1. Why Countries Trade To understand why countries trade

2. Why Trade? There are two theories on why countries trade, they both agree that countries should produce those things that they are most efficient at making

3. Absolute Advantage Theory that we should produce what is efficient, and trade the surplus for things that we aren’t efficient at making

4. Absolute Advantage Theory that we should produce what is efficient, and trade the surplus for things that we aren’t efficient at making Ex. – we export machinery to Central America, they export bananas to us

5. Comparative Advantage Theory that we should produce those things at which we are relatively more efficient at making

6. Comparative Advantage Theory that we should produce those things at which we are relatively more efficient at making Ex. – US makes both watches and airplanes more efficiently than Switzerland

7. Comparative Advantage Theory that we should produce those things at which we are relatively more efficient at making Ex. – US makes both watches and airplanes more efficiently than Switzerland However, we are 3x more efficient in airplanes, 2x in watches

8. Comparative Advantage Theory that we should produce those things at which we are relatively more efficient at making Ex. – US makes both watches and airplanes more efficiently than Switzerland However, we are 3x more efficient in airplanes, 2x in watches Therefore, we should specialize in airplanes

9. Barriers to Trade Tariffs – taxes on imports

10. Barriers to Trade Tariffs – taxes on imports 3 types of tariffs:

11. Barriers to Trade Tariffs – taxes on imports 3 types of tariffs: Revenue – intended to raise money

12. Barriers to Trade Tariffs – taxes on imports 3 types of tariffs: Revenue – intended to raise money Protective – to protect US made goods

13. Barriers to Trade Tariffs – taxes on imports 3 types of tariffs: Revenue – intended to raise money Protective – to protect US made goods Restrictive – to reduce/eliminate flow on a product to the country

14. Barriers to Trade Quotas – limit on the amount of goods let into a country (made illegal by GATT General Agreement of Tariffs and Trade)

15. Barriers to Trade Quotas – limit on the amount of goods let into a country (made illegal by GATT General Agreement of Tariffs and Trade) VER (Voluntary Export Restraints) countries volunteer to set their own quota on exports to help another country out

16. Barriers to Trade Regulations and Certification – imports must meet these

17. The Costs and Benefits of Trade Barriers Why restrict trade?

18. The Costs and Benefits of Trade Barriers Why restrict trade? Infant Industry – needs to protect young growing industry from well-established industry

19. The Costs and Benefits of Trade Barriers Why restrict trade? Infant Industry – needs to protect young growing industry from well-established industry National Security – produce necessary military products itself

20. The Costs and Benefits of Trade Barriers Why restrict trade? Infant Industry – needs to protect young growing industry from well-established industry National Security – produce necessary military products itself Protection of domestic jobs – foreigners work for less

21. The Costs and Benefits of Trade Barriers Why restrict trade? Infant Industry – needs to protect young growing industry from well-established industry National Security – produce necessary military products itself Protection of domestic jobs – foreigners work for less Maintaining economic stability – can be greatly disrupted by other countries’ problems

22. Balance of Trade Since 1980, US imports more than it exports (negative balance of trade)

23. Balance of Trade Since 1980, US imports more than it exports (negative balance of trade) Can be bad for employment, taxes, profits, economic growth

24. Balance of Trade Since 1980, US imports more than it exports (negative balance of trade) Can be bad for employment, taxes, profits, economic growth Good for fighting inflation, providing low cost goods

25. Politics The US has backed away from Free Trade, and pushed for Fair Trade

26. Politics The US has backed away from Free Trade, and pushed for Fair Trade Opposed to the policy of dumping (selling of products for less than that country can produce them for)

27. Politics The US has backed away from Free Trade, and pushed for Fair Trade Opposed to the policy of dumping (selling of products for less than that country can produce them for) The US has published a list of Unfair Trade Countries, and threats of retaliation from the US have improved conditions