International Trade

Wealth and Trade Wealth is created by any swap. It may seem like an even trade, but each trader gives up something he values less in order to receive something he values more. When Neolithic spear makers did business with Neolithic basket weavers, the spear makers were able to carry things around in a manner more convenient than skewering them on spear points, and the basket weavers were able to kill mastodons by a method more efficient than swatting them with baskets.

Trade is the voluntary exchange of goods and services. The decision to trade is made because two or more parties involved in the exchanges expect to gain. When one or both of the trading partners believe they can no longer gain from trading, the exchanges will stop.

Wealth DO NOT LOOK IN THE BAG!!!! Can you create wealth? Let’s try it!!!! Boys grab a bag that has ‘B’ Girls grab a bag that has ‘A’ DO NOT LOOK IN THE BAG!!!!

Imports & Exports You can learn about a nation’s economy by what goods it imports and exports. Can’t produce everything you need Unequal distribution of resources “Import” depends on our ability to “export”

Exports Exports are goods and services that a nation sells to others or goods and services sent out of the country. A nation’s exports tell you about the goods that a country produces efficiently. US exports in 2006 = $1.4 trillion Automobiles, computers, aircraft, corn, wheat, soybeans, scientific instruments, coal, machinery, and plastic materials

Imports Imports are goods and services that a nation buys from other nations or goods and services brought into the country. A nation’s imports tell you which goods it does not produce efficiently. US imports in 2006 = $2.2 trillion Petroleum, clothing, iron, steel, office machines, footwear, fish, coffee, and diamonds

International Trade International trade is important to all countries. Most trade is in goods, but trade in services is growing. Services include banking and insurance. The international marketplace is generally more complex than the domestic market of a nation, but essential characteristics are identical.

Rules to Trade By Trade agreements, the rights and regulations that govern trade, are made by nations (actually it is people that trade). Voluntary exchange will not occur unless both parties anticipate that they will benefit from the exchange. Absolute and comparative advantage help explain the reasons that people trade.

Specialization Often nations specialize, which means they focus on making the goods they produce best. Nations then trade their goods for others that are more expensive or even impossible for them to produce. Honduras - bananas Middle East – oil

Absolute Advantage DEFINITION - Ability to produce something with fewer resources than other nations require Some nations have absolute advantage in the production of particular goods and services due to natural resources, climate, etc. They make enough for themselves and enough to export

Okay – Now remember back to the first unit????? Production Possibilities Frontier???? When comparing the absolute advantage that a nation has over another nation for a particular product, economists use a production possibilities frontier. Remember the maximum that can be produced when all resources are fully used.

What????? Two countries can benefit from trade even if one has a smaller output than the other. In some instances, a smaller country can produce an item more efficiently, even if it cannot produce as large a volume as a larger country. This is a comparative advantage

Comparative Advantage DEFINITION – When a nation has a lower opportunity cost of producing one product than another. By concentrating their production on those products they can increase their standard of living

The Gains From Trade When people specialize in their comparative advantage, and trade in markets for other goods, wealth increases. Use existing resources more efficiently No extra resources used Using low cost producer Specialization and trade REDUCES scarcity!

Your Turn Comparative Advantage in Paper-Folding and Page Turning Grab your partner

Outsourcing/Offshoring Outsourcing = work done for a company by another company or by people other than the original company’s employees Offshoring = outsourcing in another country Jobs are lost Jobs can be done cheaper, reduces costs

Trade Restrictions Tariffs – Toyota cars 100% Quota Tax on an import – paid by producer when import comes into a country Quota Legal limit on the amount of good that may be imported into a country Subsidy – policy reduces costs for producers, often to promote exports

Trade Restrictions Customs duty Tax on certain items purchased abroad – fill out form when you come into the country Embargo – complete elimination of trade with a country U.S. trade embargo with Cuba

Trade Restrictions VER (Voluntary Export Restraint) a self-imposed limitation on the number of products shipped to a particular country – done so importing country won’t set up trade barriers Standards (Safety and Environmental) High government licensing fees and costly product standards (insecticides used by some countries ban that fruit)

Protectionism Use of trade barriers to protect a nation’s industries from foreign competition Trade Barriers limit supply from other countries

International Organizations GATT – 1948 - General Agreement on Tariffs and Trade was established to reduce tariffs and expand world trade WTO – World Trade Organization was founded to ensure compliance with GATT, to negotiate new trade agreements, and to resolve trade disputes

International Organizations EU – a regional trade organization made up of 25 European Nations – free-trade zone NAFTA – North American Free Trade Agreement – agreement that will eliminate all tariffs and other trade barriers between Canada, Mexico, and the US

Free Trade Zones Region where a group of countries agrees to reduce or eliminate trade barriers Jamaica China Argentina Bangladesh ……and 28 other countries

Balance of Trade Difference between the value of its exports and the value of its imports. Balance of trade = Value of exports Value of imports Trade surplus = positive balance of trade Trade deficit = negative balance of trade

US Trade Deficit US has run a trade deficit since the early 1970’s Imports of foreign oil large part – but we like foreign goods To reduce it we set quotas and tariffs to urge consumer to buy domestic We import almost twice as much as we export

The value of a foreign nation’s currency in relation to your own currency is called the exchange rate. An increase in the value of a currency is called appreciation. A decrease in the value of a currency is called depreciation. Multinational firms convert currencies on the foreign exchange market, a network of about 2,000 banks and other financial institutions.