1. International Trade Chapter 17

2. Why Nations Trade Resource distribution –Natural endowments –Natural resources –Human capital –Physical capital –Economic activity patterns –Unequal resource distribution Resource distribution –Natural endowments –Natural resources –Human capital –Physical capital –Economic activity patterns –Unequal resource distribution

3. Advantage Absolute advantage: ability to produce more of a given product using a given amount of resources Comparative Advantage: produce a product most efficiently, given all other products that could be produced (opportunity cost) –David Ricardo: law of comparative advantage Absolute advantage: ability to produce more of a given product using a given amount of resources Comparative Advantage: produce a product most efficiently, given all other products that could be produced (opportunity cost) –David Ricardo: law of comparative advantage

4. US and Trade Imports –Capital goods –Industrial supplies, materials –Consumer goods –Food, feeds, beverages –Automotive vehicles –Engines Imports –Capital goods –Industrial supplies, materials –Consumer goods –Food, feeds, beverages –Automotive vehicles –Engines Exports –Capital goods –Industrial supplies and materials –Consumer goods –Food –Feed –Automotive vehicles –Engines Exports –Capital goods –Industrial supplies and materials –Consumer goods –Food –Feed –Automotive vehicles –Engines

5. Trade and Employment Specialization Productivity –Physical capital –Education –Government subsidies (health insurance) Specialization Productivity –Physical capital –Education –Government subsidies (health insurance)

6. Trade Barriers and Agreements Trade Barriers –Import quota –Voluntary export restraint (VER) –Standards / Quality tests / safety regulations –Customs duty Trade Barriers –Import quota –Voluntary export restraint (VER) –Standards / Quality tests / safety regulations –Customs duty

7. Effects of Trade Barriers Increase prices of foreign goods Trade wars Resource allocation Increase prices of foreign goods Trade wars Resource allocation

8. Arguments for Protectionism Protecting jobs Protecting infant industries Safeguarding national security Protecting jobs Protecting infant industries Safeguarding national security

9. International Agreements Reciprocal Trade Agreement Act 1934: reduce tariffs by 50% –MFN - most favored nation status, Congress grants –Normal trade relations (NTR): all nations pay same tariff Reciprocal Trade Agreement Act 1934: reduce tariffs by 50% –MFN - most favored nation status, Congress grants –Normal trade relations (NTR): all nations pay same tariff

10. World Trade Organization 1948: GATT 1995 WTO –Ensure compliance with GATT –Acts as referee 1948: GATT 1995 WTO –Ensure compliance with GATT –Acts as referee

11. European Union EU –1957: Common Market –1986: eliminated tariffs, formed European Economic Community (EEC) –2002: Euro EU –1957: Common Market –1986: eliminated tariffs, formed European Economic Community (EEC) –2002: Euro

12. North American Free Trade Agreement 1994 NAFTA Canada, Mexico, USA Eliminate all tariffs and other trade barriers Eventual include all of the Americas 1994 NAFTA Canada, Mexico, USA Eliminate all tariffs and other trade barriers Eventual include all of the Americas

13. Other Regional Trade Agreements APEC:Asia Pacific Economic Cooperation (Pacific Rim) MERCOSUR: Southern common Market (Brazil, Argentina, Paraguay, Uruguay) CARICOM: Caribbean Community and Common Market APEC:Asia Pacific Economic Cooperation (Pacific Rim) MERCOSUR: Southern common Market (Brazil, Argentina, Paraguay, Uruguay) CARICOM: Caribbean Community and Common Market

14. Role of Multinationals Products: parts imported from around the world; assembled in country Designed in USA made overseas; sold internationally (NIKE) MNCs have more power than nation states Products: parts imported from around the world; assembled in country Designed in USA made overseas; sold internationally (NIKE) MNCs have more power than nation states

15. Measuring Trade Exchange Rates –Foreign exchange –Determining exchange (s/d) –Strong / weak currencies Appreciation - increase in purchasing power Depreciation - decrease in purchasing power Exchange Rates –Foreign exchange –Determining exchange (s/d) –Strong / weak currencies Appreciation - increase in purchasing power Depreciation - decrease in purchasing power

16. FOREX MARKET Foreign exchange market –Strong dollar - buys more foreign currency - buy more foreign goods –Weak dollar - buys less foreign currency - buy fewer foreign goods Foreign exchange market –Strong dollar - buys more foreign currency - buy more foreign goods –Weak dollar - buys less foreign currency - buy fewer foreign goods

17. Exchange Rate Systems Fixed exchange rates system Bretton Woods Conference –International Monetary System –Cooperation –Currency stabilization Flexible Exchange Rate –Supply and demand Fixed exchange rates system Bretton Woods Conference –International Monetary System –Cooperation –Currency stabilization Flexible Exchange Rate –Supply and demand

18. Euro Abolish different currency Stimulates trade & economic activity Abolish different currency Stimulates trade & economic activity

19. Balance of Trade The relation between a nation’s imports and exports –Trade surplus: Ex > Im –Trade deficit: Ex < IM –USA trade deficit Global economy: is it important? Reducing trade deficit –Purchase fewer goods from abroad –How long will foreigners be willing to buy our debt? »Bonds »imports The relation between a nation’s imports and exports –Trade surplus: Ex > Im –Trade deficit: Ex < IM –USA trade deficit Global economy: is it important? Reducing trade deficit –Purchase fewer goods from abroad –How long will foreigners be willing to buy our debt? »Bonds »imports