1. Global Trade & Economic Interdependence

2. Why do nations trade?
No country produces everything it needs to survive
US imports > US exports
Global economic interdependence

3. 1. Obtaining Scarce Goods
Trade for goods that they can’t otherwise have or have as cheaply
Ex: US buys diamonds
Ex: Foreign countries buy commercial aircraft from USA

4. 2. Comparative Advantage: a country’s ability to produce a good at relatively lower cost than another country can
Comparative advantage = specialization
Specialization  overproduction  export
Ex: USA can make color TVs, but other countries can make them for less. So we buy TVs that are made abroad

5. Comparative advantage might be based on natural resources
Ex: Saudi Arabia has huge oil deposits, so it can export oil OR
Comparative advantage might be based on labor & capital
Ex: USA has $, wealth, workers, technology, so it can make expensive products like airplanes, weapons

6. 3. Creating Jobs
By expanding market, companies will have more orders = need to hire more workers

7. Restrictions and Integration
We like to buy foreign products because they’re cheaper
Companies in our own country lose sales… lower production, lay off workers … gov’t must step in and remedy, which leads to some restrictions

8. Restrictions
Protectionism: policy of trade restrictions to protect domestic industries. LIKE:
Tariff (aka customs duty): tax on imported goods  to make foreign goods more expensive than domestic goods
Quota: limit on the amount of foreign goods imported

9. Free Trade Agreements
Most ppl agree total costs of trade barriers outweigh their benefits.. Most countries are trying to reduce barriers (free trade). EXAMPLES:
European Union (EU): no trade barriers; goods, services, & workers move freely; common currency (euro)
World Trade Organization (WTO): international org. that oversees trade among nations; settles disputes, negotiates; provides aid

10. North American Free Trade Agreement (NAFTA; 1990s): USA/ Canada/ Mexico
Will eventually eliminate all trade barriers between the 3 countries
(Lots of pros/ cons… we’ll see these soon)

11. Financing Trade
Exchange rate: price of your nation’s currency in terms of another nation’s currency
Flexible system (supply/ demand set rate)
Affects balance of trade

12. Balance of Trade
Difference between value of nation’s exports + imports
Positive B.O.T.= exports > imports (trade surplus)
Negative BOT = imports > exports (trade deficit)
Trade deficit erodes value of the country’s currency on foreign exchange markets