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International Economics Why do nations trade with one another?

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Presentation on theme: "International Economics Why do nations trade with one another?"— Presentation transcript:

1 International Economics Why do nations trade with one another?

2 How does a country decide what to make? Absolute Advantage- when a country can produce more of a given product using the same amount of resources. Comparative Advantage- when a country has a lower opportunity cost associated with the production of a g/s. A country will decide to produce those g/s’s for which it has a comparative advantage.

3 Why will a country specialize in production for which it has a comparative advantage? The country can trade for g/s that it did not choose to produce and end up with more g/s than if it chose not to trade with other countries.

4 Advantages and Disadvantages of trade Advantages Thru trade, production is increased b/c countries can specialize. Consumers pay less for g/s. Good reason to maintain friendly relations with other countries. Disadvantages Native industries that produce goods for which a nation does not have a comparative advantage will be lost. Gov’t oversight of production practices is lost. Native labor may need new training or to become more mobile to survive in a changing job market.

5 Examples of Trade barriers Import quota- limit on the amount of a good that can be imported. Ex: cotton imports Tariff- tax on imported g/s makes those imported g/s more expensive. Customs duties (tariff)- international travelers must declare goods bought in another country and one may have to pay tax on that good based on its value and what country it came from. Duty Free Shops can be found at airports or cruise ships where purchases of foreign goods are exempt from customs duty. Embargo- may apply to a country like Cuba, or to a particular good like fruit for safety reasons.

6 Protectionism- use of trade barriers to protect native industry from foreign competitors. pros Trade barriers protect American jobs Infant industries- barriers will allow new businesses to grow free of established foreign competitors. National Security- the military needs computers and steel, a nation also needs to be able to feed itself. cons Consumers pay higher prices. Less incentive for business to be innovative. Can lead to trade wars- where other nations erect barriers to our exports. Ex: Smoot-Hawley tariff aggravated the Great Depression. Less overall production

7 International Trade Agreements General Agreement on Tariffs and Trade (GATT-1948)- created during post WWII negotiations in Geneva to promote economic recovery and stimulate international trade. Initially 153 participating countries. GATT’s stated goal is, "substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis."

8 The World Trade Organization (WTO) The WTO was created in 1995 during GATT conference to normalize procedures for dispute resolution between member nations and broaden goals of GATT. In 1999, the WTO met in Seattle. Protestors descended on the city with complaints about environmental issues, the growing economic gap b/n rich and poor, and disruption to the interests of American labor brought on by global trade. The protest brought a quick end to negotiations.

9 Regional Trade Blocs NAFTA (1994)- is gradually eliminating tariffs b/n Mexico, Canada, and the U.S., and enabling the free flow of business investment and labor. NAFTA has led to a reduced # of jobs in each country where that country did not have a comparative advantage, while increasing the # of jobs concerning industries within those countries with a comparative advantage.

10 Regional Trade Blocs The European Union (EU)- eliminated trade barriers between European countries. Started in 1957 as the Euro. Economic Union as a trade agreement between 6 countries to eliminate/reduce tariffs between them. currently 28 member nations, 18 of which have adopted the Euro as official currency. The Euro was first printed in 2002, but has existed since 1975 by other names as a unit of account to reduce problems of trade caused by fluctuating values of differing European currencies.

11 U.S. Trade Agreements There are over 100 different trade agreements that differ in intentions and level of cooperation b/n nations. The U.S. has direct free trade agreements with over 20 countries and over 150 indirect free trade agreements with other countries thru its membership in the WTO. trade-agreements trade-agreements

12 Exchange Rates Currency is a Commodity used to buy goods. To buy goods from another country, an importing business needs to exchange its currency for the currency used by the exporter. After WWII, countries that traded globally adopted a Fixed Exchange-Rate System where the value of different currency was fixed against the U.S. dollar, which could then be traded for gold. This encouraged global trade b/c it was easy to recognize the value of currencies against another.

13 Exchange Rates The Fixed system was effective at stimulating global trade, but by the late 1960’s, it was apparent that gov’t’s fiscal and monetary policies were not maintaining equal supplies of currency to make the system work. In 1971, the U.S. stopped allowing $ to be exchanged for Federal gold reserves and countries shifted to a Flexible Exchange-Rate System.

14 Exchange Rates Flexible Exchange-Rate System- the market (supply and demand) determined the value of currencies against one another. tudies/Economics_13/InternationalEconomics _TradeandCurrency/index.html tudies/Economics_13/InternationalEconomics _TradeandCurrency/index.html Also watch Milton Friedman: Imports, Exports, and Exchange Rates

15 Exchange Rates Currency appreciation- a currency can buy more of a foreign currency, so the foreign goods are then cheaper. Currency depreciation- a currency can buy less of a foreign currency, so the foreign goods become more expensive. By depreciating the value of its currency, a country will encourage foreign purchase of its goods (increasing exports) and discourage domestic purchase of foreign goods (decrease imports). China does this.

16 Exchange Rates currency-manipulation.htm currency-manipulation.htm Balance of Trade-a country’s exports=imports Trade Surplus- a country’s exports > imports Trade Deficit- a country’s exports < imports China has a trade surplus with the U.S. The U.S. has a trade deficit with China. This scenario is perpetuated b/c China artificially depreciates (causes inflation) to its currency.

17 Exchange Rates Because the U.S. operates in a trade deficit with many other countries due to our “strong” dollar, other countries, namely China and Japan are left holding U.S. dollars that they don’t care to use for buying U.S. goods. So instead of buying goods for consumption, other countries use these dollars for investment, namely U.S. gov’t bonds. Which increases our national debt. my/who-we-owe/ my/who-we-owe/

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