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INTERNATIONAL TRADE

INTERNATIONAL TRADE. CHAPTER 18. International Trade : When we trade with other countries. Import : When we buy products from another country. Export : When we sell products to another country. Exports and Imports as a Percentage of U.S. Gross Domestic Product.

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INTERNATIONAL TRADE

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  1. INTERNATIONAL TRADE CHAPTER 18 SWS 2009

  2. International Trade: When we trade • with other countries. • Import: When we buy products from • another country. • Export: When we sell products to • another country. SWS 2009

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

  4. Exports, Imports and the Balance of Trade IMPORTS > EXPORTS = TRADE DEFICIT IMPORTS < EXPORTS = TRADE SURPLUS Balance of Trade is similar to Balance of Payments SWS 2009

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

  6. WHY WE TRADE 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. • Ex- rum on the islands, oil • 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. • ex- lawn mower/car was business, coachbook SWS 2009

  7. SWS 2009

  8. BARRIERS TO INTERNATIONAL TRADE SWS 2009

  9. INTERNATIONAL TRADE BARRIERS 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 off 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! So US producers & consumers will be more likely to get goods from DOMESTIC (USA)_PRODUCERS. This action by the government is known as aPROTECTIONIST TRADE POLICY SWS 2009

  10. INTERNATIONAL TRADE BARRIERS QUOTA: • A quota- Instead of imposing a tax on imports the government sets a quota (or maximum amount) on imports/exports. 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

  11. INTERNATIONAL TRADE BARRIERS EMBARGOS: • An embargo shuts down all imports from a country. • EXAMPLE: CUBA & USA SWS 2009

  12. 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 SWS 2009

  13. FREE INTERNATIONAL TRADE SWS 2009

  14. 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) • Mexico • Canada • USA SWS 2009

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

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

  17. INTERNATIONAL TRADE In-class Questions • What is the advantage of free trade? • It can increase the flow of goods from 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? • US consumers who like foreign products b/c they will be more expensive due to tariffs SWS 2009

  18. EXCHANGING CURRENCY SWS 2009

  19. EXCHANGING CURRENCY EXCHANGE RATES: • The exchange rate between two currencies shows how much one currency is worth in terms of the other. • Currency can appreciate or depreciate in value • 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.Who 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

  20. 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. • Who is aided by a strong US dollar? • U.S. CONSUMERSbecause the prices of foreign goods and services are lower since 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. EXPORTERS because they can’t compete with lower-priced imports. What we find is that a WEAK dollar can be a good thing. SWS 2009

  21. 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

  22. 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

  23. 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

  24. 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

  25. STUDY FOR THE TEST SWS 2009

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