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International Trade

Chapter 17. International Trade. Chapter 17, Section 1. Why Nations Trade. Resource Distribution. The factors of production are not evenly distributed throughout the world Human capital is more skilled in nations with higher literacy rates Physical capital is deeper in some nations

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International Trade

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  1. Chapter 17 International Trade

  2. Chapter 17, Section 1 Why Nations Trade

  3. Resource Distribution • The factors of production are not evenly distributed throughout the world • Human capital is more skilled in nations with higher literacy rates • Physical capital is deeper in some nations • Better machinery • Infrastructure is better

  4. Resource Distribution • The unequal distribution of resources encourages nations to specialize • Although some countries could be self sufficient, it is to their advantage to specialize...why?

  5. Absolute and Comparative Advantage • Absolute advantage...when one nation can produce a good at a lower cost than another • Comparative advantage...the ability for a nation to produce at a lower opportunity cost • The nation with the lowest opportunity cost should specialize in that product • Known as the law of comparative advantage

  6. International Trade • Since some countries may have a comparative advantage over others, it makes sense for them to trade • The US and trade • The US is the largest importer and one of the top three exporters of goods (Germany and China)

  7. US Exports • The US is among the top three exporters in the world • Flips with Germany and China • China current leader (since 2009)

  8. US Imports • We are also one of the largest importers. • In total, we import more than we export • We have a trade deficit

  9. Trade on Employment • International trade has caused many changes and trends in employment • Due to comparative advantage, workers need to gain certain skills in order to find employment

  10. Chapter 17, Section 2 Trade Barriers and Agreements

  11. Free Trade? • Many people argue that governments should regulate trade in order to protect industries and jobs from foreign competition • This is known as protectionism • Many nations set up trade barriers in order to provide protectionism

  12. Trade Barriers • Trade barriers...trade restrictions that prevent foreign products or services from freely entering a nation’s territory • Import quotas...limits on the amount that can be imported • Voluntary Export Restraints...self imposed export restraint (hopes to avoid import quotas

  13. Trade Barriers • Tariffs...taxes on imported goods • Customs duty • Used to encourage purchasing of domestic products • Other Trade Barriers • Licenses • Standards of production

  14. Effects of Trade Barriers • Increased prices for foreign goods • Trade Wars • When countries institute restrictions on each other • Usually leads to poor trade for both countries

  15. Arguments for Protectionism • Protects jobs • Protects infant industries • Protects national security

  16. International Trade Agreements • Recent trends are encouraging free trade…why? • Raises living standards • Encourages world peace • Promotes competition • International Free Trade Agreements • Cooperation of two or more countries to reduce trade barriers

  17. World Trade Organization • GATT...general agreement on tariffs and trade...founded in 1948 • WTO…a worldwide organization whose goal is freer global trade and lower tariffs...founded in 1995 to ensure GATT • Acts as a referee for trade agreements

  18. Free Trade Zones • Areas established by countries to reduce or eliminate trade barriers • Two such Organizations • European Union (EU) • North American Free Trade Agreement (NAFTA)

  19. European Union http://europa.eu.int/euro/ • Regional trade organization made up of 27 member nations • Essentially developed a single market (EEC...European Economic Community) in Europe • Goal is to create a single economy that rivals the US • Currently the largest trading partner of the US • Canada and Mexico are next

  20. EU

  21. NAFTA • Created to eliminate all tariffs and barriers in the region (Canada, Mexico, US) • Ratified in 1994 • Although there has been much controversy, NAFTA has increased trade between the three nations

  22. Chapter 17, Section 3 Measuring Trade

  23. Exchange Rates • Value of a foreign nation’s currency in terms of the home nation’s currency • Exchange rates fluctuate on a daily basis with the strength and weakness of a nation’s currency • Based on supply and demand for currency

  24. Strength of Currency • Appreciation...increase in the value of currency • When a currency appreciates, exports decline • Products are more expensive • Depreciation...decrease in the value of currency • When a currency depreciates, exports rise • Products become cheaper

  25. Exchange Rate Systems • Fixed Exchange Rate System...governments try to keep their currency constant with another • Known as pegging currency • China • Flexible Exchange Rate System...exchange rate is determined by supply and demand and it fluctuates • Used by most major currencies today

  26. Balance of Trade • Trade surplus...export more than you import • Trade deficit...import more than you export • Balance of trade...relationship between exports and imports

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