1. International Trade

2. Motive for Trading People expect to gain by trading with other people.
They hope to receive a good/service that is more valuable than whatever they trade away.
Have you traded lunches with anyone? Motive?
People refuse to trade when the good/service being offered is of less value than the good or service they are asked to exchange.

3. Wealth and Trade Wealth is created by any swap.
It may seem like an even trade, but each trader gives up something he/she values less in order to receive something he/she values more.
When Neolithic spear makers did business with Neolithic basket weavers, the spear makers were able to carry things around in a manner more convenient than skewering them on spear points, and the basket weavers were able to kill mastodons by a method more efficient than swatting them with baskets.

4. Imports & Exports
You can learn about a nation’s economy by what goods it imports and exports.
Nations cannot produce everything they need
EX: Unequal distribution of resources
“Import” depends on our ability to “export”

5. Exports
Exports are goods and services that a nation sells to others or goods and services sent out of the country.
A nation’s exports tell you about the goods that a country produces efficiently.
US exports in 2013 = $2.2 trillion
Ex: Automobiles, computers, aircraft, corn, wheat, soybeans, scientific instruments, coal, machinery, plastic materials, etc.

6. Exporters US is the world’s second leading exporter (China)
16.1 % of all exports
Followed by Germany and Japan
Partners
Canada EU
Mexico
China
Japan

7. Imports
Imports are goods and services that a nation buys from other nations or goods and services brought into the country.
A nation’s imports tell you which goods it does not produce efficiently.
US imports in 2013 = $2.7 trillion
EX: Petroleum, clothing, iron, steel, office machines, footwear, fish, coffee, diamonds, etc.

8. Importers Major trade partners of US: China Canada Mexico Japan
Germany

9. International Trade International trade is important to all countries.
Most trade is in goods, but trade in services is growing.
Services include banking and insurance.
The international marketplace is generally more complex than the domestic market of a nation, but essential characteristics are identical.

10. Rules to Trade By
Trade agreements, the rights and regulations that govern trade, are made by nations (actually it is people that trade).
Voluntary exchange will not occur unless both parties anticipate that they will benefit from the exchange.
Absolute and comparative advantage help explain the reasons that people trade.

11. Specialization
Often nations specialize, which means they focus on making the goods they produce best.
Nations then trade their goods for others that are more expensive or even impossible for them to produce.
Honduras: bananas
Middle East: oil

12. Absolute Advantage
Ability to produce something with fewer resources than other nations require, so they can potentially make more than other countries at less cost.
Some nations have an absolute advantage in the production of particular goods and services due to natural resources, climate, etc.
They make enough for themselves and enough to export

13. Okay – Remember a PPF????? Production Possibilities Frontier????
When comparing the absolute advantage that a nation has over another nation for a particular product, economists use a production possibilities frontier.
Remember the maximum that can be produced when all resources are fully used.

14. The Next Step
Two countries can benefit from trade even if one has a smaller output than the other.
In some instances, a smaller country can produce an item more efficiently, even if it cannot produce as large a volume as a larger country.
This is called a Comparative Advantage

15. Comparative Advantage
When a nation has a lower opportunity cost of producing one product than another.
By concentrating production on products they can make by giving up very little, a country can increase their standard of living by trading with others.
To find comparative advantages, do not compare absolute advantages. Compare opportunity costs.

16. Your Turn Comparative Advantage in Paper-Folding and Page Turning
Grab a partner, 3 pieces of paper, and a book.
Remember: The opportunity cost of producing x is found by taking y/x or (OCX = Y/X)

17. The Facts Before Us Economies are defined by scarcity.
Scarcity forces people to make choice
Choices involve costs
Since we all face different costs, by specializing and trading we can create wealth
Markets form to facilitate trade

18. The Simplest Economy We consider the simplest possible economy
There is one actor, Robinson Crusoe
There is one resource - TIME

19. Choices Food - he can catch fish in the local lagoon 1 hour = 3 fish
Shelter – palm leaves for a hut
1 hour = 4 palm leaves
8 Hour day
3 Fish/ hr
4 Palms/hr
24 Fish/day
32 Palms/day

20. PPF: The Possibilities
Fish Palms
Rob’s PPF

21. Opportunity Costs for 1 hour
3 Fish = 4 Palms
4 Palms = 3 Fish
Opportunity Cost
1 Fish = 4/3 Palm
1 Palm = ¾ Fish

22. Meanwhile on the other side of the island…..
Not alone
Friday is living similar life
Faces scarcity
Fishes and cuts down palm leaves
Has different talents than Rob

23. Friday’s Workday Food - 1 hour = 3 fish
Shelter – 1 hour = 6 palm leaves
8 hour day
3 Fish/ hr
6 Palms/hr
24 Fish /day
48 Palms/day

24. PPF: The Possibilities
Fish Palms
Friday’s PPF

25. Opportunity Costs for 1 hour
3 Fish = 6 Palms
6 Palms = 3 Fish
Opportunity Cost
1 Fish = 2 Palms
1 Palm = 1/2 Fish

26. Comparison Rob 1 Fish = 4/3 Palms 1 Palm = 3/4 Fish Friday

27. Current Production Robinson 15 fish and 12 palms daily
Friday 6 fish and 36 palms daily
What will the trade be?

28. Let’s Make A Deal Both will trade 3 fish for 5 palms
Robinson gives up 3 fish (normally gives up 4 palms) now he gets 5 palms
Increase in 1 palm
Friday gets 3 fish (normally gives up 6 palms) only giving up 5
Increase of 1 palm

29. Punchline If you care about someone’s welfare, trade with them!
Trade creates wealth
Trade causes specialization, with trade we get more goods from fewer resources
Trade improves welfare even if one party is bigger, smarter or more productive than others

30. Outsourcing/Offshoring
Outsourcing = work done for a company by another company or by people other than the original company’s employees
Offshoring = outsourcing in another country
Jobs are lost
Jobs can be done cheaper, reduces costs
Show “Are Boycotts of Sweatshop Products Helpful” and “Does Outsourcing Cost Americans Jobs”

31. Trade Restrictions Tariffs : Toyota cars
Tax on an import – paid by producer when import comes into a country (Show: Jobs Taken by Cheaper Goods)
Quota: Absolute and Tariff -rate
Legal limit on the amount of good that
may be imported into a country/without penalty of higher duty
Subsidy: Farmers (Show: Farm Subsidies)
policy reduces costs for producers, often to promote exports

32. Trade Restrictions Customs duty: Embargo: Cuban cigars (old news)
Tax on certain items purchased abroad – fill out form when you come into the country
Embargo: Cuban cigars (old news)
Complete elimination of trade with a country
VER (Voluntary Export Restraint)
a self-imposed limitation on the number of products shipped to a particular country – done so importing country won’t set up trade barriers
Standards (Safety and Environmental)
High government licensing fees and costly product standards (insecticides used by some countries ban that fruit)

33. Effects of Restrictions
Limits the supply of foreign goods
Increases the prices
Consumers lose out – prices are higher

34. Arguments for Trade Restrictions
National-defense: May not want to rely on China to produce our weapons.
Infant-Industry: Protect new industries in the early stages of development

35. Arguments for Trade Restrictions
Anti-dumping: selling of goods in foreign countries at prices below cost and below the price charged in the domestic market
Done to drive out US competitors and get % of the market
Raise prices once their strategy works
Low Foreign-Wages – US producers argue they will be ruined – can’t compete with low prices goods

36. International Organizations
General Agreement on Tariffs and Trade (GATT) Established to reduce tariffs and expand world trade
World Trade Organization (WTO): Founded to ensure compliance with GATT, to negotiate new trade agreements, and to resolve trade disputes
European Union (EU): A regional trade organization made up of 27 European Nations – free-trade zone
North American Free Trade Agreement (NAFTA): Eliminate tariffs and other trade barriers between Canada, Mexico, and the US

37. Protectionism
Use of trade barriers to protect a nation’s industries from foreign competition
Trade Barriers limit supply from other countries

38. Free Trade Zones
Region where a group of countries agrees to reduce or eliminate trade barriers
Jamaica
China
Argentina
Bangladesh
……and 28 other countries

39. Balance of Trade
Difference between the value of its exports and the value of its imports.
Balance of trade = Value of exports
Value of imports
Trade surplus = positive balance of trade
Trade deficit = negative balance of trade

40. US Trade Deficit US has run a trade deficit since the early 1970’s
Imports of foreign oil large part – but we like foreign goods
To reduce it we set quotas and tariffs to urge consumers to buy domestic
We import almost twice as much as we export

41. International Monetary Fund
Organization of 188 countries that aim to foster global monetary cooperation, secure financial stability and facilitate international trade.
IMF focuses on countries that are in poverty an aim to advise and assist those countries.

42. Exchange Rates and International Markets

43. Dollar Values
Dollar value goes down – foreign countries buy more of our goods
Dollar value goes up – we buy more of foreign goods

44. How does the Value of the Dollar Change
An increase in the demand of a countries currency will lead to an increase in the value of the currency.
Ex: Increase in US exports will lead to an increase in the value of the US Dollar.

45. Types of Exchange Rate Systems
Fixed Exchange-Rate Systems
A currency system in which governments try to keep the values of their currencies constant against one another is called a fixed exchange-rate system. (Small countries; small economies)
Flexible Exchange-Rate Systems
Flexible exchange-rate systems allow the exchange rate to be determined by supply and demand. (large countries; large economies)
Chapter 17, Section 3

46. Let’s Go Shopping
You are at an International Mall and you are starving!!!
The menu items are in foreign currency.
You have $10.00 American dollars to spend but you don’t know what the exchange rates are.
By trying to stay within your budget order the items you would like for lunch.