INTERNATIONAL TRADE CHAPTER 18

1. INTERNATIONAL TRADECHAPTER 18 MAIN TOPICS • BALANCE OF TRADE • COMPARATIVE ADVANTAGE • BARRIERS OF TRADE:EMBARGOS, TARIFFS & QUOTAS • TRADE ORGANIZATIONS:NAFTA, EU, & ASEAN • ARGUMENTS AGAINST FREE TRADE? • EXCHANGE RATES

2. Exports and Imports as a Percentage of U.S. Gross Domestic Product SWS 2009

3. Exports, Imports and the Balance of Trade IMPORTS > EXPORTS = TRADE DEFICIT IMPORTS < EXPORTS = TRADE SURPLUS USA has a TRADE DEFICIT! Other have a TRADE SURPLUS! SWS 2009

4. Exports, Imports and the Balance of Trade Current Balance of Trade SWS 2009

5. INTERNATIONAL TRADE:WHY TRADE IN THE FIRST PLACE? SWS 2009

6. ADVANTAGES OF TRADE COMPARATIVE ADVANTAGE: This is a theory. • 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) SWS 2009

7. ADVANTAGES OF TRADE COMPARATIVE ADVANTAGE: The theory of Comparative Advantage explains why it can be beneficial for two countries to trade. SWS 2009

8. ADVANTAGES OF TRADE COMPARATIVE ADVANTAGE: The theory of Comparative Advantage explains why it can be beneficial for two countries to trade. SWS 2009

9. ADVANTAGES OF TRADE COMPARATIVE ADVANTAGE: The theory of Comparative Advantage explains why it can be beneficial for two countries to trade. 6 18 SWS 2009

10. ADVANTAGES OF TRADE COMPARATIVE ADVANTAGE: SWS 2009

11. ADVANTAGES OF TRADE ABSOLUTE ADVANTAGE: This is a statement! • 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. SWS 2009

12. WHY WE TRADE SUMMARY There are two ways to compare the ability of two countries that produce a good. • The country that can produce a good with a smaller quantity of inputs has an absolute advantage. • 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. SWS 2009

13. 3 BARRIERS TO INTERNATIONAL TRADE SWS 2009

14. INTERNATIONAL TRADE BARRIERS 1.) TARIFFS: The down-side: Who is hurt by tariffs? • A tariff is a taxed placed on imports (goods coming into the country). • It must be paid before goods can be taken of a ship. (makes foreign products more expensive) • Good source of income for government. US consumers of Foreign products 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! This action by the government is also known as aPROTECTIONIST TRADE POLICY US producers & consumers will be more likely to get goods from DOMESTIC (USA) PRODUCERS. SWS 2009

15. INTERNATIONAL TRADE BARRIERS 2.) QUOTA:(or maximum amount) • A quota as 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! This action by the government is also known as aPROTECTIONIST TRADE POLICY SWS 2009

16. INTERNATIONAL TRADE BARRIERS 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 • OPEC enforces Production Quotason member countries. • What would this do to the $ of oil when production quotas are set low and demand is high? SWS 2009

17. INTERNATIONAL TRADE BARRIERS OPEC: Organization of Petroleum Exporting Countries Price is USD per barrel of oil SWS 2009

18. INTERNATIONAL TRADE BARRIERS 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. • EXAMPLE: CUBA & USA 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. This action by the government is also known as aPROTECTIONIST TRADE POLICY SWS 2009

19. HOW TO PROMOTEFREE INTERNATIONAL TRADE? SWS 2009

20. 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 • Mexico • Canada • USA SWS 2009

21. FREE INTERNATIONAL TRADE Free Trade Area of the Americas: FTAA 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  Haiti Honduras Jamaica  Mexico Nicaragua All the above are countries that have expressed interest in the FTAA. SWS 2009

22. FREE INTERNATIONAL TRADE E.U. (European Union) is a trade organization. SWS 2009

23. FREE INTERNATIONAL TRADE A.S.E.A.N is a trade organization. Association of Southeast Asian Nations SWS 2009

24. FREE INTERNATIONAL TRADE W.T.O is a trade organization. World Trade Organization SWS 2009

25. INTERNATIONAL TRADE In-class Questions • 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. • 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. • Who is hurt by tariffs? • Foreign companies that operate in the US (Nissan) • US consumers who like foreign products (and also domestic products) SWS 2009

26. EXCHANGING CURRENCY SWS 2009

27. EXCHANGING CURRENCY EXCHANGE 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? EXAMPLE QUESTION: • 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 goods • B Japanese consumers of European goods • C European consumers of Japanese goods • D Japanese consumers of Japanese goods SWS 2009

28. EXCHANGING CURRENCY 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! SWS 2009

29. EXCHANGING CURRENCY EXCHANGE RATES & THE STRONG DOLLAR PROBLEM • What is a “strong dollar”? • The value of the dollar is appreciating. • ..or the value of the dollar rises compared to other currencies. • …ormore foreign currency is necessary to purchase U.S. dollars. Strong US dollars would lower fuel prices, but more money would flow out of the US. • Who is aided by a strong US dollar? • U.S. CONSUMERS because the prices of foreign goods and services arelowersince the US Dollar goes further in terms of foreign currency. • Who is hurt by a strong US dollar? • U.S. PRODUCERSbecause they can’t compete with lower-priced foreign products. • U.S. EXPORTERSbecause they can’t compete with lower-priced imports. Weak US dollars would promote foreign investment in America and more countries would buy US products. What we find is that a WEAK dollar can be a good thing. SWS 2009

30. 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 SWS 2009

31. CALCULATING EXCHANGE RATES 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 ¥ SWS 2009

32. 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? Average Price in US dollars $130.00 6,000¥ x .0084 = $50.00 SWS 2009

33. CALCULATING EXCHANGE RATES SIMPLE FORMULA: PRICE OF FOREIGN ITEM EXCHANGE RATE COMPARED TO USD Colombian Peso $40.16 $19.05 $3.89 $177.82 $430,461.47 SWS 2009

34. CALCULATING EXCHANGE RATES $18.00 $56.50 $5.14 $6.87 $400 $250 $8500 $5920 $0.32