International Trade. Chapter 17. Facts about Int. Trade. The world trades due to necessity The key to trade is Specialization US is a highly specialized country: New York: Financial hub Florida (S.E.) & California: citrus & fruits, wine Midwest & high plains: farming
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International Trade Chapter 17
Facts about Int. Trade • The world trades due to necessity • The key to trade is Specialization • US is a highly specialized country: • New York: Financial hub • Florida (S.E.) & California: citrus & fruits, wine • Midwest & high plains: farming • Detroit: auto industry • Northwest: Tech based • Texas & southwest: oil & cattle
Facts about int. trade cont.. • If you want to see what your country specializes in, just look at their exports • So, why trade? • Because we believe what we get far exceeds the value of what we give up in return! • Without Int. trade, many products we use would not be available • Ex. Banana, coffee, shoes, clothing, oil etc… • In many cases, it is cheaper for a country to import than to manufacture
Absolute v. Comparative advantage! • Absolute adv.: when all factors of production are running effectively who is out producing who • If US wanted to and put all resources towards being the #1 exporter of bananas, could they do it? • Comparative adv.: which country can produce any product with the lowest opportunity cost • At what cost could US become the #1 exporter of bananas? Is it worth it? Something else we do better where we give up less? • http://www.youtube.com/watch?v=Vvfzaq72wd0`
Abs. v comp. adv. Cont. • The assumption here is: • Everyone will be better off producing the product they produce relatively best • It will increase total world output
Trade Restrictions • Trade can be restricted in three main ways: • 1. Embargo: a full trade blockage (Cuba, Iran, N. Korea) • 2. Tariffs: a tax placed on imports; increases the price of foreign good vs. domestic good (protection) • 3. Quotas: a limit placed on quantities of products that can be imported(if good really cheap, tariff not helping)
Who in favor/against trade restrictions? • Protectionists (restrict trade):favor trade barriers to protect domestic businesses/jobs • Free-Traders (open trade): favor fewer or no trade restrictions • Main arguments: • 1. National Defense • 2. Promoting infant industries • 3. Protecting domestic jobs • 4. Keeping the money @ home • 5. Balance of payments • http://www.youtube.com/watch?v=65UcSx_LrZI (Free Trade Agreement)
The Move Towards Free-Trade • Result of: Smoot-Hawley Tariff Act of 1930s shutting down all trade causing tensions & eventually WWII • Reason: we would have less conflict, tension and can be friendlier towards each other, help each other • Reciprocal Trade Act: passed by US lowering tariffs over 50% if other countries did as well • GATT: (General Agreement on Tariffs & Trade, 1947): give assistance, lower barriers, less tension more friendliness • WTO: (World Trade Organization, 1991)updated GATT with courts for dispute & Tech assistance • NAFTA (North American Free Trade Agreement, 1993):Mexico, USA & Canada, lowered barriers, lost jobs • EU (European Union, 1993)27 countries, one currency, no barriers, friendliness! • http://www.youtube.com/watch?v=O37yJBFRrfg (EU explained)
Exchange Rate & Trade • Trade between countries like people, but different currency makes it challenging due to some with less value, some with more • The country you trade with wants its money in its home currency: • A. Foreign Exchange: currencies from trading countries are bought & sold in the foreign exchange market • B. Foreign exchange rate: the price of one country’s currency in terms of another country’s currency • For example: 1 British Pound = $1.58 or 0.6329 Pound = $1 • http://www.youtube.com/watch?v=xwtgByffoUw (exc r)
Imbalance of Trade • The Flexible Exchange Rate: • Defined: Rate on currency is based on supply & demand • The more demand for your currency the higher the value and vice versa • What does this mean toward trade? • When country X exports more to us than we export to them they get more of our currency than us of theirs, making their supply of $ exceed demand, driving value down & vice versa!
Imbalance of Trade • Trade deficit vs. surplus: • Trade deficit: when value of goods imported exceeds value of goods exported (unfavorable, drag on GDP!) • Trade Surplus: when value of exports exceeds imports (favorable, what every country wants) • Ramifications of Trade-Deficit: • 1. Makes value of your currency go down • 2. causes unemployment to go up in industries involved in exporting trade • 3. But helps out industries involved in importing of goods • 4. Eventually things will reverse as other currencies rise in value making their goods more expensive and American products cheaper etc.
Move Towards Free-Trade • 3. North American Free Trade Agreement (NAFTA) 1993: • Open up trade between Mexico, US, Canada • It lead to loss of some industries and jobs due to cheaper competition
Move Towards Free-Trade • 4. European Union (EU) 1993: • Economic & political union of 27 member mainly European countries • Lowering most trade restrictions • A huge market with one currency (Euro) to make trade easier for all members
Move Towards Free-Trade • 1. General Agreement on Tariffs & Trade (GATT) 1947: • Signed by 23 countries • It extended tariff reductions & do away with import quotas • Way of bringing countries together for prosperity & not war!
Move Towards Free-Trade • 2. World Trade Organization (WTO) 1991: • Updated GATT after 44 years • Carries out all GATT agreements, but also: • Settles trade disputes between governments • Organizes trade negotiations • Provide technical assistance to developing countries
Who in favor/against trade restrictions? Cont. • 2. Promoting infant industries: • Protectionists: new or emerging business have to be protected against foreign trade • Free-Traders: only if eventually removed • 3. Protecting domestic jobs: • Protectionists: not letting businesses out source to other parts of world • Free-Traders: not to interfere, survival of fittest should make economy efficient • 4. Keeping the money at home: • Protectionists: invest in made in the USA and money stays at home • Free-Traders: money comes back as those countries get things they need from America • 5. Balance of payments: • Protectionists: make imports fall and exports rise good for GDP • Free-Traders: however, money coming back will stop and hurt other US industries