Chapter 17 International Trade

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					Chapter 17: International
            I. Why Nations Trade
•   Resource distribution—unequal distribution
    of land, labor, and capital.
•   Absolute and Comparative Advantage
    –   Absolute advantage—“With the same amount of
        resources, I make more than you.”
    –   Comparative advantage—“I can produce it
        more efficiently than you.”
        •   Nation with lower opportunity cost has comparative
– Why trade and with whom?
  • Specialize and trade products in
    which a nation has the
    comparative advantage.
  • Specialization – countries decide to
    only produce certain goods and
    services which is determined by their
 II. Trade Barriers and Agreements

• Trade Barriers—restrictions to trade.
  – Import quotas—limit on amounts that
    can be imported.
  – Tariffs—tax on imported goods.
  – Embargo – complete restriction
• Effects of Trade Barriers
  – Increased prices for foreign goods.
  – Trade wars.
• Other Barriers to Trade
    • Other barriers to trade include
      high government licensing fees
      and costly product standards.
• Arguments for Protectionism—use of
   trade barriers to protect industries from
  – Protecting jobs.
  – Protecting infant industries.
  – National security.
Free Trade – trade with lack of restrictions

Arguments for Free Trade
1.Competition means improved products
2.Trade restrictions damage export industries
  putting Americans out of work
3.Specialization and comparative advantage
  lowers prices
Top 12 International Trading Partners
                 1. Canada
                  2. China
                 3. Mexico
                  4. Japan
                5. Germany
           6. United Kingdom
              7. South Korea
                 8. France
                 9. Taiwan
             10. Netherlands
                 11. Brazil
                  12. Italy
Top 5 Countries Receiving U.S. Exports

               1. Canada
               2. Mexico
               3. Japan
               4. China
               5. United Kingdom
Top 5 Countries Supplying U.S. Imports

               2. China
               3. Mexico
               4. Japan
               5. Germany
       International Cooperation
• Recent trends have been toward lowering trade
  barriers and increasing trade through international
  trade agreements.
• In 1948, the General Agreement on Tariffs and
  Trade (GATT) was established to reduce tariffs
  and expand world trade.
• In 1995, the World Trade Organization (WTO) was
  founded to ensure compliance with GATT, to
  negotiate new trade agreements, and to resolve
  trade disputes.
    III. International Cooperation and
•       The European Union.(EU)
    –     27 member nations in Europe operating under same
          currency and economic rules.
•       NAFTA—North American Free Trade
    –   Creates largest free-trade zone (no barriers, tariffs, quotas,
        etc.) in the world by 2009.
    (As of January 1, 2008, all tariffs between the three countries
        were eliminated. Between 1993-2007, trade tripled from
        $297 billion to $1 trillion )
•       Canada, Mexico, and the United States
European Union
                    Global Trade Agreements
Major Trade Organization Members

                              ATLANTIC OCEAN

                                                              PACIFIC OCEAN

                                               INDIAN OCEAN

          . Measuring Trade
• Exchange rates—value of a nation’s
   currency in relation to a foreign currency.
• Strong and Weak Currencies
  – Appreciation—when a currency gains
     in value.
  - Depreciation—when a currency loses
   in value
                   Reading an Exchange Rate Table
                   The following table shows an example of exchange rates.

 Foreign Exchange Rates
                     U.S. $    Aust $    U.K. £   Canadian $       ¥en    Euro    Mexican NP   Chinese renminbi

U.S. $               1        0.6489      1.599    0.6764      0.01       1.051     0.11           0.12

Australian $         1.541    1           2.465    1.042       0.01       1.62      0.17           0.19

U.K. £               0.6252   0.4057      1        0.4229      0.01       0.657     0.07           0.08

Canadian $           1.478    0.9593      2.365    1           0.01293    1.554     0.16           0.18

¥en                114.3      74.19     182.9     77.34        1         120.2      12.24         13.81

Euro                 0.9516   0.6175      1.522    0.6436      0.01        1         0.1           0.11

Mexican              9.33     6.06        6.3      6.3         0.08        9.81      1             1.13
nuevo peso

Chinese renminbi     8.28     5.37       13.25     5.6         0.07        8.7       9.8           1
    Types of Exchange Rate Systems
Fixed Exchange-Rate       Flexible Exchange-Rate
  Systems                   Systems
• A currency system in    • Flexible exchange-rate
  which governments try     systems allow the
  to keep the values of     exchange rate to be
  their currencies          determined by supply
  constant against one      and demand.
  another is called a
  fixed exchange-rate
            Balance of Trade
• When a nation exports more than it imports,
  it has a trade surplus.
• When a nation imports more than it exports,
  it creates a trade deficit.

  The relationship between a nation’s
  imports and its exports is called its
  balance of trade.
     The United States Trade Deficit
• The Trade Deficit
  – The United States has run a trade deficit since the early
• Why the Trade Deficit?
  – Imports of foreign oil as well as Americans’ enjoyment
    of imported goods account in part for the large
    American trade deficit.
• Reducing the Trade Deficit
  – Quotas and other trade barriers can be used to raise
    prices of foreign-made goods and urge consumers to
    buy domestic goods.
          Chapter 9: Labor
• Labor Market trends
  – Emphasis on technology
  – Fewer goods and more services
  – Advanced education leads to higher pay
              Types of Labor
• Unskilled Labor-
  – No specialized skills, education, or training
  – Ex: dishwashers, janitors, factory and farm workers
• Semi-skilled Labor-
  – Minimal specialized skills and education
  – Ex: lifeguards, short-order cooks, some construction
  – Blue collar workers- work in industrial jobs and
• Skilled Labor-
  – Specialized skills and training- need little supervision
  – Ex: mechanics, plumbers, chefs, carpenters
• Professionals-
  – Advanced skills and education- White-collar
  – Ex: managers, teachers, doctors, lawyers
             Trade Unions
• Brought on by the industrial revolution of
  the earl and mid 1800s
• Long days and hours: 12 to 16 hrs, 7 days a
  week for low wages. Men, women,
  children 5+
• Created to create a fair working
  environment with livable wages
• Strike: an organized work stoppage
  intended to force an employer to address
• Collective bargaining: when a
  representative from both sides meets to
  work on a compromise sometimes
  Mediation is needed
• Arbitration: settlement technique where a
  3rd party reviews the case and makes it
  legally binding for both sides
• Right-to-work: measure that bans
  mandatory union membership

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