International Trade Chapter 15, Lesson 14

Int’l Trade Extremely influential both in terms of the United States’ economy and the larger global economic system. Voluntary exchange seen to benefit both parties (Remember the pillars of economics?!) The “Two-way street” of int’l trade

Imports and Exports Import: Good or Service purchased from a seller in another country. Export: Good or service sold to a buyer in another country. One country’s imports are another’s exports “I’m an Importer/exporter for Vandalay Industries””

Imports and Exports Cont. In a sense, by exporting goods, a country is said to be paying for the goods they import. This is why, in theory, international trade is a two-way street. Important to note: Voluntary trade does not equate to relationships of economic equality among nations.

More on Trade Imports/exports not equal, do not have to be in order to benefit an economy. Because imports and exports depend on one another, trade is said to be a two-way street Specialization- Some nations may be relied upon to produce certain goods or services The Middle East has an abundant supply of oil. Their ability to export large amounts of it is one example of specialization. However, as seen in this photograph, the limited nature of the resource has been a cause of much conflict. Source: http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/8364835/Middle-East-unrest-puts-oil-on-a-slippery-slope.html

Absolute Advantage and Comparative Advantage Absolute Advantage: The ability of a nation to produce a good at a lower cost than another nation. Comparative Advantage: Ability of a nation to produce a good at a lower opportunity cost than another nation Absolute advantage is not necessarily the only factor to be taken into consideration when deciding to specialize. Countries, like individuals or businesses, must weigh costs and benefits when deciding how much/what to export. “It is a maxim of every prudent master of a family to never attempt to make at home what it will cost him more to make than to buy” -Adam Smith, The Wealth of Nations (1776) To the right, a selfie of Adam Smith 

Productivity, Wages and Trade Are poorer countries fighting an inevitably losing battle? Even poorer nations have a comparative advantage when it comes to trading certain products Workers whose nations invest more in industry are more likely to be productive, and therefore more likely to earn higher wages Because the United States’ workers are more able than those of other nations to produce more goods, they can be paid up to four times the amount of wages without consequence for U.S. trade.

Barriers to Int’l Trade If a group perceives trade of a certain item to be unbeneficial to them, they may enact barriers to prevent large amounts of importation. Four (4) Types of Barriers: -Tariffs -Quotas -Preservation of Standards -Export Subsidies

Barriers Cont. Tariffs: A tax on imports Quotas: Restriction on how much of a certain good from another country may be imported Preservation of standards: A country may expect a trading partner industry to meet certain environmental or safety standards. Export Subsidies: Government paying companies to export goods. Incentive to produce.

Barriers a good thing? Free trade can increase production, employment, and the general well-being of nations. Cheap foreign labor could drive down U.S. wages, some industries are vital to national security, with barriers, we can regulate companies in order to protect the environment.

Attempts at Maintaining Free Trade World Trade Organization: Established to attempt to encourage free trade Had its difficulties due to tense disagreements in between nations regarding policy. Other examples: Free Trade Association, European Union. -Even with these consensual agreements to foster free trade, the self-interest of nations leads to the encouragement of barriers.

Financing Int’l Trade Different currency is worth different amounts in different places. Exchange rate: Value of one nation’s currency stated in terms of the value of another nation’s currency. These rates are subject to change as demand for the particular type of currency changes Demand up, exchange rate up

Example: The Exchanging of Euros If Europeans want to go on American vacations, they will have to supply more Euros for exchange. Europeans will supply more Euros if the price for Euros is high. If the price is increasing, more will be offered for sale This is consistent with the laws of supply and demand.

Other Factors Monetary policy: How much currency is being produced? Differences in interest rates: if interest rises, more currency may be demanded Expectations: what people believe the be the future value of currency may become a self-fulfilling prophecy.

A Balancing Act Balance of Trade: nation’s record of all exchanges between its residents and those of other nations over some time period Balance of Trade: Measure of all goods and services bought and sold on the world market

A Balancing Act Cont. Current Account: Nation’s balance of payments that includes exports and imports of goods and services Capital Account: An account in a nation’s balance of payments that shows the flow of financial capital into and out of a nation

In Summary Nations, like individuals or businesses, act in self-interest when making decisions regarding trade. Trade, in theory, is mutually beneficial In theory, when a nation acts in rational self-interest, all benefit.