INTERNATIONAL TRADE SWS 2009 CHAPTER 18

SWS 2009 International Trade: When we trade with other countries. Import: When we buy products from another country. Export: When we sell products to another country.

Exports and Imports as a Percentage of U.S. Gross Domestic Product SWS 2009

Exports, Imports and the Balance of Trade TRADE DEFICIT TRADE SURPLUS IMPORTS > EXPORTS = IMPORTS < EXPORTS = Balance of Trade is similar to Balance of Payments SWS 2009

INTERNATIONAL TRADE: WHY TRADE IN THE FIRST PLACE? SWS 2009

WHY WE TRADE There are two ways to compare the ability of two countries that produce a good. The country that can produce a good with a smaller quantity of inputs has an absolute advantage. Ex- rum on the islands, oil When two countries both produce items for the propose of trading with each other and this results in a less opportunity cost due to specialization, these countries have a comparative advantage. ex- lawn mower/car was business, coachbook There are two ways to compare the ability of two countries that produce a good. The country that can produce a good with a smaller quantity of inputs has an absolute advantage. Ex- rum on the islands, oil When two countries both produce items for the propose of trading with each other and this results in a less opportunity cost due to specialization, these countries have a comparative advantage. ex- lawn mower/car was business, coachbook SWS 2009

BARRIERS TO INTERNATIONAL TRADE SWS 2009

TARIFFS: A tariff is a taxed placed on imports (goods coming into the country). A tariff is a taxed placed on imports (goods coming into the country). It must be paid before goods can be taken off a ship. (makes foreign products more expensive) It must be paid before goods can be taken off a ship. (makes foreign products more expensive) Good source of income for government. Good source of income for government. So if the government wants to PROTECT DOMESTIC (US) businesses, what should it do to this tariff? ANSWER : They should increase it because this makes it LESS PROFITABLE buying from oversea producers. Very Dangerous! This action by the government is known as a PROTECTIONIST TRADE POLICY The down-side: Who is hurt by tariffs? US consumers of Foreign products So US producers & consumers will be more likely to get goods from DOMESTIC (USA)_PRODUCERS. SWS 2009 INTERNATIONAL TRADE BARRIERS

QUOTA: A quota- Instead of imposing a tax on imports the government sets a quota (or maximum amount) on imports/exports. A quota- Instead of imposing a tax on imports the government sets a quota (or maximum amount) on imports/exports. So if the government wants to PROTECT DOMESTIC businesses, what should it do to this quota? ANSWER: They should decrease it because this makes a limited amount of imports in the country, which will increase the price of those imports. Very Dangerous! This action by the government is also known as a PROTECTIONIST TRADE POLICY SWS 2009 INTERNATIONAL TRADE BARRIERS

EMBARGOS: An embargo shuts down all imports from a country. An embargo shuts down all imports from a country. EXAMPLE: CUBA & USA EXAMPLE: CUBA & USA SWS 2009 INTERNATIONAL TRADE BARRIERS

Other Barriers to Trade: OPEC: Organization of Petroleum Exporting Countries Cartel Members: Algeria, Angola, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, UAE, and Venezuela Cartel Members: Algeria, Angola, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, UAE, and Venezuela INTERNATIONAL TRADE BARRIERS SWS 2009

FREE INTERNATIONAL TRADE SWS 2009

FREE INTERNATIONAL TRADE In order to eliminate barriers to trade such as tariffs & quotas countries will establish trade organizations and charge less (or no) tariffs and set no quotas. Such as NAFTA North American Free Trade Agreement (Formed in 1993) 1.Mexico 2.Canada 3.USA SWS 2009

E.U. (European Union) is a trade organization. SWS 2009 FREE INTERNATIONAL TRADE

A.S.E.A.N is a trade organization. Association of Southeast Asian Nations SWS 2009 FREE INTERNATIONAL TRADE

INTERNATIONAL TRADE 1.What is the advantage of free trade? It can increase the flow of goods from countries, giving consumers more LOWER PRICE choices. 2.What is a disadvantage of no tariffs? No tariffs might result in hurting US producers. If consumers can now get cheaper goods from another country, then they will not buy US goods. 3.Who is hurt by tariffs? US consumers who like foreign products b/c they will be more expensive due to tariffs In-class Questions SWS 2009

EXCHANGING CURRENCY SWS 2009

EXCHANGING CURRENCY EXCHANGE RATES: The exchange rate between two currencies shows how much one currency is worth in terms of the other. The exchange rate between two currencies shows how much one currency is worth in terms of the other. Currency can appreciate or depreciate in value Currency can appreciate or depreciate in value For example an exchange rate of 120 Japanese Yen to the U.S. Dollar means that ¥120 is worth the same as $1.How does this relationship affect trade? For example an exchange rate of 120 Japanese Yen to the U.S. Dollar means that ¥120 is worth the same as $1. How does this relationship affect trade? Over the course of one year, the Japanese Yen depreciates compared to the Euro. Who would benefit the most from this occurrence? A European consumer of European goods B Japanese consumers of European goods C European consumers of Japanese goods D Japanese consumers of Japanese goods EXAMPLE QUESTION: SWS 2009

EXCHANGE RATES & THE STRONG DOLLAR PROBLEM 1) What is a strong dollar: The value of the dollar is appreciating. The value of the dollar is appreciating...or the value of the dollar rises compared to other currencies...or the value of the dollar rises compared to other currencies. …or more foreign currency is necessary to purchase U.S. dollars. …or more foreign currency is necessary to purchase U.S. dollars. 2) Who is aided by a strong US dollar ? U.S. CONSUMERS because the prices of foreign goods and services are lower since the US Dollar goes further in terms of foreign currency. U.S. CONSUMERS because the prices of foreign goods and services are lower since the US Dollar goes further in terms of foreign currency. 3) Who is hurt by a strong US dollar ? U.S. PRODUCERS because they cant compete with lower-priced foreign products. U.S. PRODUCERS because they cant compete with lower-priced foreign products. U.S. EXPORTERS because they cant compete with lower-priced imports. U.S. EXPORTERS because they cant compete with lower-priced imports. What we find is that a WEAK dollar can be a good thing. SWS 2009 EXCHANGING CURRENCY

EXCHANGE RATES: QUESTION: What country (America or Mexico) would benefit from a appreciated (strong) U.S. dollar? ANSWER:If the U.S. dollar is appreciated, this means that American goods and services are more expensive to Mexico. At the same time, making Mexican goods cheaper to U.S. consumers. ANSWER: If the U.S. dollar is appreciated, this means that American goods and services are more expensive to Mexico. At the same time, making Mexican goods cheaper to U.S. consumers. So this decreases spending on U.S. goods and decreases American GDP. So this decreases spending on U.S. goods and decreases American GDP. More US spending will go to the cheaper Mexican products because your money goes further in Mexico. More US spending will go to the cheaper Mexican products because your money goes further in Mexico. MEXICO COULD BENEFIT! SWS 2009 EXCHANGING CURRENCY

CALCULATING EXCHANGE RATES Lets say you traveled to Japan and took $500 in U.S. currency. When you exchanged the $500 in Japan, you would receive about… $500 x = 59,480 ¥ Lets say you traveled to US and took £550 pounds. When you exchanged the £550 pounds in US, you would receive about… £550 x = $ SWS 2009

Lets say you traveled to Japan and took £8000 pounds. When you exchanged the £8000 in Japan, you would receive about… £8000 x = $16,233 $16,233 x = 1,931,077 ¥ SWS 2009 CALCULATING EXCHANGE RATES

Price of a D.S. in Japan is about 6,000 yen. What would be the price if you could buy it in US dollars? 6,000¥ x.0084 = $50.00 Average Price in US dollars $ SWS 2009 CALCULATING EXCHANGE RATES

STUDY FOR THE TEST SWS 2009