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Global Trade & Economic Interdependence
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Why do nations trade? No country produces everything it needs to survive US imports > US exports Global economic interdependence
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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
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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
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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
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3. Creating Jobs By expanding market, companies will have more orders = need to hire more workers
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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
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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
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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
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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)
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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
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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
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