1. Chapter 17
International Trade

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

4. 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

5. 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

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

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

8. 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

9. 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

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

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

12. 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

13. 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

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

16. 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

17. 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

18. 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 Nixon announces US no longer on gold standard

19. 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

20. 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