The Global Marketplace International Trade
Exports are goods and services that one country sells to another country. Imports are goods and services that one country buys from another country.
Trade in Goods Final and intermediate goods Trade in Services Outsourcing Vacation Trade in Labor Immigration legal and illegal Trade in Capital Foreign direct investment Financial flows: stocks, bonds, currencies
65 % made in America 90% made in America Ford Mustang Toyota Sienna Hard to distinguish: American vs. Foreign made goods!
Should Wisconsin grow oranges? Should Florida make cheese? No and No! Wisconsin should specialize in cheese Florida should specialize in orange production Then trade cheese for oranges
The average American spends $5,460.00 per year for imports. In 2009 the United States imported almost 2 trillion dollars from foreign countries.
The United States exports a little over one trillion dollars in 2009. The trade deficit was 819 billion dollars.
Absolute Advantage is when a country can produce a good more efficiently than another country. If a country produces a good with greater output per unit of input it has absolute advantage for trading over a country with less efficiency, therefore it is likely to trade that good with another country
Country A can produce 40 million pounds of coffee or 8 million pounds of cashew nuts Country B can produce 6 million pounds of coffee or 6 million pounds of cashew nuts. Country A can produce more of either product so it has the absolute advantage
Comparative Advantage is absolute advantage with a lower opportunity cost. If a country can produce a good with a lower opportunity cost it has comparative advantage and is likely to trade that good.
Country A loses 5 pounds of coffee for every pound of cashews where Country B only loses 1 pound of coffee for every pound of cashews. Therefore Country B has comparative advantage in cashew (and country A must have comparative advantage in producing coffee) So country B would produce and trade cashews with country A for coffee. Country A s opportunity cost for every pound of cashew nuts is 5 pounds of coffee. Country B s opportunity cost for one pound of cashew nuts is 1 pound of coffee.
The country with the lower opportunity cost in producing one good has a comparative advantage in that good. Wisconsin has a comparative advantage in cheese production => specialize in cheese Florida in orange production => specialize in oranges Cheese production Orange production Wisconsin Low Comparative opportunity advantage cost High opportunity cost Florida High opportunity cost Low Comparative opportunity advantage cost
In order to restrict the free flow of products, countries institute obstacles that are designed to slow down or stop the movement of goods and services from country to country.
Tariff is a tax on imports. Quota is a limit on the amount of imports or exports. Import Licenses the government can charge high fees to import selected items Protectionism is the idea that we should limit international trade to protect our own self interest.
Protective tariff a tariff high enough to protect lessefficient domestic industries. Revenue tariff is a tariff high enough to generate revenue for the government without actually prohibiting imports.
When tariffs cannot limit imports the government can institute quotas. Quotas, the limiting of quantities of a product that can enter the country, are used to reduce supply keeping prices high for domestic producers.
The most commonly used reason for quotas & tariffs protecting jobs. These measures usually work in the short run. Failing to compete in the long run will always lead to the loss of jobs in a global economy.
Manufacturing jobs: 1993 normalized to 100 3m jobs lost in the U.S. It s a worldwide phenomenon!
1. National Defense a compelling argument for the protectionist? 2. Promote Infant Industries help them to be able to compete by protecting them in the early years. 3. Protecting Domestic Jobs discussed earlier 4. Keep the Money at Home dollar kept here stays here? 5. Helps the balance of payments this is a no brainer
When governments intervene to protect an industry through subsidies and tax breaks the company can market goods below the market rate (normal costs). This is sometimes called dumping. Dumping is exporting goods below normal costs.
Most Favored Nation Clause gives some nations a reduction in tariffs with the U.S. GATT or the General Agreement on Tariffs and Trade is an agreement that gave broad international support to improving trade among countries. NAFTA or the North American Free Trade Agreement is a trade agreement established between the United States, Canada, and Mexico to promote economic growth and prosperity for all three economies by eliminating barriers to free trade.
A long-lasting trade deficit affects the value of a nation s currency and the price and volume of its exports and imports.
CURRENCY EXCHANGE: The price of one currency expressed in terms of another currency. ex: (1 USD= 121.44 Japanese Yens) Between 1870 and 1914, there was a global fixed exchange rate. Currencies were linked to gold, meaning that the value of a local currency was fixed at a set exchange rate to gold ounces. This was known as the gold standard. For most of the 1990s the world exchanged currencies at fixed rates set by government..
With the start of World War I, the gold standard was abandoned and the Inconvertible Fiat Money Standard was introduced. The U.S dollar and the Euro account for 50% of all the currency exchange transactions. The exchange rate defines how many Pesos, Euros, or Japanese Yens you can get for one US dollar (or what the equivalent of one dollar will buy another country).
Is the use of foreign currencies to facilitate international trade. These currencies are bought and sold (like stocks) in the foreign exchange market.
The price of one country s currency in terms of another country s currency. Euro (2003) 1.16 to the dollar or a dollar is worth 84. 1.36 to 1 (2008) and today June2012 1.24 to 1
A fixed rate is a system where the price of one currency is fixed (tied) to something. The rate does not change. A flexible or floating rate lets the forces of supply and demand establish value.
The foreign currency exchange market is known as Forex. -Basic idea: is to get the maximum favorable rate of exchange. (bank hopes to make profit) Forex s purpose is to facilitate global investments and trade. -Operations are run world wide. In 24 hours the market does over 3 trillion dollars in transactions. 70% of transactions are made on the basis of speculative nature. -Meaning: in hope of making a profit rather than an exchange.
Trade Deficit is the result when a country imports more than it exports. Trade Surplus is the result when a country exports more than it imports.
The Trade Weighted US dollar Index: is a weighted average of the price of various currencies relative to the dollar. It differs in which currencies are used and how their relative values are weighted. Introduced in 1998 for 2 reasons: 1.Intro of euro-eliminated several of the currencies in the standard dollar index. 2.Keep pace with developments in US trade.
When this index increases, the value of the dollar increases, making it easier for Americans to afford imports. An increase in the index also makes American exports more expensive in other countries.
Jobs will shift between import and export sectors as the value of the dollar rise and fall. Under the flexible exchange rate, trade deficits are normally self correcting.