International Trade Key Concepts: Economic Interdependence involves producers in one nation that...
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International Trade Key Concepts: Economic Interdependence involves producers in one nation that depend on producers in other nations to supple them with
International Trade Key Concepts: Economic Interdependence
involves producers in one nation that depend on producers in other
nations to supple them with certain goods and services Why it
Matters: Nations choose to produce some things and trade for
others.
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Resource Distribution and Specialization Nations economic
patterns based on factors of production it has Patterns change over
time (U.S. agriculture to technology) Specialization occurs when
narrow range of products are made; this leads to: Increased
productivity and profit Economic interdependence-reliance on others
for products not made
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Specialization Costa Rico exports bananas; wet climate bananas
need Relatively low wages are beneficial Production is labor
intensive New Zealand exports wool, lamb and mutton Has temperate
climate, H2O, open grasslands needed for grazing Has low population
density, scientific breeding, mechanized processing
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David Ricardo: Comparative Advantage Trading in Opportunity
English Economist 1772-1823 In his time: international trade was
based on absolute advantage Ricardo showed nations can benefit from
comparative advantage Produce products it can make at lower
opportunity cost that others
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Absolute and Comparative Advantage Absolute advantage: nations
ability to make product more efficiently Due to uneven distribution
of production factors in different areas Comparative advantage:
ability to produce at lower opportunity cost Absolute cost of
product not important, just opportunity cost
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Absolute and Comparative Advantage Absolute Advantage Examples
Australia produces more iron ore and steel than China with same
labor Australia has absolute advantage Before Ricardo, logic held
Australia should not trade for either Comparative Advantage
Examples Law of comparative advantage: countries gain when produced
items they are most efficient at producing And are at the lowest
opportunity cost If Australias ratio of steel to iron ore is 1:15
tons and Chinas is 1:3, China has comparative advantage in steel
production
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Advantages of Free Trade If China, Australia specialize, set
trade ratio steel to iron ore 1:4 China gets 4 tons of iron ore for
1 of steel Australia gets 1 ton of steel for 4 of iron ore: cost 5
before Specialization, trade raise nations production ratios, world
output Increased output is mark of economic growth
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International Trade Affect the National Economy Exports: goods
and services produced in one country, sold in others Imports:
products produced in one country, purchased by another Costs and
benefits of international trade vary by nation Economists examine
impact of exports and imports on prices and quantity.
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Impact #1: Exports on Prices and Quantity If a country begins
exporting product, foreign buyers increase total demand Demand
curve shifts right, sets higher equilibrium price Higher prices at
home offset by more jobs and income Created by production expanded
to meet demand
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Impact #2: Imports on Prices and Quantity Imports shift supply
curve right, lower equilibrium price Lower prices lead domestic
producers to offer less of the product Improve efficiency, worker
productivity, customer service Trade gives consumers increased
selection of goods, lower prices Gives producers new markets,
chance for more profit
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The U.S. in the World Economy U.S. is worlds largest exporter;
exports more services than imports Tourism, transportation,
architecture, construction, information systems Also worlds largest
importer; imports more goods than it exports Oil and refined oil
products, machinery, raw materials Main trading partners: Canada,
China, Japan
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Trade Barriers Most nations pass trade limit laws to protect
domestic industries Laws lead to higher prices, economic
retaliation by other nations In long run, industries can only be
saved by becoming competitive Trade restrictions are basically a
political issue
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Trade Barriers Types of Barriers Trade barrier: law limiting
free trade among nations; most mandatory Quota: limits on the
amount of a product that can imported Dumping: sale of product in
other country at lower price than at home Hurts domestic producers;
gives consumers lower prices
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Type of Trade Barriers Tariff: fee charged for goods brought
from another country Revenue tariff: tax on imports, specifically
to raise money Rarely used today Protective tariff: tax on imported
goods to protect domestic products Raise price of goods more
cheaply elsewhere
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Impact of Trade Barriers Trade Barriers may temporarily save
domestic jobs Lack of competition promotes inefficiency, higher
prices Trade limits can lead to trade war: Succession of increasing
trade barriers between nations
Slide 20
Impact of Trade Barriers #1: Higher Prices Trade barriers raise
prices or keep them high In 2000, U.S. & Japan set tariffs on
S. Korean semiconductor chips Korean and domestic chip prices went
up in U.S. & Japan #2: Trade Wars Trade wars often result from
disagreements over quotas or tariffs Can result over other issues
EU banned U.S. hormone-treated beef, U.S. set 100% tax on many EU
foods
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Arguments for Protectionism Protectionism: use of trade
barriers to protect domestic industries Purpose: to protect jobs,
national security, infant industries (new industries unable to
compete with larger, established competitors)
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Arguments for Protectionism #1: Protecting Domestic Jobs U.S.
workers upset over jobs lost to countries with cheaper labor Trade
barriers generally protect inefficient production, prices higher
Laid-off voters influenced government to fund job training
programs
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Arguments for Protectionism #2: Protecting Infant Industries
Protection expected to allow new industries to grow until
competitive Used by developing nations to keep out goods from
developed countries Critics say freedom form competition maintains
perpetual infancy; And need for perpetual support
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Arguments for Protectionism #3: Protecting National Security
National security affects industries considered vital for safety
Energy industry considered vital by most nations Political
differences exist over which industries are truly vital 2006 Dubai
forced to abandon deal to operate several port facilities Critics
doubted security concerns, worried over interference with
trade
Slide 28
Foreign Exchange Market
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Rates of Exchange In 1800s, early 1900s gold standard
determined value of currencies Fixed rate of exchange: nations
currency constant in relation to others Post WWII to 1970s:
currencies pegged to USD: 1 oz gold = $35 Flexible rate of exchange
(floating rate): changes along with currencys supply, demand
Regulates foreign exchange, balancing imports and exports
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Strong and Weak Currencies Trade-weighted value of the dollar -
international value of U.S. dollar Measured by Fed Weak dollar
makes imported goods more expensive Easier for domestic goods to
compete Exports become cheaper, easier to sell
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Strong U.S. Dollar
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Balance of Trade Balance of Trade: difference between value of
imports and exports Balance of payments: all transactions between
nation and rest of world Includes government and private
transactions, both trade and investment Trade surplus: nation
exports more that imports; favorable balance Trade deficit: nation
imports more than exports; unfavorable balance
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Balance of Trade U.S. China Trade China undergone one of the
most rapid industrialization in history Has pegged yuan at fixed
rate vs. dollar; keeping yuan weak Made U.S. top destination for
Chinese exports China has record trade surplus of $200 billion with
U.S.
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1770-1870: U.S. had deficit in products; surplus in capital
investments 1870-1920: paying back debt; was exporting >
importing 1920-1945: had surplus in exports; deficit in foreign
investment 1945-1980: deficit in merchandise; deficit in foreign
investment Today: surplus in foreign investment; merchandise
deficit The U.S. Trade Balance
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Modern International Institutions Regional and World
Organizations Free-trade zones: areas where nations trade without
protective tariffs Customs unions: agreements that abolish trade
barriers among members Establish uniform tariffs for non-members
Some trade groups called common markets
Slide 38
The European Union 1957: six European nations created Common
Market: became EU in 1993 European Union: economic and political
union; no barriers for members Euro: currency of the EU; used by 12
of 27 member nations EU has 20% of global exports and imports;
worlds biggest trader Sets low tariffs; wants to remove all
barriers to international trade
Slide 39
North American Free Trade Agreement Adopted 1994 Also known as
NAFTA Phases out trade barriers between Canada, Mexico & U.S.
Has led to specialization, efficiency, expanded markets, new jobs
Also competitive advantage over EU and Japan All countries have had
economic gain Trade has more than doubled
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Other Regional Trade Groups Various groups formed to
specialize, promote free trade, stay competitive Mercosur: South
America ASEAN: Southean Asian Nations APEC: Asian Pacific Market
SADC: South Africian Development Community OPEC (Organization of
Petroleum Exporting Countries) OPEC is a cartel Group of producers
controls production, pricing, marketing of a product
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Other Regional Trade Groups World Trade Organization 1944
Allied nations formed General Agreement on Tariffs and Trade (GATT)
WTO formed in 1995 by nations that follow GATT Negotiates,
administers trade agreements Resolves disputes Monitors policies of
149 members Gives support to developing countries WTO successful to
varying degrees
Slide 44
Multinationals Bring Changes Key Concepts Multinational
corporations affect many different nations Must deal with different
sets of tariffs, labor restrictions, taxes Often bring jobs and
technology to developing nations Boost overall levels of
international trade
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International Trade W/in Multinationals Intrafirm trade is
trade between various divisions of a multinational Exchange of
goods between two parts of the company Coordination of production
between parts of the multinational Materials or parts sent to
overseas affiliate count as exports Intrafirm imports count as
imports in balance of trade
Slide 46
Multinational Example World Wide Cellular Mines raw materials
in Australia Manufactures phones in South Korea Markets phones in
Europe Provides customer service from India