Why Do Nations Trade?

Transcription

1 International Trade

2 Standards: SSEIN1A: Define and distinguish between absolute and comparative advantage SSEIN1B: Explain that most trade takes place because of comparative advantage in the production of a good or service. SSEIN1C: Define balance of trade, trade surplus, and trade deficit.

3 Why Do Nations Trade? Nations trade for the same reason individuals trade Out of self-interest. What they trade is determined by: Specialization nations, like people, produce only certain goods and services. Specialization is determined by 1. Natural resources 2. Human capital 3. Physical capital

4 Absolute Advantage A country has an absolute advantage over another country in trade when it can simply produce more of a product than another nation. China can produce more rice than the US So, China has an absolute advantage in rice production. Large nations usually have an absolute advantage over small nations in the production of EVERYTHING. So, why do large nations trade with small nations?

5 Comparative Advantage Honduras cannot produce as many T-shirts as the US The US has an absolute advantage in T-shirt production. So, why does the US import T-shirts from Honduras? Because it is CHEAPER for Honduras to manufacture T- shirts than it is for the US. Why? Honduras has cheaper labor, and fewer regulations On pollution standards, work hours, benefits, child labor, safety standards, etc. So, Honduras has the COMPARATIVE advantage in T- shirts Because they can make them CHEAPER than the US. A country should always IMPORT a product if another nation has the comparative advantage.

6 Absolute and Comparative Advantage Countries Number of Labor Hours to Produce 1 MP3 Player Number of Labor Hours to Produce 1 Tablet Computer Osterland 10 Botkinville 15 Opportunity Cost = 10/12 =.833 tablet computer Opportunity Cost = 15/12 = 1.67 tablet computers 12 Opportunity Cost = 12/10 = 1.2 mp3 players 12 Opportunity Cost = 12/15 =.6 of an mp3 player.

7 D.) the election of a multi-lingual President who supports foreign trade. Which of the following would be most likely to lead to a nation developing comparative advantage in the production of computer software? A.) the establishment of high import tax rates that discourages foreign competition. B.) the development of a highly skilled and technologically advanced workforce. C.) the construction of thousands of automobile factories.

8 Which nation is most likely to enjoy the absolute advantage in terms of corn production? A.) the US. B.) Japan. C.) Belgium. D.) Australia.

9 The Balance of Trade Is the difference between a nation s imports and exports. When the U.S. exports more than it imports it has a trade Surplus. When the U.S. imports more than it exports it has a trade Deficit. The US has posted a trade deficit since the 1960 s. Don t confuse trade surpluses and deficits with BUDGET surpluses and deficits Which occur as a result of which POLICY? FISCAL POLICY.

10 In 1958, US exports were valued at $430 billion and US imports were valued at $230 billion. In 1958, therefore, the US ran a... A.) trade deficit. B.) trade surplus. C.) trade balance.

11 Standards: SSEIN2A: Define trade barriers such as tariffs, quotas, embargoes, standards, and subsidies. SSEIN2B: Identify costs and benefits of trade barriers to consumers and producers over time. SSEIN2C: Describe the purpose of trading blocs such as the EU, NAFTA, & ASEAN. SSEIN2D: Evaluate arguments for and against free trade.

12 Protectionism Oftentimes, the government is persuaded to establish polices That keep foreign products OUT of the United States. This policy is called PROTECTIONISM. Who is Protected? DOMESTIC PRODUCERS. Name a DOMESTIC auto company: GM/Ford/Chrysler Who might they want to be protected from? Toyota/Honda/Nissan, etc.

13 Trade Barriers To undertake PROTECTIONISM Governments use TRADE BARRIERS To keep foreign products OUT OF THE COUNTRY. There are three basic types of trade barriers:

14 Trade Quotas A quota is a LIMIT. A trade quota is a limit on the importation of a foreign product. Example: The US currently allows 1.23 million tons of raw sugar into the country.

15 Trade Barriers: Tariffs A tariff is a TAX on IMPORTS. A 10% tariff on a $20,000 imported Toyota Would raise the cost to $22,000. Who would SUPPORT such a tax? GM/Ford/Chrysler Who is HARMED by such a tax? ALL CAR BUYERS. How might Toyota GET AROUND such a tariff? By building factories in Kentucky.

16 Trade Barriers: Embargo Embargo A government ban on all trade with a foreign nation. The Foreign Assistance Act of 1961 banned all trade with Cuba. The act also imposes penalties on any country that trades with Cuba.

17 Due to the trade embargo, Cuban streets are a time warp with many automobiles dating from the 1950 s.

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19 Standards & Subsidies Standard requirements a good must meet before it can enter a country as an import. Subsidy Government payments given to companies to allow them to compete with other nations.

20 In order to encourage New Balance to continue to make their shoes at factories in Massachusetts, the US Congress has undertaken to "protect" the company by taking steps to make foreign-made athletic shoes more expensive. An additional tax on such shoes would be considered a... A.) quota. B.) tariff. C.) embargo. D.) limit.

21 Government policies like protectionism create winners and losers. Who would be the winners associated with protectionist policies? A.) American manufacturers. B.) American importers. C.) American consumers. D.) American service providers.

22 International Agreements World Trade Organization est. 1995, negotiates agreements & resolves disputes. The European Union est. 1957, coordinates the economic policies of 27 nations Many EU nations use a common currency, called the Euro.

23 ASEAN Is the ASSOCIATION of SOUTHEAST ASIAN NATIONS And was formed by Indonesia, Malaysia, the Philippines and Thailand And whose goal is to promote SECURITY Cultural integration And FREE TRADE between member nations.

24 NAFTA Is the NORTH AMERICAN FREE TRADE AGREEMENT Its goal is to create an economic United States of North America By eliminating trade barriers between the US, Canada and Mexico. So far, 70% of all tariffs have between the three countries have been cancelled.

25 The Results of NAFTA Before NAFTA, high tariffs made Mexican products EXPENSIVE And this kept American factories in business. With the cancellation of tariffs, however, Mexican-made products became MUCH CHEAPER So American factories began to close down And reopen in Mexico Resulting in the loss of hundreds of thousands of manufacturing jobs in the US.

26 The Results of NAFTA When NAFTA was established, US EXPORTS to Mexico exploded The US unemployment rate dropped And wages increased. This indicates that as low-paid factory jobs disappeared They were replaced by high-skilled, higher-paying jobs.

27 Arguments Against Free Trade 1. Protecting Infant Industries 2. Protecting National Security 3. Protects Domestic Employment 4. Protecting Workers in Developing Countries 5. Protection of the Environment.

28 Free trade agreements like NAFTA and ASEAN also create winners and losers. In terms of NAFTA, who were the losers? A.) highly-skilled American workers. B.) middle-class American consumers. C.) the US higher-education industry. D.) low-skilled American workers.

29 Standards: SSEIN3A: Define exchange rate as the price of one nation s currency in terms of another nation s currency. SSEIN3B: Interpret exchange rates, in regards to appreciation and depreciation of currency. SSEIN3C: Explain why some groups benefit and others lose when exchange rates change.

30 Because there are hundreds of currencies in the world So we need a way to convert one currency into another. A Foreign Exchange Market is a market for buying and selling currency. Once the value of one currency is determined in relation to another, a foreign exchange rate for the two has been established. The Value of Currency

31 Currency Conversion Table

32 Depreciation & Appreciation When one nation s currency decreases in value relative to another, depreciation has occurred. When one nation s currency increases in value relative to another, appreciation has occurred.

33 On Monday, $1 buys 2 euros. On Friday, $1 buys 1.5 euros. Between Monday and Friday, the euro... A.) appreciated relative to the dollar. B.) depreciated relative to the dollar. C.) remained static relative to the dollar.

34 Why is a Weak Dollar Good for American Businesses? Say a German manufacturer has 300,000 euros and wants to buy some new $300,000 Caterpillar bulldozers And the exchange rate is one dollar = one euro. He takes his 300,000 euros and exchanges them for dollars how many dollars does he get? How many bulldozers can he buy? Now say the exchange rate is two dollars = one euro How many dollars does he get for 300,000 euros? How many bulldozers can he buy? $300,000 One bulldozer. $600,000 Two bulldozers.