1. International Trade

2. Key Questions Why do countries trade with each other?
How does international trade help the economy?
What are the effects of tariffs and quotas?
Why do exchange rates matter?
Key Questions

3. Should a nation never trade for goods and services it can produce itself?

4. "What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage. The general industry of the country, being always in proportion to the capital which employs it, will not therby be diminished... but only left to find out the way in which it can be employed with the greatest advantage."
Adam Smith, 1776

5. “Under a system of perfectly free commerce, each country naturally devotes its capital and labour to such employments as are most beneficial to each. This pursuit of individual advantage is admirably connected with the universal good of the whole. By stimulating industry, by regarding ingenuity, and by using most efficaciously the peculiar powers bestowed by nature, it distributes labour most effectively and most economically… It is this principle which determines that wine shall be made in France and Portugal, that corn shall be grown in America and Poland, and that hardware and other goods shall be manufactured in England.”
David Ricardo, 1817

6. Benefits of trade: nationally
Maintains and improves relations between countries
Allows countries to acquire goods and services they may not be able to produce on their own
Natural Resources
Raw Materials
Allows countries to obtain products that other countries may produce more efficiently (less costly)
Foreign competition diminishes domestic monopoly power

7. Example: clothing & food
United States
Mexico
Skilled workforce, capital, land
Comparative advantage in food production
Less-skilled workforce
Comparative advantage in labor-intensive goods

8. Gains from trade
Mexico and the U.S. prefer some of both goods. Choice to make:
Each country could produce both outputs on own, or
They could specialize and trade
Where do gains from trade come from?
Nations produce goods in which they have a low opportunity cost of production, and trade in exchange of goods in which they have a high opportunity cost
Lower costs of production lead to maximized combined output
Solution: Mexico makes clothes, U.S. grows food

9. Benefits of trade: Consumer
People can acquire a product or service through trade more cheaply
Economies of scale result in lower prices
Promotes competition
Wider variety of goods
Lower prices

10. Over the past 70 years, nations all over the world have increased imports and exports
Lower costs
Reduced trade barriers
Increased specialization
Since 1980, while world GDP has grown at just under 3.5% annually, trade has been growing at about 5.7% annually. The growth in trade is interesting because it largely reflects the effects of specialisation and trade in intermediate goods

11. Barriers to Trade
Barriers create inefficiencies in protected industries
Tariffs
Taxes levied on imported goods and services
Subsidies
A benefit (usually cash) given y a country to support an industry
Quotas
Limits on the quantity of products that can be imported into a country

12. Why prevent trade? National Security Infant Industries Anti-Dumping
Argument: Without ability to produce own missiles, firearms, aircraft, etc. a nation could be reliant on its enemies
Infant Industries
Argument: New industries need protection until they are established and able to compete internationally
Anti-Dumping
Argument: Foreign suppliers sell a good below the price it charges in its home country (usually subsidized)
Special Interests
Argument: Groups that lobby their government for consideration (tariffs, subsidies, etc.) to protect their domestic products

13. Arguments for and against
Protectionism
Free Trade
Protects domestic jobs
Allows new industries to grow until competitive
Protects national security
Lower prices
Allows for a greater variety of goods
Improves economic welfare
Access to new markets

14. Terminology Trade balance Trade surplus Trade deficit Free trade
Total exports minus total imports
Trade surplus
Positive trade balance, when exports > imports
Trade deficit
Negative trade balance, when imports > exports
The U.S. has had a trade deficit since 1975
Free trade
The absence of barriers such as tariffs or quotas
Protectionism
Use of barriers such as tariffs, quotas, or embargoes

15. Even More Terminology Absolute Advantage Comparative Advantage
Ability to produce a good or service at a lower cost per unit than anyone else
Comparative Advantage
Ability to produce a good or service at a lower opportunity cost than other countries (or businesses)

16. Containership information
Largest 18,000 TEU, or 9,000 40’ semi trailers
Average
Number of pairs of shoes per container in a 40’ container 10,000+ pairs of shoes
Number of pairs per avg ship if all shoes 90 million
Nike cost to ship $1.00 per pair

17. Major Trading partners of the U.S.

18. Exchange rates Def: The price of foreign currency
The amount of dollars required to buy units of another currency
Exchange rates are prices
Prices are determined in world currency markets
AKA foreign exchange markets
How are these prices determined?
Like other markets, supply and demand determine prices (exchange rates)
How to use
Number of euros you can buy with one dollar (€ per $)
Number of dollars required to buy one euro ($ per €)

19. Exchange rates Currency Appreciation Currency Depreciation Bottom line
Occurs when a currency increases in value relative to other currencies
Dollar appreciation means that
You can buy more euros with a dollar
It becomes more valuable in world markets
Currency Depreciation
Occurs when a currency decreases in value relative to other currencies
Bottom line
If exchange rates rise, foreign currency becomes more expensive
Imports become more expensive
Exports cheaper for other countries