2 Purpose of international trade is to benefit trading partners Imports = goods bought from other countries for domestic use•Manufactured goods, transportationequipment and oil = 2/3rds of the totalvalue of imports into the US•Imports = Roughly 17% of U.S. GDP
3 Exports = goods sold to other countries •Ideally a country would like to export more than itimports•Since the mid-1970s the U.S. has had a negativebalance of trade = trade deficit … the value of goodscoming in is greater than those going out
10 Opportunity cost = what is given up in order to produce a certain product Absolute advantage = ability of one country, using the same amount of resources as another country, to produce a particular product at less cost
11 Comparative advantage = ability of a country to produce a product at a lower opportunity cost than another country*According to the law of comparative advantage, a nation is better off when it produces goods and services for which it has a comparative advantage.Specialization = concept that it is profitable for a nation to produce and export a limited assortment of goods for which it is particularly suited•Helps a country determine which goods to importand which to export
12 Which country has an absolute advantage in Corn? Soybeans? U.S.75100Russia6040Which country has an absolute advantage in Corn? Soybeans?Which country has a comparative advantage in Corn? Soybeans?
13 Which country has an absolute advantage in Shoes? Phones? U.S.80150Brazil6020Which country has an absolute advantage in Shoes? Phones?Which country has a comparative advantage in Shoes? Phones?
14 And you thought we were finished with PPF curves!! The Production Possibility Curve can be used to illustrate the principles of absolute and comparative advantage.And you thought we were finished with PPF curves!!
15 Country A has an absolute advantage in the production of both maize andwheat.At all points its production possibilitycurve lies to the right of that of Country B.
16 Country B has an absolute disadvantage. Due to abundance of raw materials or more productively efficient production techniques, Country A is able to produce more wheat and more maize than Country B.
18 Three major barriers to world trade are Tariffs Quotas EmbargoesThe most commonly used barrier to Free Trade is the tariff (a tax onimports)•Types of tariffs1. Revenue – used to raise income without restrictingimports2. Protective – used to raise the cost of imported goods andprotect domestic products
19 Import quotas – a restriction imposed on the value of or the number of units of a particular good that can be brought into the countryExamples of U.S. quotas: sugar, shoes, shirts, and clothEmbargo – complete restrictions on the import or export of a particular goodOften embargoes are used for political reasonsOther restrictions = rigorous health inspections anddifficult licensing requirements = StandardsSubsidies = direct financial aid (tax credits orDeductions), to certain domestic industries. This lowersProduction costs, which allows domestic goods tocompete with lower-cost imported goods.
20 Since World War II countries have been relaxing trade barriers
22 Protectionists are those who argue for trade restrictions (against free trade) Job security threatenedProtection of the nation’s economic security is neededProtection of infant industriesLimiting imports keeps American money in the USBalance of Payments = the difference between the money a country pays out to, and receives from, other nations when it engages in international trade.
23 Arguments for FREE trade Competition = better productsTrade restrictions damage export industries and put Americans out of workSpecialization and comparative advantage lowers prices (more goods = lower prices)Restrictive legislation in the past nearly halted international trade
25 Trade AgreementsGeneral Agreement on Tariffs and Trade (GATT); est. after WW II (1947), countries work together to mutually lower tariffsWorld Trade Organization (WTO); 130 nations, 1993 an attempt at a 40% reduction in tariffs
26 3. North American Free Trade Agreement (NAFTA); regional trade agreement between U.S., Canada, and Mexico 1993
27 4. European Union (EU); regional trade agreement between 28 member nations, including France, Germany, Britain, Denmark, Italy, Spain, Greece, Portugal, Benelux countries, Finland, Sweden, Austria and Ireland•1993—eliminated most of its restrictions on trade among member nations and labor and capital should be freely mobile within the 28 countries. Shared currency = Euro
28 5. Association for Southeast Asian Nations (ASEAN); regional trade agreement between ten member nations (1967), includingIndonesia, Malaysia, Singapore, the Philippines, and ThailandWork to promote regional peace and stability, accelerate economicgrowth, and liberalize trade policies
29 6. Organization of Petroleum exporting Countries (OPEC): organized in 1960 as an international cartel whose members have been able to take advantage of a natural monopoly and push up oil pricesMembers are: Algeria, Indonesia, Iran, Iraq, Kuwait, Libya,Nigeria, Qatar, Saudi Arabia, United Arab Emirates, andVenezuela.
30 7. The United States-Dominican Republic-Central America Free Trade Agreement (CAFTA)—2004, CAFTA has eliminated all tariffs on 80 percent of U.S. manufactured goods, with the remainder phased out over a few years.Importantly, the agreement is not limited to manufactured goods, but covers virtually every type of trade and commercial exchange between these countries and the United States.
32 I. Financing International Trade Foreign exchange is the buying and selling of the currenciesof different nationsThe foreign exchange rate is the price of one country’scurrency in terms of another country’s currencyC. Exchange rates are fixed or flexibleBalance of payments deficit = supply of a country’scurrency exceed the demand for the currency at thecurrent exchange rate (Balance of payments surplusis the opposite)
33 D. Flexible exchange rates, commonly used today, establish the value of each currency through the forces of supplyand demand
34 Strong and Weak Currencies A. An increase in the value of currency is calledappreciationA strong dollar can lead to a trade deficit becauseAmerican goods become too expensive in foreigncountries, and imports become relativelyinexpensive in the US, which would likely causeAmericans to purchase foreign goodsStrong dollar = American exports decline
35 B. A decrease in the value of a currency is called depreciation 1. When a nation’s currency depreciates, its productsbecome cheaper to other nations… foreign consumersare better able to afford US goods2. Weak dollar = American exports rise
36 Trade Deficits and Surpluses A. Nations seek to maintain a balance of trade;balanced trade means a country can protect itscurrency on the international marketWhen a country imports more than exports, thevalue of its currency falls
37 B. Persistent trade imbalance tends to reduce the value of a country’s currency on foreign exchangemarketsA strong dollar can lead to a trade deficit becauseAmerican goods become too expensive, and importsbecome relatively inexpensiveA weaker dollar buys fewer foreign goodsC. Trade imbalances can be corrected by limiting importsor increasing the number and/or quality of exports(could lead to retaliation)
42 Exchange RatesExchange rates are very important to people involved in international trade, tourism, and investment.That is why changes in the rates are posted daily and experts are hired to predict possible changes in the future.
43 Exchange rate = the relative values of different currencies, i.e. the price of one nation’s currency in terms of another nation’s currencyThe exchange rate between two currencies dependson how much demand there is for each country’s exports at any given time.When there is more demand for a nation’s products,people need more of that nation’s currency to buy theproducts
44 Value of $1 U.S. (in foreign currency) Value of foreign currency (in U.S. dollars)Canadian dollar0.971.03Euro0.701.42Japanese yen113.940.008Mexican peso10.840.09In 2007, $1 was worth about Yen (¥), while 1 yen was worth about .008 of $1, or less than a penny. So if the price of an imported Japanese computer is $1,000, the American company must exchange $1,000 for about 113,940 Yen to pay for it:$1 U.S. = Yen$1,000 U.S. = Yen X 1,000 = ¥113,940