Ch. 16: International Trade CIE3M1-01 M. Nicholson

International Trade Canadians have become accustomed to consuming goods & services from all parts of the world Canada is part of a global trading system sells its own goods & services to other countries (exports) buys goods & services from other countries (imports)

Why Do Nations Trade? Absolute advantage – the ability of one person, region or country to produce a good or service at a lower cost than a competitor’s Comparative advantage - the ability of one person, region or country to provide a good or service relatively more cheaply (i.e. lower opportunity cost) than a competitor

Gains from Trade Based on Comparative Advantage Canada (10 wkr)12 tonnes12 computers1.0 computer1.0 tonnes paper Mexico (20 wkr)3 tonnes9 computers3.0 computers0.33 tonnes paper PaperComputers of 1 tonne of paper of 1 computer Hypothetical Output Per Worker Opportunity Cost Why should Canada trade with Mexico if we have absolute advantage? If Canada & Mexico do not trade how much Paper / Computer produced? Assume they split their workforce between Paper & Computers

Total Gains from Specialization Canada (10 wkr) 60 tonnes60 computers120 tonnes0 computers Mexico (20 wkr)30 tonnes90 computers0 tonnes180 computers 90 tonnes150 computers120 tonnes180 computers PaperComputersPaperComputers Before TradeAfter Trade

Barriers To International Trade Protective tariffs – taxes imposed on imported goods in order to raise the price and lower the quantity sold Embargo – ban against the import or export of a good (e.g. cocaine)

Barriers To International Trade Quotas – a restriction on the amount of foreign foods that may be imported Red tape – government can use bureaucracy to delay or even prevent the importing of foreign goods

Arguments Against International Trade Infant industry argument Vital industries argument Cheap foreign labour argument Employment argument

International Trade And The Circular Flow

domestic & international trade is similar  both have specialization but currency exchange needed for international trade Canada’s trade partners – biggest trading partner is USA with 80.3% of Canadian exports going there and 73% of imports coming from the USA EU and Japan 2 nd and 3 rd most significant

International Trade And The Circular Flow Visible and invisible trade – merchandise trade is visible, tangible goods whereas tourism, services, investment income and money transfers are not visible or tangible Canadian merchandise trade  trade surplus Capital movements – purchase and sales of foreign and domestic bonds and stocks

International Trade And The Circular Flow Balance of payments – is the summary of all the visible, invisible and capital transactions over a year Balance of trade – difference between visible exports and imports (Bal Of Trade = Vis Exports – Vis Imports) Balance of trade on current account - difference between visible and invisible exports and imports (Bal of Trade Cur Acct = Vis/Inv Exports – Vis/Inv Imports)

Exchange Rates Exchange rate is the price of one currency expressed in terms of another currency Canadian = Foreign  divide (e.g. $10 Cdn = ? £  1 £ = $2 Cdn  $10 ÷ $2 = 5 £ UK) Foreign = Canadian  multiple (e.g. 200 Jap = ? $  1 ¥ = $0.01 Cdn  200¥ x $0.01 = $2 Cdn) Flexible exchange rates – supply and demand for a currency determine its price relative to other currencies

Exchange Rates Fixed exchange rates – governments intervene in the foreign currency market to maintain the price of their currency relative to some other currency (e.g. US $) Canada has had both types and now prefers a mixture of the two called a managed or dirty float

Exchange Rates Causes a) British Exports ↑ b) British Interest Rates ↑

Freer Trade Since WW 2 ended in 1945 countries realize increased international trade increases prosperity and helps prevent war General Agreement on Trade and Tariffs (GATT)  World Trade Organization (WTO) European Union (EU) – most Western European countries

Freer Trade

Auto Pact of 1965 – great benefits to Canada through economies of scale lowering costs and increasing workers wages Canada – U.S. Free Trade Agreement, 1987 North American Free Trade Agreement (NAFTA), January 1, 1994 – 363 million people, $6.25 trillion GDP (Canada / USA / Mexico)

NAFTA 1. Canada – can sell telecommunications and banking services, will buy manufactured goods 2. Mexico – great opportunity for economic prosperity, but fear the efficient USA producers and USA culture 3. United States – hope Mexico stabilizes and stops flow of illegal immigrants into America, but fear businesses will move to lax Mexico where costs are lower  loss of USA jobs

Summary