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History of Trade

History of Trade . Surplus to 1975 Competition after 1975 Tariffs Quotas Free Trade Globalization. Specialization. Individual National. Back to Production Possibility Frontier. Domestic exchange equation How would trade help?. Trade. Will not do unless countries gain

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History of Trade

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  1. History of Trade • Surplus to 1975 • Competition after 1975 • Tariffs • Quotas • Free Trade • Globalization

  2. Specialization • Individual • National

  3. Back to Production Possibility Frontier • Domestic exchange equation • How would trade help?

  4. Trade • Will not do unless countries gain • Trade will fall somewhere between domestic and exchange equation (trade equation) • Both countries end up with more product • What would happen to the PPF?

  5. Absolute Advantage • The ability of a country to produce a good or service at a lower cost than its trading partner

  6. Comparative advantage • Output is greatest when each product is made by the country that has the lowest opportunity cost.

  7. Protectionism • National Security • Infant Industry • Low Wage • Employment

  8. Tariff • Tax on imports • Raises prices • Increases tax revenue • Quality can suffer

  9. Quota • Limits on imports • Raises prices • Quality can suffer • No tax revenue

  10. Causes of Trade Imbalance • Rise/fall of currency • Low savings rate • Cost of capital • Defense spending • Education system • Growth rate (GDP)

  11. Free Trade • NAFTA 1993 • EU 1999

  12. Balance of Payments • Flow of currency in and out of the country • Current Year • Capital accounts

  13. Exchange Rates • Price of a country’s currency in terms of another’s currency

  14. Strong Currency • Good Appreciation • Adv. • Imports cheaper • Good for travel • Buy more foreign assets • Keeps domestic prices lower • Dis. • Less exports • Less travel into country • Less foreign investment • Domestic price competition from imports

  15. Weak currency • Bad Appreciation • Adv. • Domestic producers sell more • Good for tourism • More foreign investment • Less price competition • Dis. • Imports costly • Bad for travel • Foreign assets more expensive • Less foreign competition for domestic goods

  16. Three Periods of Exchange Rates • Gold Standard 1933 • $1=1/23 oz. of gold • Gold Exchange Standard 1934-1971 • $1=1/35 oz of gold • Free Floating System • Fiat

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