Trading with other Nations Chapter 18 Trading with other Nations

Benefits of World Trade Imports – goods bought from other countries for domestic use. Exports – goods sold to other countries Because countries posses different Factors of Production a world trade allows countries to get items they could not produce. It allows countries to focus on what they can produce efficiently and trade for things they are less efficient at

Absolute Advantage Def- ability of one country to produce more output per unit of input than another country. Example – The tropical climate and cheap labor in Brazil allows it to produce bananas efficiently. In France which has a moderate climate and more expensive labor can produce fewer bananas and at a much higher cost. Specialization – concept that a nation should produce and export a limited assortment of goods for which it is particularly suited in order to use its resources most efficiently

Comparative Advantage Def- ability of a country to produce a product at a lower opportunity cost than another country Sometimes a country can produce 2 goods rather efficiently but it is still advantageous for them to specialize one one good over another Example: YEAR 1 YEAR 2 Country A produces soybeans and corn: 10 Million Soy | 50 million corn Country B produces soybeans and corn: 8 Million Soy | 25 million corn Country A has Absolute Advantage over Country B in both Products. Because Country A would benefit more from producing corn and trading for Soy they should trade Country B corn for soy thus they have a lower opportunity cost if they produce corn.

Hatfield's and McCoy's Find the worksheet for this activity in your notes packet. Work through the activity and answer the questions.

Financing World Trade Exchange rate – the price of one nation’s currency in terms of another nation’s currency Foreign Exchange Markets – market dealing in buying and selling foreign currency for businesses that want to import goods from other countries According to the chart, how many Venezuelan bolivar would you receive if you exchanged $5 US?

Exchange rates continued Fixed Exchange Rate – system under which a national government sets the value of its currency in relation to other currencies. International Monetary Fund (IMF) – agency whose member governments once were obligated to keep their foreign exchange more or less fixed; today it offers monetary advice and provides loans to developing nations Devaluation – lowering a currency’s value in relation to other currencies by government order

Exchanges Rates con’t This chart shows how the devaluation of the Chinese Yuan affects consumers in the United States. How much would an American consumer pay for a Chinese MP3 player if the yuan was devalued to $14 per U.S. dollar?

Flexible Exchange Rates Flexible Exchange Rate – Arrangement in which the forces of supply and demand are allowed to set the price of various currencies Depreciation – fall in the price of a currency through the action of supply and demand For example – Suppose that the Mexican exporters demand exceeds the quantity of dollars supplied by Americans who want to buy Mexican goods. Because the quantity demanded exceeds that supplied, the American dollar will become more expensive in relation to the peso MD<AS so price of US$ goes up

Balance of Trade Def- difference between the value of a nation’s exports and its imports. When is the last time the US trade deficit decreased? Since 1980, what is the longest span of time that the U.S. trade deficit decreased?

Restrictions on World Trade Three ways to restrict imports Tariffs Definition: tax placed on an imported product Revenue Tariffs – tax on imports used primarily to raise government revenue without restricting imports Revenue tariffs are currently less than 2 % of federal income but in the early 1900’s they were a significant source of revenue Protective tariffs – is one designed to raise the cost of imported goods and thereby protect domestic producers Some protective tariffs have been as high as 62% in the past They are much lower today but still are used

Trade Restrictions con’t Quotas Definition – restriction imposed on the number of units of a particular good that can be brought into the country At one time or another the U.S. has placed quotas on sugar, dairy, apparel and cloth Embargoes Complete restriction on the import or export of a particular good or goods going to or coming from a specific country Often done for political reasons, for example, Syria was embargoed for supporting terrorism in 2003.

Arguments against Free Trade Protectionists – people who argue for trade restrictions to protect domestic industries Job Security Fear that domestic workers will lose their jobs if imports are sol at lower prices In 1980, many steel mills laid off many workers because of foreign competition National Economic Security Argument that certain industries are crucial to the US economy For example, industries like oil should be protected against competition Infant Industries Belief that temporary tariffs and quotas are necessary to protect new and infant companies

Arguments for Free Trade Improved Products Foreign Competition encourages US firms to improve their technology and production methods Export Industries When imports are reduced there is less money available outside the US to buy American exports When the US restricts their may be retaliation and they may restrict our goods Both of these could cause US export workers to lose jobs Specialization and Comparative Advantage Although those in favor of free trade agree that too much specialization can put a country at the mercy of others, they believe that some specialization benefits consumers because comparative advantage results in more goods at lower prices

International Trade Agreements World Trade Organization (WTO) Definition – World’s largest trade agreement, currently with more than 140 member nations Regional Trade Agreements North American Free Trade Act (NAFTA) – trade designed to reduce and gradually eliminate tariff barriers between Mexico, Canada and the United States Central American Free Trade Agreement (CAFTA) – trade agreement designed to reduce barriers between Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, the Dominican Republic, and the United States European Union (EU) – Organization of European nations whose goal is to encourage economic integration as a single market Currently there are 25 countries in the EU Most of them also use a common currency called the Euro Eventually there will be 400 million consumers that use the Euro this will rival the US in market size