The Benefits of World Trade ► 13% of GDP is from imports ► Imports – goods bought from other countries for domestic use ► Chief imports – oil, bauxite, raw materials, electronics, tvs, coffee, chocolate, & pepper

Benefits of Trade ► Exports – goods sold to other countries ► Export business employs many Americans ► Chief exports – technology, food, & entertainment ► Nations differ in the types and amount of factors of production ► US is highly skilled and technological compared to other nations (India & Malaysia)

Absolute Advantage ► Absolute Advantage – ability of one country, using the same quantity of resources as another, to produce a particular product at a lower absolute cost ► Example – bananas grown in Brazil vs. France ► Specialization – concept that a nation should produce & export a limited assortment of goods for which it is particularly suited in order to remain profitable

Financing World Trade ► Different countries use different currencies. ► Exchange rate – the price of one nation’s currency in terms of another nation’s currency. ► Foreign exchange markets – markets dealing in buying and selling foreign currency for businesses that want to import goods from other countries

Financing World Trade ► Fixed rate of exchange – system under which a national government sets the value of its currency in relation to a single standard ► IMF – International Monetary Fund – offers monetary advice and provides loans to developing nations ► Fixed rate allows importers and exporters to know value of currency ► Devaluation – lowering a currencies value in relation to other currencies by government order ► Fixed rate was impractical due to constant changes in international economic climate

Financing World Trade ► Flexible exchange rate – arrangement in which the forces of supply & demand are allowed to set the price of various currencies ► Exchange rate is determined by supply and demand. ► Depreciation – fall in the price of a currency through the action of supply and demand

Financing World Trade ► Balance of trade – difference between the value of a nation’s imports and exports ► Weak currency = more exports – countries can buy more goods from a country with weak currency because their money exchanges at a higher rate ► Strong currency = more imports – strong currency will allow a country to buy more goods from countries with weak currencies

Financing World Trade ► Trade deficit – when the value of goods coming into a country is greater than those leaving the country ► U.S. has had trade deficits most years since the early 1970s ► Deficit means foreigners are investing in a country ► Dollars are in demand because of their stability

Restrictions on World Trade ► Challenges to international trade:  Different currencies  Different languages  Different cultures

Barriers to World Trade ► Three major barriers to world trade  1.tariffs – tax placed on imported goods – major source of federal funds until early 1900s – raise price of foreign goods to protect domestic goods  2.import quota – restriction imposed on the number of units of a particular good that can be brought into the country (sugar, shoes, & clothes  3.embargo – complete restriction on the import or export of a particular good – often they are instituted for political reasons

Arguments Against Free Trade ► Protectionists – people who argue for trade restrictions to protect domestic industries ► 1.Job Security – jobs lost if foreign competitors sell products for less ► 2.National Economic Security – certain industries are crucial to national economy such as oil, steel, etc. ► 3.Infant Industries – protection needed for new infant industries until it can become strong enough to compete in the world market

Arguments for Free Trade ► 1.Improved Products – competition forces a country to improve productivity and technology which raises the standard of living ► 2.Export Industries – millions in the U.S. are employed due to exports ► 3.Specialization & Comparative Advantage – allows countries to take advantage of what they are good at producing

Trade Agreements ► GATT – General Agreement on Tariffs & Trade – trade agreements made with many countries after WW II ► WTO – World Trade Organization – over 130 nations established in 1993 that replaced the GATT ► NAFTA – North American Free Trade Agreement - controversial agreement between the U.S., Canada & Mexico ► EU – European Union – organization of European nations that encourages economic integration as a single market

Characteristics of Developing Nations ► Poorest Americans earn more than the average in the rest of the world. ►.5 the world’s population lives at the subsistence level (just enough to survive) ► 39 of 201 countries are considered developed ► Developed nations – nations with relatively high standards of living & economies based more on industry than agriculture

Characteristics of Developing Nations ► Developing Nations – nations with little industrial development and relatively low standards of living. ► Per capita GDP is used to measure a nation’s prosperity. ► Developed nations have a GDP roughly between $12,000 and $29,000 per year

5 Characteristics of Developing Nations ► 1.Low GDP – may have natural & human resources, but lack equipment, financing and knowledge ► 2.Agricultural Economy – subsistence agriculture – growing just enough food to take care of a family’s needs – no crops to support an industrial workforce ► 3.Poor Health Conditions – malnutrition, few doctors or hospitals, little medicine & high infant mortality rate (death rate of infants during first year)

5 Characteristics of Developing Nations ► 4.Low Literacy Rate – percentage of people who are able to read and write. No $ to build schools & kids work. No people to work in professional jobs. ► 5.Rapid Population Growth – leads to lack of housing & food. U.S. growth rate is 1%. 3.6% will double population in 20 years

Weak Property Rights ► Lack of property rights limits ability to improve land and develop farms or businesses.

The Process of Economic Development ► Three stages of economic development 1.Agricultural 2.Manufacturing 3.Service Sector

Financing Economic Development ► Basic problem is financing necessary to provide the equipment and training to improve standard of living. ► Domestic saving is difficult because people are barely subsiding. ► Two basic outside sources of aid  1.Foreign investment  2.Foreign aid

Foreign Investment ► Attracted by low wages, few regulations and abundant raw materials ► Companies often set up branch offices ► Risks include  Political instability  Terrorism  Nationalization – placement of industries under government ownership  Some citizens resent control by foreign companies

Foreign Aid ► Foreign aid – money, goods and services given by governments and private organizations to help other nations and their citizens ► 3 Types  1.Economic assistance – loans and outright grants of money or equipment to other nations  2.Technical assistance – aid in the form of engineers, teacher and technicians to teach skills to individuals  3.Military assistance – aid given to a nation’s armed forces  Other aid includes emergency assistance

Foreign Aid ► U.S. provided much aid to rebuild Europe after WW II. ► Today aid is sent throughout the world ► $8.1 billion in aid in 1998 which was a fraction of GDP compared to other nations. ► The U.N. and World Bank provide aid using American $ ► IMF provides aid and many countries are defaulting on foreign loans.

Foreign Aid ► Foreign aid is given for 3 reasons  1.Encourage international trade  2.Politics  3.Help protect a nation’s security (Israel)