1. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.

2. Trade Terminology Exports Imports Trade balance Trade deficit
Value of goods and services sold to foreigners
Imports
Value of goods and services purchased from foreigners
Trade balance
Value of nation’s exports minus imports
Trade deficit
Amount by which nation’s trade balance is in deficit
Imports exceed exports
Trade surplus
Amount by which nation’s trade balance is in surplus
Exports exceed imports
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3. Country Export and Import Data
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4. Absolute Advantage
Country can produce a good at lower resource cost than another country
Example: Growing coffee in Brazil and growing barley in United States
Brazil can produce coffee at lower resource cost than can United States because it has better climate to do so
United States is better suited for growing barley at lower resource cost than is Brazil due to better weather, proper land, machinery, and technology
With United States specializing in barley and Brazil specializing in coffee, both countries would produce more total output than if each country tried to produce both goods
Larger total output means larger total consumption: each country could benefit from specialization and trade
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5. Comparative Advantage
Country can produce a good at lower opportunity cost than another country
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6. Comparative Advantage (cont.)
From Table 9-2:
Opportunity cost of producing two floppy disks in U.S. is one pair of shoes (2:1 ratio)
Opportunity cost of producing two floppy disks in Greenland is two pairs of shoes that will not be produced (1:1 ratio)
Because U.S. gives up fewer shoes when producing floppy disks, has comparative advantage in floppy disk production
Opportunity cost of producing two pairs of shoes in U.S. is four floppy disks (1:2 ratio)
Opportunity cost of producing two pairs of shoes in Greenland is only two floppy disks (1:1 ratio)
Greenland has comparative advantage in shoe production
If U.S. specializes in floppy disk production, and Greenland specializes in shoe production, two countries will be able to come up with rate of exchange in trade that will be mutually beneficial
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7. Production Possibilities Curve
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8. Consumption Possibilities Curve
Shows alternative combinations of maximum amounts of two products that can be consumed within country during particular time period
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9. The Basis for Advantage
Factors that may determine why one country is better at producing a good than another country:
Weather and climate
Labor productivity
While skills and education are important determinants of labor productivity, even more important are capital and technology used in conjunction with labor
As a result, U.S. workers are generally higher productive
Quality and availability of land
Capital equipment
Technology
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10. No Trade vs. Free Trade
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11. The Effects of Free Trade
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12. Restrictions to Free Trade
Two common types of trade restrictions are quotas and tariffs
Quota
Restriction on quantity of imported good
Tariff
Tax on imported good
Purpose of most U.S. trade restrictions is to force or encourage American consumers to buy more American-made products and fewer foreign counterparts
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13. The Effects of Trade Restrictions
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14. Less-Developed Countries (LDCs)
Problems that people of less-developed countries (LDCs) experience with trade:
Lack of diversity in exports
Reliance of many LDCs on primary commodities (unprocessed raw material and agricultural products) for export
Overreliance on important imports from other countries
Globalization has created opportunities for local and foreign companies to exploit local workers, including children, in production of goods for export
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15. Problems with Primary Commodities
Have experienced a problem known as declining terms of trade
Price of country’s exports declines relative to price of imports
Prices for these types of products are often very unstable
Inelastic demand characterizes markets for many primary commodities
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16. Problems with Primary Commodities (cont.)
Supply for primary commodities tends to fluctuate a lot
Combination of fluctuating supply and inelastic demand results in large fluctuation in price
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17. Politics and Trade
United States has restricted trade (in past and present) with several countries to bring about political goals
Cuba
Iran
Sudan
Libya
North Korea
China
Vietnam
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18. International Trade Agreements
North American Free Trade Agreement (NAFTA)
Agreement between United States, Canada, and Mexico allowing more equal access to one another’s markets
European Union (EU)
Mercosur
Andean Community
ASEAN
General Agreement on Tariffs and Trade (GATT)
International trade agreement, first negotiated in 1947, that has included efforts to reduce tariff barriers among countries of world
Replaced by World Trade Organization (WTO)
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19. The Economic Left and the Economic Right
THE ECONOMIC LEFT (Liberal)
Concerned about effects of free trade on U.S. workers and businesses
Argue that government intervention in form of quotas and tariffs is necessary to protect U.S. citizens from “unfair” trade practices in foreign countries
Concerned about effects of globalization on less developed countries
THE ECONOMIC RIGHT (Conservative)
Generally favor free trade
Feel free trade results in efficiencies that arise in general from free markets
Concerned about inefficiencies with trade restrictions
Promote freer markets for international trade
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20. Appendix: Exchange Rate Determination
Exchange rate is price of one country’s currency in terms of another country’s currency
Always a relative value
Most of industrialized world uses flexible (floating) exchange rate system
Exchange rates are determined on basis of demand and supply
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21. Appendix: The Dollar and the Peso
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22. Appendix: Appreciation and Depreciation
Appreciate: Value of one country’s currency increases relative to another country’s currency
Depreciate: Value of one country’s currency decreases relative to another country’s currency
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23. Appendix: Economic Policy
Economic policy in United States (or any other country) can have impact on exchange rates
Trade restrictions on imports
If U.S. purchases of imported good decline, so does demand for foreign currency with which to pay for good
As demand for foreign currency falls, value of that currency decreases (and relative value of dollar increases)
Rising value of dollar makes exports more expensive to foreign consumers, who will likely purchase fewer of them
Interest rates
If U.S. interest rates rise relative to interest rates in other countries, U.S. financial markets now become more attractive to foreign investors
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24. Appendix: International Management of Exchange Rates
Group of Eight (G-8)
Eight countries (United States, Canada, Britain, France, Italy, Germany, Japan, Russia) that coordinate policies in effort to influence exchange rates
Major goal of G-8 is to stabilize exchange rates of major world currencies within acceptable range of one another
Six Markets Group (Asian G-6)
Six (original) countries (United States, Japan, China, Singapore, Australia, Hong Kong) that coordinate financial policies
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