1 Chapter 7 Section 1 Global Economics Objectives Describe how international trade benefits consumers. Explain the significance of currency exchange rates. Analyze the impact of the U.S. trade deficit.

2 Imports and Exports -Imports: is a product brought in for sale from a foreign country *Fuel * Bauxite -Exports: is a product sent to a foreign country for sale *Automatic data and processing equipment Types: Manufactured goods - wireless phones Producer goods – Automobile parts Agricultural goods - Bananas Services - Accounting Raw materials – like petroleum and iron

3 Why might Nations Trade? If one nation lacks a resource it may spark a trade with one that has it. To specialize in a certain good rather than manufacturing several goods. Adam Smith, an 18 th century Scottish economist proved this effective.

4 Benefits of Trade Ways International Trade Benefits You and Others Consumer Choices Increased Competition Expanded Markets Benefit workers they employ International Relations Prosperity and Peace

5 Currencies and Trade If two countries with different currency want to do business with one another the buyer must convert its money to the sellers currency.

6 Exchange Rates The cost of one currency expressed in terms of another currency is called exchange rate. At one time, currency exchange rates were fixed. They were set by governments and rarely changed.

7 Flexible Exchange Rates Under this system, the price of buying a particular currency rises and falls from day to day because of demand and supply. For importers and exporters, flexible exchange rates can make the cost of doing business unpredictable.

8 Factors Affecting Exchange Rates cont. Changes in interest rates A country that offers high interest rates increases the demand of currency. A currency’s value is also effected by economic and political stability. The U.S. is considered a stable nation so other investors around the world often prefer to invest with us.

9 How Exchange Rates Affect Trade The strength or weakness of nation’s currency affects the willingness of other countries to trade with the nation. If the U.S. dollar is weak, exports from the U.S. tend to increase.

10 Understanding the Trade Deficit Balance of Trade~ difference between value of a nation’s exports and it’s imports Trade Deficit~ negative balance of trade –Occurs if country spends more on imports

11 Understanding the Trade Deficit Balance of payments~ an accounting of all financial transactions that involve other countries and financial dealings All imports/exports recorded in balance of payments with the goal equally zero

12 The U.S. Trade Deficit U.S. has had a trade deficit almost every year since 1970’s Some people think the trade deficit is harmful because of the increase in foreign investment and are concerned with unemployment Some people see foreign investment not as a problem, but as a sign that the U.S. economy is strong enough to attract investors and is prosperious.

13 Chapter 7 Section 2 Trade Restrictions and Agreements Objectives Describe methods used to restrict international trade. Analyze arguments in favor of protectionism and free trade. Explain the impact of major trade agreements.

14 Ways to Restrict Trade Tariff – tax on imports Most common trade restriction Discourages from buying out of country 1.Revenue-used for government revenue 2.Protective-straight to the producer

15 Ways to Restrict Trade Quota - a government limit on the quantity or value of a certain imported product

16 Ways to Restrict Trade Embargo - government order prohibiting trade Specific product or country Used for political reasons

17 Protectionism Versus Free Trade Protectionism-a policy of using trade restrictions to protect domestic business from foreign competition. Free Trade-a policy of minimizing trade restrictions.

18 Arguments for Protectionism National Security Job Security – imported products costs less than those made in U.S. because workers from other countries are paid less Infant Industries Environmental Protection Unfair advantages

19 Arguments for Free Trade Effects on Export Effect on consumers – more for their money Benefits of Specialization Benefits of Competition – Can improve production efficiency, quality of products, and lower prices Alternatives

20 International Trade Agreements Between WW1 and WW2 international trade was hindered by different countries practice of protectionism. In order to increase trade many countries began to adopt a free trade policy after WW2 to decrease trade barriers.

21 World Trade Organization (WTO) –An international organization that governs trade between over 140 nations. General Agreement on Tariffs and Trade (GATT) –Signed by 90 countries in 1941 –Promotes international trade. –New GATT signed in 1994 to reduce or remove trade barriers. GATT and the WTO

22 North American Free Trade Agreement NAFTA –Wide ranging regional trade agreement between U.S., Canada, and Mexico to give legal protections to investors and international business. –Started January 1, 1994

23 European Union Organization of European nations –Goal is to create a unified and strong market –Euro is the European Union’s common currency.

24 Technology making the world smaller. Media influence Companies Multi-National- companies with divisions in more than two countries