Chapter 17 Trading With Other Nations

Net Exports = Exports – Imports Imports – Goods they produce and sell here (14%) –D–Dependence: Oil Exports – Goods we produce and sell abroad (12%) –D–Dependence: Agricultural goods World trade has been growing since the 1950’s

Why trade? Absolute advantage – the ability to do or produce something more efficiently or better than someone else Comparative advantage – the country with the lowest opportunity costs will produce the good and trade Specialization – the division of productive activities among persons or regions Increases world output Voluntary trade reallocates production from high cost to low cost areas International trade leads to an exchange of ideas Intellectual property – The fruits of human minds –M–Music –S–Software –M–Movies –C–Computer games –S–Scientific discoveries

In the long run Imports = Exports Trading Partners: Canada, Japan, Mexico Trade Restrictions Types Tariffs – tax on imports Quota – import restrictions Reasons Protect American jobs Protecting Infant Industries Foreign Subsidization argument – foreign companies get aid from their governments Antidumping National Defense

Free Trade Zones World Trade Organization – lessen trade barriers Oversee tariffs Administers trade agreements Accounts for 97% of trade European Union 25 countries Euro NAFTA – U.S., Mexico and Canada FTAA

Foreign Exchange Markets – markets for selling currencies Speculators – people who try to make money buying and selling currencies Derived Demand – Demand for a currency is taken from the demand for imports Exchange Rates – the rate at which two currencies trade Appreciation – value of a currency increases Depreciation – value of a currency decreases Supply is taken from the demand of our exports by foreigners Intersection of demand and supply is the equilibrium exchange rate Demand shifts –I–I–I–Increase causes exchange rate to rise and the dollar depreciates Supply shifts –I–I–I–Increase causes exchange rate to fall and dollar appreciates

Shifting the Curves Real Interest Rates – if our rates increase then the demand for dollars rises Productivity – if our productivity increases, our goods are cheaper and demand for dollars rise Consumer preferences – if foreigner increase the demand for our goods then the demand for dollars rises Economic stability – the more stable a country the greater the demand for that currency

Floating and Fixed Exchange Rates Floating – allowed to change with the market Fixed – established by the government