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Chapter 5

Chapter 5. International Trade Theory. Key terms. Imports Exports Balance of Trade Balance of Payments Exchange Rate. Imports. items bought from other countries Top importing countries in the world Top US imports : Crude oil Passenger cars Medicinal preparations

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Chapter 5

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  1. Chapter 5 International Trade Theory

  2. Key terms • Imports • Exports • Balance of Trade • Balance of Payments • Exchange Rate

  3. Imports items bought from other countries • Top importing countries in the world • Top US imports: • Crude oil • Passenger cars • Medicinal preparations • Automotive accessories • Other household goods

  4. EXPORTS goods and services made that are sold to other countries • Top exporting countries in the world • Top US Exports • Civilian aircrafts • Semi-conductors • Passenger cars • Pharmaceutical preparations • Automotive accessories

  5. Balance of trade Difference between a country’s total exports and total imports • Trade Surplus • Export (sells) more than it imports (buys) • Favorable balance of trade • Trade Deficit • Imports (buys) more than it exports (sells) • Unfavorable balance of trade

  6. TRADING AMONG NATIONS • Absolute Advantage – exists when a country can produce a good or service at a lower cost than other countries • Typically results from an abundance of natural resources or raw materials

  7. Producing Coffee & Cocoa

  8. Producing Coffee & Cocoa

  9. Without Trade - Coffee & Cocoa

  10. TRADING AMONG NATIONS • Comparative Advantage – situation in which a country specializes in the production of a good or service at which it is relatively more efficient • Produces what it can within own borders, buys (imports) what they need from someone else

  11. With Trade - Coffee & Cocoa

  12. Coffee & Cocoa Without Trade With Trade

  13. EXAMPLE OF U.S. IMPORT RELIANCE

  14. U.S. TRADE BALANCES

  15. INTERNATIONAL TRADE BARRIERS • Trade Barriers – restriction to free trade • Quotas • Tariffs • Embargoes

  16. QUOTAS A limit on the quantity of a product that may be imported or exported within a given period • Reasons for quotas • To keep supply low and prices the same • Protects domestic producers from international competition • To express displeasure at the policies of the importing country • To protect one of a country’s industries from too much competition from abroad • Critics of import quotas • Corruption (bribes to get a quota allocation) • Smuggling (circumventing a quota)

  17. TARIFFS A tax that a government places on certain imported products • Reasons for tariffs • To set amount per pound, gallon, or other unit • To set the value of a good • In 2010, the US collected over $25 Trillion in import tariffs • Example of tariffed goods: • Chickens $0.90 each • Rice $0.018/kg

  18. EMBARGOES Government stops the export or import of a product completely • Reasons for embargoes • To protect a country’s industries from international competition more than the quota or tariff will achieve • To prevent sensitive products from falling into the hands of unfriendly groups or nations • Against countries the federal government of the United States considers State Sponsors of Terrorism. • The US currently has trade embargos with 30 countries

  19. ENCOURAGING INTERNATIONAL TRADE • Free-trade zones • Free-trade agreements • Common markets

  20. FREE-TRADE ZONES A selected area where products can be imported duty-free and then stored, assembled, and/or used in manufacturing • Usually located around a seaport or airport • Importer pays duty only when the product leaves the zone

  21. FREE-TRADE AGREEMENTS Member countries agree to remove duties (import taxes) and trade barriers on products traded among them • Results in increased trade between members • NAFTA (North American Free Trade Agreement) • Began on January 1, 1994 • Canada & Mexico are US #1 and #3 trading partners, respectively • 10/12/11 Breaking News: Congress Passes 3 Free Trade Agreements • South Korea, Panama, Columbia • Boost exports by $13 Million • Support tens of thousands of American jobs

  22. COMMON MARKETS Members do away with duties and other trade barriers • Allow companies to invest freely in each member’s country • Allow workers to move freely across borders • Examples • European Union (EU) • 27 member countries • #2 Importer, #1 Exporter in the world

  23. INTERNATIONAL CURRENCY • Foreign exchange rates – the value of a currency in one country compared with the value in another • Effects imports/exports • Example: • If the Toyota Motor Company can produce a car for export in Japan at a cost of 2,000,000 Yen, how much does that car cost in U.S. dollars? • If the exchange rate for Yen/U.S. Dollar is 200.00 yen to the dollar, the car would have to cost $10,000 at the factory for the Toyota company to realize its costs. • Toyota cars typically sell for $20,000+ US dollars, making the car very profitable to export to the US (for Japan) • As Yen/US Dollar exchange rates change to 100.00, it now costs $20,000 at the factory to make, therefore reducing the Japanese profit and lowering the incentive to export to the US

  24. INTERNATIONAL CURRENCY • Factors affecting currency values • Balance of payments – when favorable, stronger currency • Economic conditions – when buying power of currency declines (i.e. high inflation), value of currency declines • Political disability – country instability weakens currency

  25. RECENT VALUES OF CURRENCIES Source: http://www.xe.com/

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