Chapter 4 Global Analysis International Trade Section 4.1 International Trade Section 4.2 The Global Marketplace

International Trade Objectives Explain the interdependence of nations Key Terms international trade imports exports balance of trade free trade tariff quota embargo protectionism World Trade Organization (WTO) North American Free Trade Agreement (NAFTA) European Union (EU) Objectives Explain the interdependence of nations Explain the nature of international trade Discuss the balance of trade List three types of trade barriers List three significant trade agreements and alliances that foster worldwide free trade Marketing Essentials Chapter 4, Section 4.1

International Trade Study Organizer On a chart like this one, organize the key concepts related to international trade. Marketing Essentials Chapter 4, Section 4.1

Global Marketplace Global marketplace = a worldwide trading system in which goods can be produced wherever the production costs are cheapest and are ultimately sold wherever market encompassing the whole world all people and businesses in the world are potential customers, employers, or employees

Global Marketplace Why do you think the marketplace is Global? Countries don’t have all 4 resources Land, labor, capital, entrepreneurs Countries don’t produce all the goods & services they need Need to trade with other countries to obtain products that meet the wants and needs of their people

Nature of International Trade International trade is the exchange of goods and services between nations Imports X are goods and services purchased from other countries Exports X are goods and services sold to other countries These exchanges Occur between the businesses involved Are Controlled by the governments involved

Interdependence of Nations Interdependence of Nations: when countries must rely on each other to produce all the goods they need to survive Why does Economic interdependence occur? countries do not produce all the goods and service they need Each country possesses unique resources and capabilities Have limited resources in one or more of the factors of production Different countries can produce specific goods such as: U.S. and Canada: Agriculture Saudi Arabia and Russia: Oil India and Japan: Computer science and Technology

Two Types of Economic Advantages Economic Advantage: Where one country does something better than other countries There are two types of advantages in international trade: Absolute Advantage Comparative Advantage

China produces 80% of all silk in the world 1. Absolute Advantage Absolute Advantage: When a country has natural resources or talents that allow it to produce an item at the lowest cost possible Example: China produces 80% of all silk in the world China has an absolute advantage in the production of silk Marketing Essentials Chapter 4, Section 4.1

2. Comparative Advantage Comparative Advantage: The value a nation gains by selling what it produces most efficiently Example: US produces high-tech products because of strong infrastructure, raw materials and educated labor force Airplanes, computers, high tech machinery, entertainment, and telecommunications

Who Benefits from International Trade Consumers Producers Workers Nations All benefit in different ways

Benefits of International Trade Consumers: competition encourages the production of high-quality goods with lower prices Producers gain higher profit by expanding their operations into international markets

Benefits of International Trade Workers leads to higher employment rates at home and abroad Nations foreign investment in a country often improves the standard of living for that country’s people

Government Involvement in International Trade All nations control and monitor their trade with foreign businesses In the U.S., the customs division of the Treasury Department monitors all imports All imports into US subject to search and review All U.S. citizens and firms must meet custom requirements of foreign countries Marketing Essentials Chapter 4, Section 4.1

All nations track their international trade Balance of Trade All nations track their international trade Shows their economic status balance of trade - The difference in value between the exports and imports of a nation A positive balance happens when a nation exports more than it imports A negative balance (aka trade deficit) is when a nation imports more than it exports

A trade deficit (negative balance of trade) reduces a nation’s revenue When more money leaves a country than comes in, the country is in debt or is a debtor nation Unemployment can also be another negative result of a large trade deficit. Marketing Essentials Chapter 4, Section 4.1

Trade Barriers Many countries favor and practice free trade - trade that is done purely on free market principles, without restrictive regulations Other nations impose trade barriers -controls and restrictions that regulate the flow of goods and services

Trade Barriers There are three main types of controls (trade barriers): Tariffs Quotas Embargoes

1. Tariffs A tariff X is a tax on imports. Also known as a duty, tariffs come in two different types: Revenue-producing: tax as a source of income for the government Normally low in price Protective: raises the price of imports to encourage consumers to buy locally made goods high price to increase price of imported goods

2. Import Quota An import quota X limits either the quantity or the monetary value of a product that may be imported These help local business compete with foreign companies Ex: quota on cars imported into US so U.S. manufacturers can sell their autos Some countries will impose their own quota’s on exports to improve relationship with another country

3. Embargos embargo X a total ban on specific goods coming into and leaving a country An embargo can be imposed for different reasons: Poisoned or defective goods Political reasons Protectionism X is a government’s establishment of economic policies that systematically restrict imports in order to protect domestic industries It is the opposite of free trade

Trade Agreements and Alliances Trade Agreements: Governments make agreements with each other to establish guidelines for international trade and to set up trade alliances Three Trade agreements & Alliances: World Trade Organization (WTO North American Free Trade Agreement (NAFTA) European Union (EU)

1. World Trade Organization The World Trade Organization (WTO) X A global coalition formed in 1995 of more than 140 governments that make rules governing international trade Benefits: Open markets and promote global free trade Reduces tariffs Standardizes trade rules Study important trade issues Evaluate the health of the world economy

2. NAFTA The North American Free Trade Agreement (NAFTA) X is an international trade agreement among the United States, Canada, and Mexico Founded on January 1, 1994 Goal was to get rid all trade barriers between the countries by 2009 Tariffs were eliminated immediately

3. European Union The European Union (EU) X is Europe’s trading bloc. established free trade among its member nations Creates a single European currency (euro) and central bank Maintains competitive practices Maintains environmental and safety standards Provides security

Key Concepts Related to International Trade Section 4.1 International Trade Key Concepts Related to International Trade

SECTION 4.1 REVIEW