How much is a cup of Starbucks coffee in

London?On Apr 25, 2014

1.00 EUR =1.383311 USD

At Starbucks in Canton, GA a Tall Pike w/ room is $1.75.

$1.75 x 1.383311= $2.42In London, England it would cost $2.42….OUCH!

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INTERNATIONAL INTERNATIONAL TRADETRADE

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CHAPTER 18CHAPTER 18

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• 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. Exports and Imports as a Percentage of U.S. Gross Domestic ProductGross Domestic Product

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Exports, Imports and the Balance of TradeExports, Imports and the Balance of Trade

TRADE DEFICIT

TRADE SURPLUS

IMPORTS > EXPORTS =

IMPORTS < EXPORTS =Balance of Trade is similar to Balance of Trade is similar to

Balance of PaymentsBalance of PaymentsSWS 2009

INTERNATIONAL INTERNATIONAL TRADE:TRADE:

WHY TRADE IN THE FIRST WHY TRADE IN THE FIRST PLACE?PLACE?

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WHY WE TRADEWHY WE TRADEWho is the best producer? There are two ways to

compare the ability of two countries that produce a good. Absolute advantage: The country that can produce a good

with a smaller quantity of inputs (resources). That country is the best at producing….○ Ex- rum on the islands, oil

Comparative advantage: A country can produce a good at a lower opportunity cost than anyone else. Do not compare absolute advantages…compare opportunity costs.

ex- lawn mower vs. car wash business

Who is the best producer? There are two ways to compare the ability of two countries that produce a good. Absolute advantage: The country that can produce a good

with a smaller quantity of inputs (resources). That country is the best at producing….○ Ex- rum on the islands, oil

Comparative advantage: A country can produce a good at a lower opportunity cost than anyone else. Do not compare absolute advantages…compare opportunity costs.

ex- lawn mower vs. car wash business

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Comparative and Absolute Advantage

Pre-Specialization CD Players Personal Computers

UK 2,000 500

Japan 4,000 2,000

Total Output 6,000 2,500

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Post-Specialization CD Players Personal Computers

UK 4,000 0

Japan 2.400 2,800

Total Output 6,400 2,800

• To identify which country should specialize in a particular product we need to analyze the opportunity cost for each country.

• For example, if the UK shifts more resources into higher output of personal computers, the opportunity cost of each extra PC is four CD players.

• For Japan the same decision has an opportunity cost of two CD players.

• Therefore, Japan has a comparative advantage in PCs.• If Japan reallocated resources to CD players, the opportunity cost of

one extra CD player is 1/2 of a PC. For the UK the opportunity cost is 1/4 of the PC.

• Thus the UK has the comparative advantage in CD players.

BARRIERS TO BARRIERS TO INTERNATIONAINTERNATIONA

L TRADEL TRADE

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TARIFFS:TARIFFS: A A tarifftariff is a taxed placed on is a taxed placed on importsimports

(goods coming into the country).(goods coming into the country).

It must be paid before goods can be taken It must be paid before goods can be taken off a ship. off a ship. (makes foreign products more (makes foreign products more expensive)expensive)

Good source of income for government. Good source of income for government.

So if the government wants to So if the government wants to PROTECT DOMESTIC PROTECT DOMESTIC (US) businesses(US) businesses, what should it do to this tariff?, what should it do to this tariff?ANSWERANSWER:: They should They should increase itincrease it because this makes it because this makes it LESS LESS

PROFITABLEPROFITABLE buying from oversea producers. buying from oversea producers. Very Very Dangerous!Dangerous!

This action by the government is known as a PROTECTIONIST TRADE

POLICY

The down-side: Who is hurt by

tariffs?

US consumers of Foreign products

So US producers & consumers will be more likely to get goods from So US producers & consumers will be more likely to get goods from DOMESTIC (USA)_PRODUCERS.DOMESTIC (USA)_PRODUCERS.

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INTERNATIONAL TRADE INTERNATIONAL TRADE BARRIERSBARRIERS

QUOTA:QUOTA:

A A quotaquota- Instead of imposing a tax on - Instead of imposing a tax on imports the government sets a quota imports the government sets a quota (or maximum amount)(or maximum amount) on on imports/exports.imports/exports.

So if the government wants to So if the government wants to PROTECT DOMESTIC PROTECT DOMESTIC businessesbusinesses, what should it do to this quota?, what should it do to this quota?

ANSWER:ANSWER: They should They should decrease itdecrease it because this makes a limited amount of because this makes a limited amount of imports in the country, which will imports in the country, which will increase the price of those imports. increase the price of those imports. Very Very Dangerous!Dangerous!

This action by the government is also

known as a PROTECTIONIST TRADE

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INTERNATIONAL TRADE INTERNATIONAL TRADE BARRIERSBARRIERS

EMBARGOSEMBARGOS:: An An embargoembargo shuts down shuts down

all imports from a all imports from a country.country.

• EXAMPLE: Iran & North Korea with EXAMPLE: Iran & North Korea with the U.Sthe U.S

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INTERNATIONAL TRADE INTERNATIONAL TRADE BARRIERSBARRIERS

Other Barriers to Trade:Other Barriers to Trade:

OPEC: Organization of Petroleum Exporting CountriesOPEC: Organization of Petroleum Exporting Countries

CartelCartel Members: Algeria, Angola, Indonesia, Iran, Iraq, Kuwait, Members: Algeria, Angola, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, UAE, and Venezuela Libya, Nigeria, Qatar, Saudi Arabia, UAE, and Venezuela

INTERNATIONAL TRADE INTERNATIONAL TRADE BARRIERSBARRIERS

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FREE FREE INTERNATIONAL INTERNATIONAL

TRADETRADE

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FREE INTERNATIONAL FREE INTERNATIONAL TRADETRADE

In order to eliminate In order to eliminate barriers to tradebarriers to trade such as such as tariffstariffs & & quotasquotas countries will countries will establish trade organizations and charge less establish trade organizations and charge less (or no) tariffs and set no quotas.(or no) tariffs and set no quotas.

Such as Such as NAFTANAFTA

North American Free Trade North American Free Trade AgreementAgreement

(Formed in 1993)(Formed in 1993)

1.1. MexicoMexico

2.2. CanadaCanada

3.3. USAUSASWS 2009

E.U. (European Union) is a trade organization.E.U. (European Union) is a trade organization.

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FREE INTERNATIONAL FREE INTERNATIONAL TRADETRADE

A.S.E.A.NA.S.E.A.N is a trade organization. is a trade organization.Association of Southeast Asian NationsAssociation of Southeast Asian Nations

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FREE INTERNATIONAL FREE INTERNATIONAL TRADETRADE

INTERNATIONAL INTERNATIONAL TRADETRADE

1. What is the advantage of free trade?• It can increase the flow of goods from countries, giving

consumers more LOWER PRICE choices.

2. 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.

3. Who is hurt by tariffs?

• US consumers who like foreign products b/c they will be more expensive due to tariffs

In-class QuestionsIn-class Questions

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EXCHANGING EXCHANGING

CURRENCY CURRENCY ( …Starbucks)

( …Starbucks)

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EXCHANGING CURRENCYEXCHANGING CURRENCYEXCHANGE RATES:EXCHANGE RATES:

The The exchange rateexchange rate between two currencies shows how much one between two currencies shows how much one currency is worth in terms of the other. currency is worth in terms of the other.

Currency can Currency can appreciateappreciate or or depreciatedepreciate in value. in value.

Example: The exchange for the Japanese Yen to the U.S. Example: The exchange for the Japanese Yen to the U.S. Dollar is ¥120 = $1.Dollar is ¥120 = $1. This means the dollar is worth more than the Yen. How does this relationship affect trade?How does this relationship affect trade?

Over the course of one year, the Japanese Yen Over the course of one year, the Japanese Yen depreciatesdepreciates compared compared to the Euro.to the Euro. Who would benefit the most from this occurrence?Who would benefit the most from this occurrence?

A A European consumer of European goodsEuropean consumer of European goodsB B Japanese consumers of European goodsJapanese consumers of European goods C C European consumers of Japanese goodsEuropean consumers of Japanese goodsD D Japanese consumers of Japanese goodsJapanese consumers of Japanese goods

EXAMPLE QUESTION:EXAMPLE QUESTION:

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CALCULATING EXCHANGE CALCULATING EXCHANGE RATESRATES

Let’s say you traveled to Japan and took $500 in U.S. Let’s say you traveled to Japan and took $500 in U.S. currency. When you exchanged the $500 in Japan, you would currency. When you exchanged the $500 in Japan, you would receive about…receive about…

$500 x 118.96 = 59,480 ¥$500 x 118.96 = 59,480 ¥

Let’s say you traveled to US and took £550 pounds. When you Let’s say you traveled to US and took £550 pounds. When you exchanged the £550 pounds in US, you would receive about…exchanged the £550 pounds in US, you would receive about…

£550 x 2.0292 = $1116.06£550 x 2.0292 = $1116.06

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Price of a D.S. in Japan is about 6,000 yen. What would be the 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?price if you could buy it in US dollars?

6,000¥ x .0084 = $50.006,000¥ x .0084 = $50.00

But the average price in the US isBut the average price in the US is$130.00. Why the discrepancy? $130.00. Why the discrepancy?

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CALCULATING EXCHANGE CALCULATING EXCHANGE RATESRATES

EXCHANGE RATES & THE EXCHANGE RATES & THE STRONG DOLLARSTRONG DOLLAR PROBLEM PROBLEM

1)1) What is a What is a “strong dollar”“strong dollar”:: The value of the dollar is The value of the dollar is appreciatingappreciating. .

..or the value of the dollar ..or the value of the dollar risesrises compared to compared to other currencies.other currencies.

……oror moremore foreign currency is necessary to foreign currency is necessary to purchase U.S. dollars.purchase U.S. dollars.

2)2) Who is aided by a Who is aided by a strong US dollarstrong US dollar?? U.S. CONSUMERSU.S. CONSUMERS because the prices of because the prices of

foreign goods and services are foreign goods and services are lowerlower since since the US Dollar goes further in terms of foreign the US Dollar goes further in terms of foreign currency.currency.3)3) Who is hurt by a Who is hurt by a strong US dollarstrong US dollar??

U.S. PRODUCERSU.S. PRODUCERS because they can’t because they can’t compete with lower-priced foreign compete with lower-priced foreign products.products.

U.S. EXPORTERSU.S. EXPORTERS because they can’t because they can’t compete with lower-priced imports.compete with lower-priced imports.

What we find is that a WEAK dollar can be a good thing for businesses.SWS 2009

EXCHANGING CURRENCYEXCHANGING CURRENCY

EXCHANGE RATES:EXCHANGE RATES:

QUESTION:QUESTION: What country (America or Mexico) would What country (America or Mexico) would benefit from a benefit from a appreciatedappreciated (strong)(strong) U.S. dollar? U.S. dollar?

ANSWER:ANSWER: If the U.S. dollar is If the U.S. dollar is appreciatedappreciated, this means that , this means that American goods and services are more expensive American goods and services are more expensive to Mexico. At the same time, making Mexican to Mexico. At the same time, making Mexican goods goods cheapercheaper to U.S. consumers. to U.S. consumers.

So this decreases spending on U.S. goods and decreases So this decreases spending on U.S. goods and decreases American GDP. American GDP.

More US spending will go to the cheaper Mexican products More US spending will go to the cheaper Mexican products because your money goes further in Mexico.because your money goes further in Mexico.

MEXICO COULD BENEFIT!MEXICO COULD BENEFIT!SWS 2009

EXCHANGING CURRENCYEXCHANGING CURRENCY

STUDY FOR THE TESTSTUDY FOR THE TEST

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