International TradeChapter 17

Resource Distribution and Trade

• Each country of the world possesses different types and quantities of land, labor, and capital resources.

• By specializing in the production of certain goods and services, nations can use their resources more efficiently.

• Specialization and trade can benefit all nations. Open competition benefits everyone

The law of comparative advantage states that nations are better off when they produce goods and services for which they have a comparative

advantage in supplying.

How do nations benefit from trade?Absolute and Comparative Advantage

• A person or nation has an absolute advantage when it can produce a particular good at a lower cost than another person or nation.

• Comparative advantage is the ability of one person or nation to produce a good at a lower opportunity cost than that of another person or nation.

  T-shirts Birdhouses

Kate 6 2

Carl 1 1

Kate has an absolute advantage because she produces more of both items

For Kate 1 birdhouse = 3 T-shirtsFor Carl 1 birdhouse = 1 T-shirtCarl should give up making T-shirts

Carl has a comparative advantage in birdhouses

  Opportunity cost for T-shirts

Opportunity cost for Birdhouses

Kate 1/3 Birdhouses

3 T-shirts

Carl 1 1

For Kate 1 T-shirt = 1/3 BirdhouseFor Carl 1 T-shirt = 1 Birdhouse

  Opportunity cost for T-shirts

Opportunity cost for Birdhouses

Kate 1/3 Birdhouses

3 T-shirts

Carl 1 1

  T-shirts Birdhouses

Kate 6 2

Carl 1 1

America is the world’s richest country and largest importer. In 2012, the US bought US$2.334 trillion worth of imported products. That total is up by 7.8% since 2008.

The United States’ main trading partners are Canada and Mexico (NAFTA)

World’s richest country the USA placed second in exporting during 2012. America shipped US$1.55 trillion worth of goods around the globe, up by 18.9% since 2008.

Imports and Exports of the United States

Goods and Services Deficit Increased in January 2014

1  Refined Petroleum $82,435,395,393.78 6.0%

2  Cars $45,942,140,263.17 3.3%

3  Integrated Circuits $38,076,490,687.79 2.8%

4  Packaged Medicaments $33,799,228,734.32 2.5%

5  Vehicle Parts $32,383,388,802.49 2.4%

6  Gas Turbines $31,237,354,054.65 2.3%

7  Planes, Helicopters, and/or Spacecraft

$30,570,688,728.76 2.2%

8  Gold $24,386,901,730.26 1.8%

9  Medical Instruments $22,582,804,575.53 1.6%

WHAT DOES UNITED STATES EXPORT?

                                                                                                                                                                                                                                                                                                                                                      

1  Crude Petroleum $316,662,798,759.68 15%

2  Refined Petroleum $157,852,991,937.77 7.4%

3  Digital Disk Drives $63,389,526,637.83 3.0%

4  Integrated Circuits $55,700,511,530.66 2.6%

5  Cars $46,784,971,542.74 2.2%

6  Packaged Medicaments $34,320,314,631.01 1.6%

7  Vehicle Parts $33,298,328,830.08 1.6%

8  Gas Turbines $31,575,835,632.49 1.5%

9  Planes, Helicopters, and/or Spacecraft $30,171,487,686.30 1.4%

As nations begin to specialize in certain goods, dramatic changes in the nation’s employment

patterns also occur.

Trade and Employment• Workers who lose their jobs due to

specialization face three options:– Unemployment: Inability to adapt and find a new job– Relocation: Moving to where current skills meet

current jobs– Retraining: Gaining new human capital to meet the

demands of specialized labor markets

A trade barrier is a means of preventing a foreign product or service from freely entering a nation’s territory.

What Are Trade Barriers?

• Import Quotas– An import quota is a limit on the amount of a good that can be imported.

• Voluntary Export Restraints– A voluntary export restraint (VER) is a self-imposed limitation on the

number of products shipped to a certain country.

• Tariffs– A tariff is a tax on imported goods, such as a customs duty.

• Other Barriers to Trade• Other barriers to trade include high government licensing fees and costly

product standards.

• Subsidies – lowers the cost of production

Closed v. Open Economies

Closed economy- does not engage in trade or other economic interaction with other countries. Very rare.

Open economy- free and unfettered trade. Also rare.

• Most economies give protection to certain domestic industries.

• Interdependence- All nations need to trade with other nations to get natural resources.

The Effects of Trade Restrictions

Increased Prices for Foreign Goods– Tariffs and other trade

barriers increase the cost of imported products, making domestic products more competitive.

– Although manufacturers of many products may benefit from trade barriers, consumers can lose out.

Trade Wars– When one country

restricts imports, its trading partner may impose its own retaliatory restrictions.

Protectionism is the use of trade barriers to protect a nation’s industries from foreign competition.

Arguments for Protectionism

• Protecting Jobs– Protectionism shelters workers in industries that would be hurt by specialization and

trade.

• Protecting Infant Industries– Protectionist policies protect new industries in the early stages of development.

• Safeguarding National Security– Certain industries may require protection from foreign competition because their

products are essential to the defense of the United States.

Balance of Trade• When a nation exports

more than it imports, it has a trade surplus.

• When a nation imports more than it exports, it creates a trade deficit.

The relationship between a nation’s imports and its exports is called its

balance of trade.

The United States Trade Deficit

• The Trade Deficit– The United States has run a

trade deficit since the early 1970s.

• Why the Trade Deficit?– Imports of foreign oil as well as

Americans’ enjoyment of imported goods account in part for the large American trade deficit.

• Reducing the Trade Deficit– Quotas and other trade barriers

can be used to raise prices of foreign-made goods and urge consumers to buy domestic goods.

International Cooperation• Recent trends have been toward lowering trade

barriers and increasing trade through international trade agreements.

• In 1948, the General Agreement on Tariffs and Trade (GATT) was established to reduce tariffs and expand world trade.

• In 1995, the World Trade Organization (WTO) was founded to ensure compliance with GATT, to negotiate new trade agreements, and to resolve trade disputes.

Major Trade Organization Members

EUCARICOMMERCOSURAPECNAFTA & APEC

PACIFIC OCEAN

ATLANTIC OCEAN

INDIAN OCEAN

PACIFIC OCEAN

Global Trade AgreementsMany nations have formed regional trade organizations. These trade organizations establish free-trade zones, or regions where a group of countries has agreed to reduce trade barriers among themselves.

Balance of payments- the value of all money coming into a country minus all of the money going out.

2 Parts of balance of payments• Current account- includes all trading of goods

and services and any money or aid that the US gives to foreign countries

• Capital account- investments by foreigners in the US and US investments abroad.

The value of a foreign nation’s currency in relation to your own currency is called the

exchange rate.

Exchange Rates and International Markets• An increase in the value of a currency is called

appreciation.

• A decrease in the value of a currency is called depreciation.

• Multinational firms convert currencies on the foreign exchange market, a network of about 2,000 banks and other financial institutions.

Types of Exchange Rate Systems

Fixed Exchange-Rate Systems

• A currency system in which governments try to keep the values of their currencies constant against one another is called a fixed exchange-rate system.

Flexible Exchange-Rate Systems

• Flexible exchange-rate systems allow the exchange rate to be determined by supply and demand.

Exchange Rates• Exchange rates move up and down as a reflection

of the worth of a nation’s currency in comparison to another.

• What will happen if the demand for U.S. products increases?

• More U.S. dollars needed to buy goods. Increase in demand causes the dollar to appreciate or strengthen.

• What would be the effect on prices?• US goods would be relatively more expensive for

others. • US consumers could purchase goods from other

countries more cheaply. .

Currency appreciation- a country’s currency is able to buy more units of another nation’s currency.

• Consequences• Consumers of foreign goods will benefit because they

can buy more foreign goods with the same amount of currency.

• Producers who sell a lot to foreign buyers will have trouble because their products will be relatively more expensive for foreign customers.

• Therefore it is not good for a nation to have too much currency appreciation because this will reduce the country’s exports. If a country were experiencing a deficit they might activate devaluation or depreciation of currency on purpose.

Currency depreciation- if a currency depreciates it is able to buy fewer units of foreign currency than previously.

• Consequences• The effects are opposite of appreciation. Exporters will

be better off because more foreign buyers will purchase their products. However, consumers cannot buy as much of a foreign product as before.

• If the US wanted to increase net exports or decrease the trade deficit they could depreciate the U.S. dollar, this would encourage foreign consumers to purchase more US products and US consumers will purchase fewer foreign goods.