Chapter 17 International Trade

Specialization Key to trade Exports are indicator Exports- goods/services a nation produces & then sells to other nations Will increase world output

US & International Trade Imports- goods/services one nation buys from another nation Why Trade? Products received have more value than products given up Necessities (oil, minerals) & native goods (coffee beans, bananas) are exchanged Cheaper to import than to manufacture a product

Absolute Advantage A country can produce a product more efficiently than another country Greater output per unit of input Both countries benefit- sometime one more than the other Ex. Climate & soil for agriculture

Comparative Advantage Ability of a country to produce a product relatively more efficiently, at a lower opportunity cost Proves both countries benefit from trade

Comparative Advantage COUNTRY STEREO SYSTEM APPLES (LBS) Opportunity COST UNITED STATES 100 25 4 Stereo Systems JAPAN 200 10 20 Stereo System

Barriers to International Trade Tariff- tax on imports to increase their price in domestic market Protective tariff- tariff set high enough to protect less-efficient domestic industries Revenue tariff- tariff set high enough to generate $ for govt. w/out prohibiting imports Called customs duties

Barriers to International Trade Quotas- used to keep foreign goods out of a country Used when even high tariffs do NOT protect domestic industry Usually used to reduce total supply in order to keep prices high for domestic goods Ex. Japanese cars in 1981

Barriers to International Trade Health Inspectors License needed for importing Nationalism & culture

Arguments for Protection Protectionism- protect domestic industry Free-traders- fewer or no trade restrictions

Arguments for Protection National Defense US too dependent Promoting Infant Industries Protecting Domestic Jobs Most often used argument Keeping Money in Country Does it come back? Helping Balance of Payment- Pay out vs. receive from other countries

Free Trade Movement 1930 Smoot-Hawley Tariff- one of most restrictive tariffs in history Imported goods increased 70% in price Other countries did same= no international trade Countries realize harm caused= US passes Reciprocal Trade Act

Most Favored Nation Allows a country to receive same tariff reduction that US negotiates w/ a 3rd country

Free Trade WTO- World Trade Organization- deals w/ trade issues, disputes Replaced GATT- which got rid of import quotas NAFTA- liberalize free trade by reducing tariffs Canada, Mexico, US

Financing International Trade Foreign exchange- foreign currencies are bought & sold in foreign exchange market Foreign exchange rate- price of one country’s currency in terms of another country’s currency

Major Exchange Rates Fixed Exchange Rates- price of one currency is fixed in terms of another Rate does not change Popular when world on gold standard (common denominator) End 1971- Nixon announces US no longer on gold standard

Major Exchange Rates Flexible Exchange Rates- supply & demand establish value of one country’s currency in terms of another country’s currency Floating Exchange Rate

Trade Deficits & Surpluses Trade deficit- value of imports exceeds value of exports Effect trade imbalance- reduces value of country’s currency Trade surplus- value of exports exceed value of imports