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Chapter 18 Trading With Other Nations


									   The Benefits of World Trade
► 13%     of GDP is from imports

► Imports– goods bought from other
 countries for domestic use

► Chiefimports – oil, bauxite, raw materials,
 electronics, tvs, coffee, chocolate, & pepper
            Benefits of Trade
► Exports  – goods sold to other countries
► Export business employs many Americans
► Chief exports – technology, food, &
► Nations differ in the types and amount of
  factors of production
► US is highly skilled and technological
  compared to other nations (India &
             Absolute Advantage
► Absolute  Advantage – ability of one country, using
  the same quantity of resources as another, to
  produce a particular product at a lower absolute
► Example – bananas grown in Brazil vs. France
► Specialization – concept that a nation should
  produce & export a limited assortment of goods
  for which it is particularly suited in order to remain
        Financing World Trade
► Different countries use different currencies.
► Exchange rate – the price of one nation’s
  currency in terms of another nation’s
► Foreign exchange markets – markets
  dealing in buying and selling foreign
  currency for businesses that want to import
  goods from other countries
           Financing World Trade
►   Fixed rate of exchange – system under which a national
    government sets the value of its currency in relation to a
    single standard
►   IMF – International Monetary Fund – offers monetary
    advice and provides loans to developing nations
►   Fixed rate allows importers and exporters to know value of
►   Devaluation – lowering a currencies value in relation to
    other currencies by government order
►   Fixed rate was impractical due to constant changes in
    international economic climate
        Financing World Trade
► Flexibleexchange rate – arrangement in
  which the forces of supply & demand are
  allowed to set the price of various
► Exchange rate is determined by supply and
► Depreciation – fall in the price of a currency
  through the action of supply and demand
       Financing World Trade
► Balance  of trade – difference between the
  value of a nation’s imports and exports
► Weak currency = more exports – countries
  can buy more goods from a country with
  weak currency because their money
  exchanges at a higher rate
► Strong currency = more imports – strong
  currency will allow a country to buy more
  goods from countries with weak currencies
          Financing World Trade
► Trade   deficit – when the value of goods
  coming into a country is greater than those
  leaving the country
► U.S. has had trade deficits most years since
  the early 1970s
► Deficit means foreigners are investing in a
► Dollars are in demand because of their
   Restrictions on World Trade
► Challenges   to international trade:
  § Different currencies
  § Different languages
  § Different cultures
          Barriers to World Trade
► Three   major barriers to world trade
  § 1.        tariffs – tax placed on imported goods – major
    source of federal funds until early 1900s – raise price of
    foreign goods to protect domestic goods
  § 2.        import quota – restriction imposed on the
    number of units of a particular good that can be
    brought into the country (sugar, shoes, & clothes
  § 3.        embargo – complete restriction on the import or
    export of a particular good – often they are instituted
    for political reasons
  Arguments Against Free Trade
► Protectionists  – people who argue for trade
  restrictions to protect domestic industries
► 1. Job Security – jobs lost if foreign competitors
  sell products for less
► 2. National Economic Security – certain industries
  are crucial to national economy such as oil, steel,
► 3. Infant Industries – protection needed for new
  infant industries until it can become strong enough
  to compete in the world market
       Arguments for Free Trade
► 1.  Improved Products – competition forces
  a country to improve productivity and
  technology which raises the standard of
► 2. Export Industries – millions in the U.S.
  are employed due to exports
► 3. Specialization & Comparative Advantage
  – allows countries to take advantage of
  what they are good at producing
           Trade Agreements
► GATT   – General Agreement on Tariffs & Trade –
  trade agreements made with many countries after
► WTO – World Trade Organization – over 130
  nations established in 1993 that replaced the
► NAFTA – North American Free Trade Agreement -
  controversial agreement between the U.S., Canada
  & Mexico
► EU – European Union – organization of European
  nations that encourages economic integration as a
  single market
Characteristics of Developing Nations
► Poorest Americans earn more than the
  average in the rest of the world.
► .5 the world’s population lives at the
  subsistence level (just enough to survive)
► 35 of 185 countries are considered
► Developed nations – nations with relatively
  high standards of living & economies based
  more on industry than agriculture
Characteristics of Developing Nations

► Developing   Nations – nations with little
  industrial development and relatively low
  standards of living.
► Per capita GDP is used to measure a
  nation’s prosperity.
► Developed nations have a GDP roughly
  between $12,000 and $29,000 per year
       5 Characteristics of Developing
► 1.  Low GDP – may have natural & human
  resources, but lack equipment, financing and
► 2. Agricultural Economy – subsistence agriculture
  – growing just enough food to take care of a
  family’s needs – no crops to support an industrial
► 3. Poor Health Conditions – malnutrition, few
  doctors or hospitals, little medicine & high infant
  mortality rate (death rate of infants during first
       5 Characteristics of Developing
► 4. Low Literacy Rate – percentage of
  people who are able to read and write. No
  $ to build schools & kids work. No people
  to work in professional jobs.
► 5. Rapid Population Growth – leads to lack
  of housing & food. U.S. growth rate is 1%.
  3.6% will double population in 20 years
         Weak Property Rights
► Lackof property rights limits ability to
 improve land and develop farms or
        The Process of Economic
► Three  stages of economic development
 1.   Agricultural
 2.   Manufacturing
 3.   Service Sector
Financing Economic Development
► Basic problem is financing necessary to
  provide the equipment and training to
  improve standard of living.
► Domestic saving is difficult because people
  are barely subsiding.
► Two basic outside sources of aid
  § 1.    Foreign investment
  § 2.    Foreign aid
           Foreign Investment
► Attracted  by low wages, few regulations and
  abundant raw materials
► Companies often set up branch offices
► Risks include
  § Political instability
  § Terrorism
  § Nationalization – placement of industries under
    government ownership
  § Some citizens resent control by foreign companies
                  Foreign Aid
► Foreign aid – money, goods and services given by
  governments and private organizations to help
  other nations and their citizens
► 3 Types
  § 1.      Economic assistance – loans and outright grants
    of money or equipment to other nations
  § 2.      Technical assistance – aid in the form of
    engineers, teacher and technicians to teach skills to
  § 3.      Military assistance – aid given to a nation’s
    armed forces
  § Other aid includes emergency assistance
               Foreign Aid
► U.S.  provided much aid to rebuild Europe
  after WW II.
► Today aid is sent throughout the world
► $8.1 billion in aid in 1998 which was a
  fraction of GDP compared to other nations.
► The U.N. and World Bank provide aid using
  American $
► IMF provides aid and many countries are
  defaulting on foreign loans.
                  Foreign Aid
► Foreign   aid is given for 3 reasons
  § 1.      Encourage international trade
  § 2.      Politics
  § 3.      Help protect a nation’s security (Israel)

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