1. International Trade

2. Surpluses & Deficits ► Budget deficit—the government spends more than it takes in one year. ► Budget surplus—the government takes in more than it spends in one year. ► The US has been running a deficit for the last several years… ► Leading to a huge national debt.

3. The National Debt ► Is the total amount of money the federal government owes to bondholders. ► Every year that the government runs a deficit, it must borrow money to operate. ► To borrow money, the government sells US Bonds (they are sometimes called SECURITIES). ► Individuals and nations all over the world buy them… ► Because they are viewed as some of the safest in the world… ► The US is stable and has never defaulted on its debt.

4. Why Do Nations Trade? ► Nations trade for the same reason individuals trade— ► Out of self-interest. ► What they trade is determined by: ► Specialization—nations, like people, produce only certain goods and services. ► Specialization is determined by… 1. Natural resources 2. Human capital 3. Physical capital

5. International Trade International trade, which is voluntary, creates wealth for a country. Without international trade, each country would be forced to consume only the goods and services it produces within its own borders. Switzerland, for example, would never get to drink coffee.

6. Absolute Advantage ► A country has an absolute advantage over another country in trade when it can simply produce more of a product than another nation. ► China can produce more rice than the US… ► So, China has an absolute advantage in rice production. ► Large nations usually have an absolute advantage over small nations in the production of EVERYTHING. ► So, why do large nations trade with small nations?

7. Comparative Advantage ► Honduras cannot produce as many T-shirts as the US… ► The US has an absolute advantage in T-shirt production. ► So, why does the US import T-shirts from Honduras? ► Because it is CHEAPER for Honduras to manufacture T-shirts than it is for the US. Why? ► Honduras has cheaper labor, and fewer regulations… ► On pollution standards, work hours, benefits, child labor, safety standards, etc. ► So, Honduras has the COMPARATIVE advantage in T-shirts… ► Because they can make them CHEAPER than the US. ► A country should always IMPORT a product if another nation has the comparative advantage.

8. The US as Importer & Exporter The US is the leading exporter in the world… Automobiles, computer software, medical equipment and entertainment are our top exports. The US is also the world’s largest importer— Clothing, food, toys, furniture and oil are some of our top imports. Every year we import an average of $1.4 trillion.

9. Essential Standards ► The student will explain why countries sometimes erect trade barriers and sometimes advocate free trade. ► The student will define trade barriers as tariffs, quotas, embargoes, standards and subsidies. ► The student will identify costs and benefits of trade barriers over time. ► The student will list specific examples of trade barriers. ► The student will list specific examples of trading blocs such as the EU, NAFTA and ASEAN. ► The student will evaluate arguments for and against free trade.

10. The Balance of Trade ► Is the difference between a nation’s imports and exports. ► When the U.S. exports more than it imports it has a trade surplus. ► When the U.S. imports more than it exports it has a trade deficit. ► The US has posted a trade deficit since the 1960’s.

11. Trade Barriers & Protectionism ► Protectionism—the policy of using of trade barriers to impede free trade. ► Trade barrier—a means of preventing a foreign product from entering a nation’s territory. ► Import quota—a limit on the amount of good that can be imported. ► Tariff—a tax on imported goods. A 10% tariff on a $20,000 Toyota raises the price to $22,000.

12. Trade Barriers: Embargo Embargo—A government ban on all trade with a foreign nation. Embargo—A government ban on all trade with a foreign nation. The Foreign Assistance Act of 1961 banned all trade with Cuba. The Foreign Assistance Act of 1961 banned all trade with Cuba. The act also imposes penalties on any country that trades with Cuba. The act also imposes penalties on any country that trades with Cuba.

13. Due to the trade embargo, Cuban streets are a “time warp” with most automobiles dating from the 1950’s.

14. Cuban family in a 1955 Chevy

15. Arguments for Free Trade 1. Competition—free trade results in lower prices… 2. Functionalism—cooperation in trade results in better all- around relations between countries… 3. Interdependence—free trade makes war very expensive… 4. Democratization—free trade often promotes democracy… 5. Economic growth—free trade results in long-term growth and creates jobs.

16. Arguments Against Free Trade 1. Short-term job loss & loss of domestic industry usually occurs. 2. Smaller countries can become too dependent on a few products… 3. National security can become endangered (if we rely on other nations for essential resources)… 4. Free trade can force countries to lower environmental or safety standards to compete.

17. International Agreements World Trade Organization—est. 1995, negotiates agreements & resolves disputes. The European Union—est. 1957, coordinates the economic policies of 27 nations… Many EU nations use a common currency, called the Euro.

18. NAFTA ► Is the NORTH AMERICAN FREE TRADE AGREEMENT… ► Its goal is to create an economic “United States of North America”… ► By eliminating trade barriers between the US, Canada and Mexico. ► So far, 70% of all tariffs have between the three countries have been cancelled.

19. The Results of NAFTA Before NAFTA, high tariffs made Mexican products EXPENSIVE… Before NAFTA, high tariffs made Mexican products EXPENSIVE… And this kept American factories in business. And this kept American factories in business. With the cancellation of tariffs, however, Mexican-made products became MUCH CHEAPER… With the cancellation of tariffs, however, Mexican-made products became MUCH CHEAPER… So American factories began to close down… So American factories began to close down… And reopen in Mexico… And reopen in Mexico… Resulting in the loss of hundreds of thousands of manufacturing jobs in the US. Resulting in the loss of hundreds of thousands of manufacturing jobs in the US.

20. The Results of NAFTA ► US exports to Mexico grew by 242% between 1993 and 2007… ► And the US unemployment rate fell steadily from 6.9% in 1993 to 4% in 2000. ► American wages also grew by almost 24%-- ► Which indicates that as low-paid factory jobs disappeared… ► They were replaced by high-skilled, higher-paying jobs.

21. Essential Standards ► The student will explain how changes in exchange rates can impact the purchasing power of individuals in the US and in other countries. ► The student will define exchange rates as the price of one nation’s currency in terms of another nation’s currency. ► The student will locate information on exchange rate. ► The student will interpret exchange rate tables. ► The student will explain why, when exchange rates change and some groups benefit and others lose.

22. The Value of Currency ► Because there are hundreds of currencies in the world… ► So we need a way to convert one currency into another. ► A Foreign Exchange Market is a market for buying and selling currency. ► Once the value of one currency is determined in relation to another, a foreign exchange rate for the two has been established.

23. Foreign Exchange Rates ► In the U.S. the foreign exchange rates are expressed in two ways: 1. How many foreign units= one US dollar. 2. How many dollars= one foreign unit ► Example: If one dollar equals.50 British Pounds… ► …then one British Pound equals… ► $2.00

24. Devaluation & Appreciation ► When one nation’s currency decreases in value relative to another, devaluation has occurred. ► When one nation’s currency increases in value relative to another, appreciation has occurred.

25. Why Has the Dollar’s Value Fallen? ► The primary reason is due to our current trade deficit… ► We’re buying more from the rest of the world than they’re buying from us. ► As long as that goes on, we're shipping to other countries pictures of American presidents on little bits of paper and they're sending us automobiles and T- shirts… ► At some point they don't want any more of our pictures of American presidents… ► And when people DON’T WANT an item… ► What happens to that item’s value? ► IT DROPS!

26. Why the Weak Dollar is Bad News ► Americans are COMPLETELY dependent on foreign products… ► And the weak dollar makes those products MORE EXPENSIVE… ► Say a pair of Nike sneakers (made in China) costs $80… ► If the value of the dollar drops by 20%, those shoes will now cost… ► $96. ► A weak dollar causes the cost of living to INCREASE for most Americans.