those industries most likely to grow in the future. Some experts have warned that the centralized planning process will hamper future economic growth. Prior to 1991, Sweden was a socialist economy which made its citizens pay extremely high taxes to pay for its welfare programs. Today, Sweden is committed to a free market economy and has reduced the role of the public sector, lowered taxes, & privatized many government-owned businesses. 2/24/2019