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INTERNATIONAL TRADE
UNIT 14
Exports and Imports as a Percentage of U.S. Gross Domestic Product
USA has a TRADE DEFICIT! Other have a TRADE
SURPLUS!
Exports, Imports and the Balance of TradeTRADE DEFICIT
TRADE SURPLUS
IMPORTS > EXPORTS =IMPORTS < EXPORTS =
Exports, Imports and the Balance of Trade
Current Balance of Trade
INTERNATIONAL TRADE:
WHY TRADE IN THE FIRST PLACE?
ADVANTAGES OF TRADECOMPARATIVE ADVANTAGE:
The theory of Comparative Advantage explains why it can be beneficial for two countries to trade.
A country may be able to produce more of an item because it trades with another country.
Basically, since the country does not have to use resources to produce two goods for the nation, it can focus solely on one good and trade for the other good.
EXAMPLES: USA (cars) and Costa Rica (fruits)Japan (electronics) and USA (raw materials)
This is a theory.
COMPARATIVE ADVANTAGE:The theory of Comparative Advantage explains why it can be beneficial for two countries to trade.
Before-Specialization DVD Players
Personal Computers
UK 20 5
Japan 40 20
Total Output 60 25
ADVANTAGES OF TRADE
COMPARATIVE ADVANTAGE:The theory of Comparative Advantage explains why it can be beneficial for two countries to trade.
After-Specialization DVD Players
Personal Computers
UK 40 0
Japan 24 28
Total Output 64 28
ADVANTAGES OF TRADE
COMPARATIVE ADVANTAGE:The theory of Comparative Advantage explains why it can be beneficial for two countries to trade.
After-Trade DVD Players
Personal Computers
UK 22 6
Japan 42 22
Total Output 64 28
18 6
ADVANTAGES OF TRADE
COMPARATIVE ADVANTAGE:
Before-Specialization DVD Players
Personal Computers
UK 20 5
Japan 40 20
Total Output 60 25
After-Trade DVD Players
Personal Computers
UK 22 6
Japan 42 22
Total Output 64 28
ADVANTAGES OF TRADE
ABSOLUTE ADVANTAGE:A country has an Absolute Advantage if it can produce MORE of the good than another country can, with less resources.
EXAMPLE: France can produce 10 liters of wine in 30 hours. Italy can produce 10 liters of wine in 20 hours. Italy has an absolute advantage over
France.
EXAMPLE: Philippines can produce clothing with less resources (money) used than the USA. Philippines has an absolute advantage
over the USA in clothing production.
ADVANTAGES OF TRADE
This is a statement!
WHY WE TRADE SUMMARY
There are two ways to compare the ability of two countries that produce a good.
1. The country that can produce a good with a smaller quantity of inputs has an absolute advantage.
2. When two countries both produce items for the propose of trading with each other and this results in a less opportunity cost due to specialization, these countries have a comparative advantage.
There are two ways to compare the ability of two countries that produce a good.
1. The country that can produce a good with a smaller quantity of inputs has an absolute advantage.
2. When two countries both produce items for the propose of trading with each other and this results in a less opportunity cost due to specialization, these countries have a comparative advantage.
4 BARRIERS TO INTERNATIONAL
TRADE
1.) TARIFFS: A tariff is a tax placed on imports (goods
coming into the country).
It must be paid before goods can be taken off a ship. (makes foreign products more expensive)
Good source of income for government.
So if the government wants to PROTECT DOMESTIC (US) businesses, what should it do to this tariff?ANSWER: They should increase it because this makes it LESS
PROFITABLE buying from oversea producers. Very Dangerous!
US consumers of Foreign products
US producers & consumers will be more likely to get goods from DOMESTIC (USA) PRODUCERS.
INTERNATIONAL TRADE BARRIERS
The down-side: Who is hurt by
tariffs?
This action by the government is also
known as a PROTECTIONIST TRADE POLICY
2.) QUOTA: (or maximum amount)
A quota has the same effect on imports.
Instead of imposing a tax on imports the government sets a LOW quota on imports/exports.
So, only a limited amount of imports can come into/out of the country.
So if the government wants to PROTECT DOMESTIC businesses, what should it do to this quota?
ANSWER: They should decrease it because this makes a limited amount of imports in the country, which will increase the price of those imports. Very Dangerous!
INTERNATIONAL TRADE BARRIERS
This action by the government is also
known as a PROTECTIONIST TRADE POLICY
Other Barriers to Trade:
OPEC: Organization of Petroleum Exporting Countries
Cartel Members: Algeria, Angola, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, UAE, and Venezuela
INTERNATIONAL TRADE BARRIERS
OPEC enforces Production Quotas on member countries.
What would this do to the $ of oil when production quotas are set low and demand is high?
INTERNATIONAL TRADE BARRIERS
OPEC: Organization of Petroleum Exporting Countries
Year Adjusted for Inflation Price
1946 17.261958 21.831966 20.061974 39.771980 95.501992 28.811998 15.352001 27.292003 28.102004 36.052005 50.642006 61.082007 67.232008 145.75
Pri
ce is U
SD
per
barr
el of
oil
3.) EMBARGOS: An embargo shuts down all imports from a
country.
Instead of imposing a tax on imports the government sets a quota (or maximum amount) on imports.
So, only a limited amount of imports can come into the country.So if the government wants to PROTECT
DOMESTIC businesses, should it enact an embargo?ANSWER: No because this will cause less competition since there are fewer imports, thus possibly increasing the price of domestic items. Americans will reduce spending and domestic businesses may suffer.
INTERNATIONAL TRADE BARRIERS
This action by the government is also
known as a PROTECTIONIST TRADE POLICY
EXAMPLE: CUBA & USA
4. Standards/Quality
Some nations will only accept goods meeting a certain quality into their country
This may limit trading partners Examples– U.S. doesn’t want lead-
based painted toys, Germans are selective of beer imports, England will only accept grass-fed beef
HOW TO PROMOTE
FREE INTERNATIONAL
TRADE?
FREE INTERNATIONAL TRADE
In order to eliminate barriers to trade such as tariffs & quotas countries will establish trade organizations and charge less (or no) tariffs and set no quotas.
Such as NAFTA
North American Free Trade Agreement
(Formed in 1993)
What’s the Next Big Thing?
Free Trade Area of the Americas FTAA
1. Mexico
2. Canada
3. USA
Free Trade Area of the Americas: FTAA
Haiti Honduras Jamaica Mexico
Nicaragua
Antigua and Barbuda Bahamas Barbados
Belize Bolivia Canada
Colombia Costa Rica Dominica
Dominican Republic Ecuador
El Salvador Grenada
Guatemala Guyana
Panama Paraguay
Peru Saint Kitts and Nevis
Saint Lucia Saint Vincent and the
Grenadines Suriname
Trinidad and Tobago United States
Uruguay
All the above are countries that have expressed interest in the FTAA.
FREE INTERNATIONAL TRADE
E.U. (European Union) is a trade organization.
FREE INTERNATIONAL TRADE
A.S.E.A.N is a trade organization.Association of Southeast Asian Nations
FREE INTERNATIONAL TRADE
W.T.O is a trade organization.World Trade Organization
FREE INTERNATIONAL TRADE
INTERNATIONAL TRADE
1.What is the advantage of NAFTA or ASEAN?• Free trade can increase the flow of goods from
other countries, giving consumers more LOWER PRICE choices.
2.What is a disadvantage of no tariffs?• No tariffs might result in hurting US producers. If
consumers can now get cheaper goods from another country, then they will not buy US goods.
3.Who is hurt by tariffs?• Foreign companies that operate in the US (Nissan)
• US consumers who like foreign products (and also domestic products)
In-class Questions
EXCHANGING CURRENCYEXCHANGE RATES:
The exchange rate between two currencies shows how much one currency is worth in terms of the other.
For example an exchange rate of 120 Japanese Yen to the U.S. Dollar means that ¥120 is worth the same as $1. How does this relationship affect trade?
Over the course of one year, the Japanese Yen depreciates compared to the Euro. Which two groups of people would benefit the most from this occurrence?
A European consumer of European goodsB Japanese consumers of European goods C European consumers of Japanese goodsD Japanese consumers of Japanese goods
EXAMPLE QUESTION:
EXCHANGE RATES:
QUESTION: What country (America or Mexico) would benefit from a appreciated (strong) U.S. dollar?
ANSWER: If the U.S. dollar is appreciated, this means that American goods and services are more expensive to Mexico. At the same time, making Mexican goods cheaper to U.S. consumers.
So this decreases spending on U.S. goods and decreases American GDP.
More US spending will go to the cheaper Mexican products because your money goes further in Mexico.
MEXICO COULD BENEFIT!
EXCHANGING CURRENCY
EXCHANGE RATES & THE STRONG DOLLAR PROBLEM
1) What is a “strong dollar”?The value of the dollar is appreciating.
..or the value of the dollar rises compared to other currencies.
…or more foreign currency is necessary to purchase U.S. dollars.
2) Who is aided by a strong US dollar? U.S. CONSUMERS because the prices of foreign
goods and services are lower since the US Dollar goes further in terms of foreign currency.
3) Who is hurt by a strong US dollar? U.S. PRODUCERS because they can’t compete
with lower-priced foreign products. U.S. EXPORTERS because they can’t compete
with lower-priced imports.
What we find is that a WEAK dollar can be a good thing.
EXCHANGING CURRENCY
Strong US dollars would lower fuel prices, but more money would flow out of the US.
Weak US dollars would promote foreign investment in America and more countries would buy US products.
CALCULATING EXCHANGE RATES
Let’s say you traveled to Japan and took $500 in U.S. currency. When you exchanged the $500 in Japan, you would receive about… $500 x 118.96 = 59,480 ¥
Let’s say you traveled to US and took £550 pounds. When you exchanged the £550 pounds in US, you would receive about…
£550 x 2.0292 = $1116.06
Let’s say you traveled to Japan and took £8000 pounds. When you exchanged the £8000 in Japan, you would receive about…
£8000 x 2.0292 = $16,233$16,233 x 118.96 = 1,931,077 ¥
CALCULATING EXCHANGE RATES
Price of a D.S. in Japan is about 6,000 yen. What would be the price if you could buy it in US dollars?
6,000¥ x .0084 = $50.00
Average Price in US dollars$130.00
CALCULATING EXCHANGE RATES
SIMPLE FORMULA: PRICE OF FOREIGN ITEM
EXCHANGE RATE COMPARED TO USD
Colombian PesoGood or Service Price in Foreign Currency
USD in Foreign Currency
Price in U.S. Dollars
Nike Shoes 95,000 Colombian pesos 2,362.28
Jeans 45,000 Colombian pesos 2,362.28
10k Gold Necklace 8,000 Colombian pesos 2,362.28
Wisdom Teeth Removal 420,000 Colombian pesos 2,362.28
5500 total square foot Home in
downtown Colombia with pool
1,016,750,000 Colombian pesos 2,362.28
CALCULATING EXCHANGE RATES
$40.16
$19.05
$3.89
$177.82
$430,461.47
