Chapter 7.1 Trade Between Nations

Imports A product brought in for sale from a foreign country

Exports A product sent to a foreign country for sale

Imports and Exports can be: Consumer goods Producer goods Agricultural products Raw materials Services

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Why Nations Trade? One country has natural resources that another country lacks or has in short supply. The U.S. has very little of the mineral bauxite (used for making aluminum). Almost all of the bauxite used in the United States today is imported.

Why Nations Trade? Nations can increase productivity and wealth by specializing in what they produce more efficiently and trading for goods they produces less efficiently

Benefits of Trade Consumer choices: Increased competition: Some consumer goods would not be available Increased competition: Foreign trade brings additional competitors to the marketplace Benefit of increased competition? Expanded markets: Business that produce goods and services for export to other countries benefit from an expanded market for their products

Benefits of Trade International relations: Prosperity and peace Countries that export many goods and services to the U.S. are likely to want to promote good relations with the U.S. government Prosperity and peace U.S. consumers buy imports, they send dollars abroad. (The other country can prosper)

Currencies and Trade When two countries with different currencies want to do business with one another, the buyer must convert its money to the sellers currency A hospital in Mexico wants to buy medicine from a U.S. company would exchange its currency, pesos, for U.S. dollars. ( A bank would perform the currency exchange)

Exchange Rate The cost of one currency expressed in terms of another currency What is our dollar worth??? http://finance.yahoo.com/currency?u

Factors affecting Exchange Rates Changes in interest rates Economic and political stability Supply and Demand Amount of National Debt Trade Deficit

How exchange rates affect trade If the U.S. dollar is weak, exports from the U.S. tend to increase Why? Other countries get a bargain rate when converting their currency to U.S. dollars

Understanding the trade deficit Balance of Trade: Difference between the value of a nation’s exports and it imports

Trade deficit When a country spends more in imports than in receives for exports; US has a trade deficit

Balance of Payments An accounting of all its financial transactions that involve other countries during a particular time period.

End of 7.1

Trade Restrictions and Agreements Chapter 7.2 Trade Restrictions and Agreements

Ways to Restrict Trade Tariff: a tax on imports There are different types of tariffs Revenue tariff: intended simply as a source of gov’t ___________ Protective tariff: larger (up to 62%) The tariff is paid by the importer, who then adds it to the price charged to consumers. The much higher price of imported goods discourages consumers from_____________ revenue buying

Ways to Restrict Trade Continued Import Quota: government limit on the quantity or value of certain imported product The U.S. government has placed quotas on peanuts, cotton, sugar, and cars It raises consumer ________________ prices

Ways to Restrict Trade Embargos: gov’t order prohibiting trade. It can apply to a specific type of product or to trade with a specific country

Protectionism Versus Free Trade Protectionism: Policy of using trade restrictions to protect domestic businesses from foreign competition Free Trade: Policy of minimizing trade restrictions

Arguments for Protectionism National security: Certain kinds of computers, software, and nuclear technology cannot be exported without gov’t approval Job security: If companies that can’t compete against cheaper foreign products, they are forced out of business and U.S. workers lose their job Environmental protection: Trade restrictions against countries that have few environmental laws could reduce the demand for their products, reducing pollution Unfair advantages: Gov’t can place a high tariff on imported goods of a country that tries to sell their product below market cost.

Arguments for Free Trade Effect on exports: Other countries often retaliate with their own trade restrictions Effect on consumers: Free trade allows for more consumer choices Benefits of competition: Competition from imports can spur U.S. firms to improve their production efficiency and the quality of their products

Trade Agreements General Agreement on Tariffs and Trade (GATT): Goal was to reduce or remove trade barriers In 1947, 90 countries signed this World Trade Organization (WTO): international organization that governs trade between over 140 nations. They agree to specific rules that guarantee certain trade rights and lower trade barriers

North American Free Trade Agreement (NAFTA) regional trade agreement between the U.S., Canada, and Mexico Went into affect on 01/01/94 Designed to give legal protections to investors and international businesses in all three countries Under NAFTA trade is ______________ growing

European Union Organization of independent European nations whose goal is to create a unified and strong market

End of 7.2