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Ch. 16: International Trade

Ch. 16: International Trade. CIE3M1-01 M. Nicholson. International Trade. Canadians have become accustomed to consuming goods & services from all parts of the world Canada is part of a global trading system sells its own goods & services to other countries (exports)

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Ch. 16: International Trade

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  1. Ch. 16: International Trade CIE3M1-01 M. Nicholson

  2. International Trade • Canadians have become accustomed to consuming goods & services from all parts of the world • Canada is part of a global trading system • sells its own goods & services to other countries (exports) • buys goods & services from other countries (imports)

  3. Why Do Nations Trade? • Absolute advantage – the ability of one person, region or country to produce a good or service at a lower cost than a competitor’s • Comparative advantage - the ability of one person, region or country to provide a good or service relatively more cheaply (i.e. lower opportunity cost) than a competitor

  4. Hypothetical Output Per Worker Opportunity Cost of 1 tonne of paper of 1 computer Paper Computers Gains from Trade Based on Comparative Advantage Canada (10 wkr) 12 tonnes 12 computers 1.0 computer 1.0 tonnes paper Mexico (20 wkr) 3 tonnes 9 computers 3.0 computers 0.33 tonnes paper Why should Canada trade with Mexico if we have absolute advantage? If Canada & Mexico do not trade how much Paper / Computer produced? Assume they split their workforce between Paper & Computers

  5. Before Trade After Trade Paper Computers Paper Computers Total Gains from Specialization Canada (10 wkr) 60 tonnes 60 computers 120 tonnes 0 computers Mexico (20 wkr) 30 tonnes 90 computers 0 tonnes 180 computers 90 tonnes 150 computers 120 tonnes 180 computers

  6. Barriers To International Trade • Protective tariffs – taxes imposed on imported goods in order to raise the price and lower the quantity sold • Embargo – ban against the import or export of a good (e.g. cocaine)

  7. Barriers To International Trade • Quotas – a restriction on the amount of foreign foods that may be imported • Red tape – government can use bureaucracy to delay or even prevent the importing of foreign goods

  8. Arguments Against International Trade • Infant industry argument • Vital industries argument • Cheap foreign labour argument • Employment argument

  9. International Trade And The Circular Flow

  10. International Trade And The Circular Flow • domestic & international trade is similar  both have specialization but currency exchange needed for international trade • Canada’s trade partners – biggest trading partner is USA with 80.3% of Canadian exports going there and 73% of imports coming from the USA • EU and Japan 2nd and 3rd most significant

  11. International Trade And The Circular Flow • Visible and invisible trade – merchandise trade is visible, tangible goods whereas tourism, services, investment income and money transfers are not visible or tangible • Canadian merchandise trade  trade surplus • Capital movements – purchase and sales of foreign and domestic bonds and stocks

  12. International Trade And The Circular Flow • Balance of payments – is the summary of all the visible, invisible and capital transactions over a year • Balance of trade – difference between visible exports and imports (Bal Of Trade = Vis Exports – Vis Imports) • Balance of trade on current account - difference between visible and invisible exports and imports (Bal of Trade Cur Acct = Vis/Inv Exports – Vis/Inv Imports)

  13. Exchange Rates • Exchange rate is the price of one currency expressed in terms of another currency • Canadian = Foreign  divide (e.g. $10 Cdn = ? £  1 £ = $2 Cdn  $10 ÷ $2 = 5 £ UK) • Foreign = Canadian  multiple (e.g. 200 Jap = ? $  1 ¥ = $0.01 Cdn  200¥ x $0.01 = $2 Cdn) • Flexible exchange rates – supply and demand for a currency determine its price relative to other currencies

  14. Exchange Rates • Fixed exchange rates – governments intervene in the foreign currency market to maintain the price of their currency relative to some other currency (e.g. US $) • Canada has had both types and now prefers a mixture of the two called a managed or dirty float

  15. Exchange Rates Causesa) British Exports ↑b) British Interest Rates ↑

  16. Freer Trade • Since WW 2 ended in 1945 countries realize increased international trade increases prosperity and helps prevent war • General Agreement on Trade and Tariffs (GATT)  World Trade Organization (WTO) • European Union (EU) – most Western European countries

  17. Freer Trade

  18. Freer Trade • Auto Pact of 1965 – great benefits to Canada through economies of scale lowering costs and increasing workers wages • Canada – U.S. Free Trade Agreement, 1987 • North American Free Trade Agreement (NAFTA), January 1, 1994 – 363 million people, $6.25 trillion GDP (Canada / USA / Mexico)

  19. NAFTA • Canada – can sell telecommunications and banking services, will buy manufactured goods • Mexico – great opportunity for economic prosperity, but fear the efficient USA producers and USA culture • United States – hope Mexico stabilizes and stops flow of illegal immigrants into America, but fear businesses will move to lax Mexico where costs are lower  loss of USA jobs

  20. Summary

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