Standard 3Understand the fundamental

concepts and interrelationships of the United States economy in the international marketplace

SS.912.E.3.3SS.912.E.3.3Discuss the effect of barriers to trade Discuss the effect of barriers to trade

and why nations sometimes erect and why nations sometimes erect barriers to trade or establish free barriers to trade or establish free

trade zones trade zones

Before we can fully understand the Before we can fully understand the impact of trade barriers, we have to impact of trade barriers, we have to understand the foreign exchange understand the foreign exchange

market and the international flow of market and the international flow of goods, services, currency, and capitalgoods, services, currency, and capital

Has the US “lost” or “given away” Has the US “lost” or “given away” our manufacturing?our manufacturing?

Absolutely not, we are still world-class Absolutely not, we are still world-class manufacturersmanufacturers

If we choose not to manufacturer, we still If we choose not to manufacturer, we still do a lot of designing and engineering and do a lot of designing and engineering and let others actually manufacturelet others actually manufacture

Examples: Nike and McDonald’sExamples: Nike and McDonald’s

The trade sector is a growing portion of GDPThe trade sector is a growing portion of GDP

Imports

Exports

Think carefully about the Think carefully about the ramificationsramifications

GDP = Consumption + Investment + GDP = Consumption + Investment + Government Purchases + Exports – Government Purchases + Exports – ImportsImports

If Imports = (-18%), then the rest, 82% If Imports = (-18%), then the rest, 82% must come from the US!must come from the US!

If GDP is about $14 trillion, 82% is a LOT If GDP is about $14 trillion, 82% is a LOT of domestic production!!!!!!!of domestic production!!!!!!!

Graph of surplus:Graph of surplus:

Graph of shortage:Graph of shortage:

The foreign exchange market The foreign exchange market coordinates coordinates allall international international

exchangesexchanges

Video: DodgeballVideo: Dodgeball

Quantity offoreign currency

Dollar price(of foreign currency)

S (exports + capital inflow)

D (imports + capital outflow)

Q

P1

Depreciationof dollar

Appreciationof dollar

Foreign Exchange MarketForeign Exchange Market

Dollar price (of foreign currency) = how much Dollar price (of foreign currency) = how much foreign currency you get for $1foreign currency you get for $1

Another way to think about foreign Another way to think about foreign exchangeexchange

““Regular” price is an exchange rate: Regular” price is an exchange rate: goods/$goods/$– Example: exchange $3.00 for Chick-fil-A Example: exchange $3.00 for Chick-fil-A

sandwichsandwich

Dollar price = foreign currency/$1Dollar price = foreign currency/$1

Example: £1/$1 then £2/$1Example: £1/$1 then £2/$1– $1 now buys twice as much in England$1 now buys twice as much in England

Foreign exchange terms:Foreign exchange terms:The dollar The dollar appreciatesappreciates when you can buy when you can buy more foreign goods with the same $1more foreign goods with the same $1– The dollar is referred to as strongThe dollar is referred to as strong– Americans import more, export lessAmericans import more, export less

The dollar The dollar depreciatesdepreciates when you can buy when you can buy less foreign goods with the same $1less foreign goods with the same $1– The dollar is referred to as weakThe dollar is referred to as weak– Americans import less, export moreAmericans import less, export more

If the dollar appreciates against another If the dollar appreciates against another currency, then that currency depreciates currency, then that currency depreciates against the dollaragainst the dollar

Canadian Dollar

Mexican Peso

Japanese Yen

South Korean Won

Key relationship:Key relationship:

A trade deficit (imports > exports) = inflow A trade deficit (imports > exports) = inflow of capital (foreigners purchasing US of capital (foreigners purchasing US financial and real assets > Americans financial and real assets > Americans purchasing foreign assets)purchasing foreign assets)

A trade surplus (exports > imports) = A trade surplus (exports > imports) = outflow of capital (Americans purchasing outflow of capital (Americans purchasing foreign assets > foreigners purchasing US foreign assets > foreigners purchasing US assets) assets)

Trade Balance

Capital Outflow

Capital Inflow

Video: Stossel 2011 Economics of trade Video: Stossel 2011 Economics of trade deficitsdeficits

Trade BarriersTrade Barriers

Main point: Generally, any trade restriction will Main point: Generally, any trade restriction will reduce quantity, increase consumer prices, and reduce quantity, increase consumer prices, and create a deadweight loss (elimination of gains create a deadweight loss (elimination of gains from trade).from trade).

A tariff is a tax on imports (it raises the price so A tariff is a tax on imports (it raises the price so quantity demanded will fall); it reduces imports quantity demanded will fall); it reduces imports and generates revenue for the governmentand generates revenue for the government

A quota is a limit on the physical units that can A quota is a limit on the physical units that can be imported; it generates no revenuebe imported; it generates no revenue

Video: Stossel are boycotts of sweatshop Video: Stossel are boycotts of sweatshop products helpful?products helpful?

So, why does the US impose trade So, why does the US impose trade restrictions?restrictions?

To “protect” certain groups, which gave To “protect” certain groups, which gave rise to the term “protectionism”rise to the term “protectionism”

The protected group is helped while others The protected group is helped while others in the US economy are hurtin the US economy are hurt

A country cannot simultaneously reduce A country cannot simultaneously reduce imports and increase exports for an imports and increase exports for an

extended period of timeextended period of time

Imports

Exports

Huge pointHuge point (that most people (that most people don’t understand):don’t understand):

Our imports give purchasing power to Our imports give purchasing power to foreigners. They, in turn, purchase our foreigners. They, in turn, purchase our exports.exports.

If we limited imports, we would limit the If we limited imports, we would limit the income of foreigners and they wouldn’t be income of foreigners and they wouldn’t be able to buy as many of our exports.able to buy as many of our exports.

That’s why imports and exports are That’s why imports and exports are positively relatedpositively related

Here are more accurate statements Here are more accurate statements about free trade:about free trade:

Free trade is harmful to some Americans Free trade is harmful to some Americans but is helpful to Americabut is helpful to America

More people are helped by free trade than More people are helped by free trade than are hurt by free trade (i.e. America are hurt by free trade (i.e. America experiences a net gain)experiences a net gain)

Video: Stossel does outsourcing cost Video: Stossel does outsourcing cost Americans jobs?Americans jobs?

A study done in 2004 by Professor Matthew J. A study done in 2004 by Professor Matthew J. Slaughter at Dartmouth University found that Slaughter at Dartmouth University found that outsourcing is actually a way of increasing the outsourcing is actually a way of increasing the number of American jobs. He found that number of American jobs. He found that employment increased both for American firms employment increased both for American firms involved in outsourcing but also for their affiliates involved in outsourcing but also for their affiliates in other countries. While employment in foreign in other countries. While employment in foreign affiliates rose by 2.8 million jobs, employment in affiliates rose by 2.8 million jobs, employment in the U.S. parent firms rose even more --by 5.5 the U.S. parent firms rose even more --by 5.5 million jobs. In other words, for every one job million jobs. In other words, for every one job outsourced, U.S. firms created nearly two jobs in outsourced, U.S. firms created nearly two jobs in the United States. the United States.

Graph 1: Total employment has increased Graph 1: Total employment has increased while exports and imports have increasedwhile exports and imports have increased

Employment

Imports

Exports

Graph 2: The unemployment rate is inversely Graph 2: The unemployment rate is inversely related to exports and importsrelated to exports and imports

Unemployment Rate

Imports

Exports

Graph 3: An increase in the trade sector has Graph 3: An increase in the trade sector has not caused inflation not caused inflation

Inflation Rate

Imports

Exports

Graph 4: Per Capita Income has increased while Graph 4: Per Capita Income has increased while both exports and imports have increasedboth exports and imports have increased

Per Capita Income

Imports

Exports

Arguments for tariffs that may, in Arguments for tariffs that may, in principle, have some merit:principle, have some merit:

1)1) National securityNational security

2)2) Infant industryInfant industry

Focus: Understanding Economics in Civics and Focus: Understanding Economics in Civics and GovernmentGovernment

Lesson 17 Making Trade-Offs in Policy Decisions: The Lesson 17 Making Trade-Offs in Policy Decisions: The Patriot ActPatriot Act

The Great Economics Mysteries BookThe Great Economics Mysteries BookChapter 3 Lesson 8 Why Would Mexico Want to Trade with Chapter 3 Lesson 8 Why Would Mexico Want to Trade with

the United States and Canada?the United States and Canada?

Focus: Understanding Economics in Civics and Focus: Understanding Economics in Civics and GovernmentGovernment

Lesson 20 Economic Freedom and RightsLesson 20 Economic Freedom and Rights

Video: Stossel 2011 International trade-Video: Stossel 2011 International trade-criticisms and responsescriticisms and responses