INTERNATIONAL TRADE CHAPTER 18

INTERNATIONAL TRADECHAPTER 18BALANCE OF TRADECOMPARATIVE ADVANTAGEBARRIERS OF TRADE: EMBARGOS, TARIFFS & QUOTASTRADE ORGANIZATIONS: NAFTA, EU, & ASEANARGUMENTS AGAINST FREE TRADE?EXCHANGE RATESMAIN TOPICS Exports and Imports as a Percentage of U.S. Gross Domestic Product

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USA has a TRADE DEFICIT!Other have a TRADE SURPLUS!Exports, Imports and the Balance of TradeSWS 2009TRADE DEFICITTRADE SURPLUSIMPORTS > EXPORTS =IMPORTS < EXPORTS =Exports, Imports and the Balance of TradeCurrent Balance of TradeSWS 2009

INTERNATIONAL TRADE:WHY TRADE IN THE FIRST PLACE?SWS 2009

ADVANTAGES OF TRADECOMPARATIVE ADVANTAGE:The theory of Comparative Advantage explains why it can be beneficial for two countries to trade.A country may be able to produce more of an item because it trades with another country.Basically, since the country does not have to use resources to produce two goods for the nation, it can focus solely on one good and trade for the other good.EXAMPLES: USA (cars) and Costa Rica (fruits)Japan (electronics) and USA (raw materials)SWS 2009This is a theory.COMPARATIVE ADVANTAGE:The theory of Comparative Advantage explains why it can be beneficial for two countries to trade.Before-SpecializationDVD PlayersPersonal ComputersUK205Japan4020Total Output6025

SWS 2009ADVANTAGES OF TRADECOMPARATIVE ADVANTAGE:The theory of Comparative Advantage explains why it can be beneficial for two countries to trade.After-SpecializationDVD PlayersPersonal ComputersUK400Japan2428Total Output6428

SWS 2009ADVANTAGES OF TRADECOMPARATIVE ADVANTAGE:The theory of Comparative Advantage explains why it can be beneficial for two countries to trade.After-TradeDVD PlayersPersonal ComputersUK226Japan4222Total Output6428

186SWS 2009ADVANTAGES OF TRADECOMPARATIVE ADVANTAGE:Before-SpecializationDVD PlayersPersonal ComputersUK205Japan4020Total Output6025

After-TradeDVD PlayersPersonal ComputersUK226Japan4222Total Output6428

SWS 2009ADVANTAGES OF TRADEABSOLUTE ADVANTAGE:A country has an Absolute Advantage if it can produce MORE of the good than another country can, with less resources.

EXAMPLE: France can produce 10 liters of wine in 30 hours. Italy can produce 10 liters of wine in 20 hours.Italy has an absolute advantage over France.

EXAMPLE: Philippines can produce clothing with less resources (money) used than the USA.Philippines has an absolute advantage over the USA in clothing production.SWS 2009ADVANTAGES OF TRADEThis is a statement!WHY WE TRADE SUMMARYThere are two ways to compare the ability of two countries that produce a good.

The country that can produce a good with a smaller quantity of inputs has an absolute advantage.

When two countries both produce items for the propose of trading with each other and this results in a less opportunity cost due to specialization, these countries have a comparative advantage.

SWS 20093 BARRIERS TO INTERNATIONAL TRADE

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1.) TARIFFS:A tariff is a taxed placed on imports (goods coming into the country).It must be paid before goods can be taken of a ship. (makes foreign products more expensive)Good source of income for government. So if the government wants to PROTECT DOMESTIC (US) businesses, what should it do to this tariff?ANSWER: They should increase it because this makes it LESS PROFITABLE buying from oversea producers. Very Dangerous!

US consumers of Foreign productsUS producers & consumers will be more likely to get goods from DOMESTIC (USA) PRODUCERS.SWS 2009INTERNATIONAL TRADE BARRIERSThe down-side: Who is hurt by tariffs?This action by the government is also known as a PROTECTIONIST TRADE POLICY2.) QUOTA: (or maximum amount)A quota as the same effect on imports.Instead of imposing a tax on imports the government sets a LOW quota on imports/exports.So, only a limited amount of imports can come into/out of the country.So if the government wants to PROTECT DOMESTIC businesses, what should it do to this quota?ANSWER: They should decrease it because this makes a limited amount of imports in the country, which will increase the price of those imports. Very Dangerous!SWS 2009INTERNATIONAL TRADE BARRIERSThis action by the government is also known as a PROTECTIONIST TRADE POLICY

Other Barriers to Trade:OPEC: Organization of Petroleum Exporting CountriesCartel Members: Algeria, Angola, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, UAE, and Venezuela

INTERNATIONAL TRADE BARRIERSSWS 2009OPEC enforces Production Quotas on member countries.What would this do to the $ of oil when production quotas are set low and demand is high?INTERNATIONAL TRADE BARRIERSOPEC: Organization of Petroleum Exporting CountriesYearAdjusted for Inflation Price194617.26195821.83196620.06197439.77198095.50199228.81199815.35200127.29200328.10200436.05200550.64200661.08200767.232008145.75

Price is USD per barrel of oilSWS 2009173.) EMBARGOS:An embargo shuts down all imports from a country.Instead of imposing a tax on imports the government sets a quota (or maximum amount) on imports.So, only a limited amount of imports can come into the country.So if the government wants to PROTECT DOMESTIC businesses, should it enact an embargo?ANSWER: No because this will cause less competition since there are fewer imports, thus possibly increasing the price of domestic items. Americans will reduce spending and domestic businesses may suffer.SWS 2009INTERNATIONAL TRADE BARRIERSThis action by the government is also known as a PROTECTIONIST TRADE POLICYEXAMPLE: CUBA & USA

HOW TO PROMOTEFREE INTERNATIONAL TRADE?SWS 2009FREE INTERNATIONAL TRADEIn order to eliminate barriers to trade such as tariffs & quotas countries will establish trade organizations and charge less (or no) tariffs and set no quotas.Such as NAFTA North American Free Trade Agreement(Formed in 1993)

Whats the Next Big Thing?Free Trade Area of the Americas FTAA

MexicoCanadaUSASWS 2009Free Trade Area of the Americas: FTAAHaiti Honduras Jamaica Mexico Nicaragua

Antigua and Barbuda Bahamas Barbados Belize Bolivia Canada Colombia Costa Rica Dominica Dominican Republic Ecuador El Salvador Grenada Guatemala Guyana Panama Paraguay Peru Saint Kitts and Nevis Saint Lucia Saint Vincent and the Grenadines Suriname Trinidad and Tobago United States Uruguay All the above are countries that have expressed interest in the FTAA.SWS 2009FREE INTERNATIONAL TRADE

E.U. (European Union) is a trade organization.SWS 2009FREE INTERNATIONAL TRADEA.S.E.A.N is a trade organization.Association of Southeast Asian Nations

SWS 2009FREE INTERNATIONAL TRADEW.T.O is a trade organization.World Trade Organization

SWS 2009FREE INTERNATIONAL TRADEINTERNATIONAL TRADEWhat is the advantage of NAFTA or ASEAN?Free trade can increase the flow of goods from other countries, giving consumers more LOWER PRICE choices.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.Who is hurt by tariffs?Foreign companies that operate in the US (Nissan)US consumers who like foreign products (and also domestic products)

In-class QuestionsSWS 2009EXCHANGING CURRENCYSWS 2009

EXCHANGING CURRENCYEXCHANGE RATES:The exchange rate between two currencies shows how much one currency is worth in terms of the other. For example an exchange rate of 120 Japanese Yen to the U.S. Dollar means that 120 is worth the same as $1. How does this relationship affect trade?Over the course of one year, the Japanese Yen depreciates compared to the Euro. Which two groups of people would benefit the most from this occurrence?A European consumer of European goodsB Japanese consumers of European goods C European consumers of Japanese goodsD Japanese consumers of Japanese goodsEXAMPLE QUESTION:SWS 2009

EXCHANGE RATES:QUESTION: What country (America or Mexico) would benefit from a appreciated (strong) U.S. dollar?ANSWER: If the U.S. dollar is appreciated, this means that American goods and services are more expensive to Mexico. At the same time, making Mexican goods cheaper to U.S. consumers.So this decreases spending on U.S. goods and decreases American GDP. More US spending will go to the cheaper Mexican products because your money goes further in Mexico.MEXICO COULD BENEFIT!SWS 2009EXCHANGING CURRENCY

EXCHANGE RATES & THE STRONG DOLLAR PROBLEM What is a strong dollar?The value of the dollar is appreciating. ..or the value of the dollar rises compared to other currencies.or more foreign currency is necessary to purchase U.S. dollars. Who is aided by a strong US dollar?U.S. CONSUMERS because the prices of foreign goods and services are lower since the US Dollar goes further in terms of foreign currency. Who is hurt by a strong US dollar?U.S. PRODUCERS because they cant compete with lower-priced foreign products.U.S. EXPORTERS because they cant compete with lower-priced imports.What we find is that a WEAK dollar can be a good thing.SWS 2009EXCHANGING CURRENCY

Strong US dollars would lower fuel prices, but more money would flow out of the US.

Weak US dollars would promote foreign investment in America and more countries would buy US products.

CALCULATING EXCHANGE RATES

Lets say you traveled to Japan and took $500 in U.S. currency. When you exchanged the $500 in Japan, you would receive about$500 x 118.96 = 59,480 Lets say you traveled to US and took 550 pounds. When you exchanged the 550 pounds in US, you would receive about550 x 2.0292 = $1116.06SWS 2009

Lets say you traveled to Japan and took 8000 pounds. When you exchanged the 8000 in Japan, you would receive about8000 x 2.0292 = $16,233$16,233 x 118.96 = 1,931,077 SWS 2009CALCULATING EXCHANGE RATES

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?6,000 x .0084 = $50.00

Average Price in US dollars$130.00SWS 2009CALCULATING EXCHANGE RATESSIMPLE FORMULA: PRICE OF FOREIGN ITEM

EXCHANGE RATE COMPARED TO USDColombian PesoGood or ServicePrice in Foreign CurrencyUSD in Foreign CurrencyPrice in U.S. DollarsNike Shoes95,000 Colombian pesos2,362.28Jeans45,000 Colombian pesos2,362.2810k Gold Necklace8,000 Colombian pesos2,362.28Wisdom Teeth Removal420,000 Colombian pesos2,362.285500 total square foot Home in downtown Colombia with pool1,016,750,000 Colombian pesos 2,362.28SWS 2009CALCULATING EXCHANGE RATES$40.16$19.05$3.89$177.82$430,461.47Good/ServicePrice in foreign currencyForeign Currency in USDPrice in U.S. DollarsAverage 4-Star Hotel(taken from 5 different resorts)100 Egyptian Pounds.18Average Beach-access Hotel(taken from 3 different resorts)500 Morocco Dirhams.113Milk in Britain (gal)3.5 Pounds1.47Average Gallon of Gas in Europe5.5 Euros1.25Ipod Video 80GB320 Euros1.25Sony 32 LCD Flat Panel HDTV25,000 Japanese Yen.01Monthly Rent 2 bedroom Apartment(Downtown Tokyo)850,000 Japanese Yen.011 Mexican Acre of Land(1 mile from cozumel)80,000 Mexican Pesos.074Iran Gallon of Gas(4 liters in a gallon)3,200 Iran Rails.000098CALCULATING EXCHANGE RATES$18.00$56.50$5.14$6.87$400$250$8500$5920$0.32