The Benefits of World TradeThe Benefits of World Trade

►13% of GDP is from imports13% of GDP is from imports

► Imports – goods bought from other Imports – goods bought from other countries for domestic usecountries for domestic use

►Chief imports – oil, bauxite, raw Chief imports – oil, bauxite, raw materials, electronics, tvs, coffee, materials, electronics, tvs, coffee, chocolate, & pepperchocolate, & pepper

Benefits of TradeBenefits of Trade

►Exports – goods sold to other countriesExports – goods sold to other countries►Export business employs many AmericansExport business employs many Americans►Chief exports – technology, food, & Chief exports – technology, food, &

entertainmententertainment►Nations differ in the types and amount of Nations differ in the types and amount of

factors of productionfactors of production►US is highly skilled and technological US is highly skilled and technological

compared to other nations (India & compared to other nations (India & Malaysia)Malaysia)

Absolute AdvantageAbsolute Advantage

► Absolute Advantage – ability of one country, Absolute Advantage – ability of one country, using the same quantity of resources as using the same quantity of resources as another, to produce a particular product at a another, to produce a particular product at a lower absolute costlower absolute cost

► Example – bananas grown in Brazil vs. Example – bananas grown in Brazil vs. FranceFrance

► Specialization – concept that a nation should Specialization – concept that a nation should produce & export a limited assortment of produce & export a limited assortment of goods for which it is particularly suited in goods for which it is particularly suited in order to remain profitableorder to remain profitable

Financing World TradeFinancing World Trade

►Different countries use different Different countries use different currencies.currencies.

►Exchange rate – the price of one Exchange rate – the price of one nation’s currency in terms of another nation’s currency in terms of another nation’s currency.nation’s currency.

►Foreign exchange markets – markets Foreign exchange markets – markets dealing in buying and selling foreign dealing in buying and selling foreign currency for businesses that want to currency for businesses that want to import goods from other countriesimport goods from other countries

Financing World TradeFinancing World Trade

► Fixed rate of exchange – system under which a Fixed rate of exchange – system under which a national government sets the value of its currency national government sets the value of its currency in relation to a single standardin relation to a single standard

► IMF – International Monetary Fund – offers monetary IMF – International Monetary Fund – offers monetary advice and provides loans to developing nationsadvice and provides loans to developing nations

► Fixed rate allows importers and exporters to know Fixed rate allows importers and exporters to know value of currencyvalue of currency

► Devaluation – lowering a currencies value in Devaluation – lowering a currencies value in relation to other currencies by government orderrelation to other currencies by government order

► Fixed rate was impractical due to constant changes Fixed rate was impractical due to constant changes in international economic climatein international economic climate

Financing World TradeFinancing World Trade

►Flexible exchange rate – arrangement Flexible exchange rate – arrangement in which the forces of supply & demand in which the forces of supply & demand are allowed to set the price of various are allowed to set the price of various currenciescurrencies

►Exchange rate is determined by supply Exchange rate is determined by supply and demand.and demand.

►Depreciation – fall in the price of a Depreciation – fall in the price of a currency through the action of supply currency through the action of supply and demandand demand

Financing World TradeFinancing World Trade

►Balance of trade – difference between the Balance of trade – difference between the value of a nation’s imports and exportsvalue of a nation’s imports and exports

►Weak currency = more exports – Weak currency = more exports – countries can buy more goods from a countries can buy more goods from a country with weak currency because their country with weak currency because their money exchanges at a higher ratemoney exchanges at a higher rate

►Strong currency = more imports – strong Strong currency = more imports – strong currency will allow a country to buy more currency will allow a country to buy more goods from countries with weak goods from countries with weak currenciescurrencies

Financing World TradeFinancing World Trade

►Trade deficit – when the value of Trade deficit – when the value of goods coming into a country is greater goods coming into a country is greater than those leaving the countrythan those leaving the country

►U.S. has had trade deficits most years U.S. has had trade deficits most years since the early 1970ssince the early 1970s

►Deficit means foreigners are investing Deficit means foreigners are investing in a countryin a country

►Dollars are in demand because of their Dollars are in demand because of their stabilitystability

Restrictions on World TradeRestrictions on World Trade

►Challenges to international trade:Challenges to international trade: Different currenciesDifferent currencies Different languagesDifferent languages Different culturesDifferent cultures

Barriers to World TradeBarriers to World Trade

► Three major barriers to world tradeThree major barriers to world trade 1.1. tariffs – tax placed on imported goods – tariffs – tax placed on imported goods –

major source of federal funds until early 1900s – major source of federal funds until early 1900s – raise price of foreign goods to protect domestic raise price of foreign goods to protect domestic goodsgoods

2.2. import quota – restriction imposed on the import quota – restriction imposed on the number of units of a particular good that can be number of units of a particular good that can be brought into the country (sugar, shoes, & clothesbrought into the country (sugar, shoes, & clothes

3.3. embargo – complete restriction on the embargo – complete restriction on the import or export of a particular good – often they import or export of a particular good – often they are instituted for political reasonsare instituted for political reasons

Arguments Against Free Arguments Against Free TradeTrade

► Protectionists – people who argue for trade Protectionists – people who argue for trade restrictions to protect domestic industriesrestrictions to protect domestic industries

► 1.1. Job Security – jobs lost if foreign Job Security – jobs lost if foreign competitors sell products for lesscompetitors sell products for less

► 2.2. National Economic Security – certain National Economic Security – certain industries are crucial to national economy industries are crucial to national economy such as oil, steel, etc.such as oil, steel, etc.

► 3.3. Infant Industries – protection needed Infant Industries – protection needed for new infant industries until it can become for new infant industries until it can become strong enough to compete in the world strong enough to compete in the world marketmarket

Arguments for Free TradeArguments for Free Trade

►1.1. Improved Products – competition Improved Products – competition forces a country to improve forces a country to improve productivity and technology which productivity and technology which raises the standard of livingraises the standard of living

►2.2. Export Industries – millions in the Export Industries – millions in the U.S. are employed due to exportsU.S. are employed due to exports

►3.3. Specialization & Comparative Specialization & Comparative Advantage – allows countries to take Advantage – allows countries to take advantage of what they are good at advantage of what they are good at producingproducing

Trade AgreementsTrade Agreements

►GATT – General Agreement on Tariffs & GATT – General Agreement on Tariffs & Trade – trade agreements made with many Trade – trade agreements made with many countries after WW IIcountries after WW II

►WTO – World Trade Organization – over 130 WTO – World Trade Organization – over 130 nations established in 1993 that replaced nations established in 1993 that replaced the GATTthe GATT

►NAFTA – North American Free Trade NAFTA – North American Free Trade Agreement - controversial agreement Agreement - controversial agreement between the U.S., Canada & Mexicobetween the U.S., Canada & Mexico

► EU – European Union – organization of EU – European Union – organization of European nations that encourages economic European nations that encourages economic integration as a single marketintegration as a single market

Characteristics of Developing Characteristics of Developing NationsNations

►Poorest Americans earn more than the Poorest Americans earn more than the average in the rest of the world.average in the rest of the world.

► .5 the world’s population lives at the .5 the world’s population lives at the subsistence level (just enough to survive)subsistence level (just enough to survive)

►39 of 201 countries are considered 39 of 201 countries are considered developeddeveloped

►Developed nations – nations with Developed nations – nations with relatively high standards of living & relatively high standards of living & economies based more on industry than economies based more on industry than agricultureagriculture

Characteristics of Developing Characteristics of Developing NationsNations

►Developing Nations – nations with little Developing Nations – nations with little industrial development and relatively industrial development and relatively low standards of living.low standards of living.

►Per capita GDP is used to measure a Per capita GDP is used to measure a nation’s prosperity.nation’s prosperity.

►Developed nations have a GDP roughly Developed nations have a GDP roughly between $12,000 and $29,000 per between $12,000 and $29,000 per yearyear

5 Characteristics of Developing 5 Characteristics of Developing NationsNations

► 1.1. Low GDP – may have natural & human Low GDP – may have natural & human resources, but lack equipment, financing resources, but lack equipment, financing and knowledgeand knowledge

► 2.2. Agricultural Economy – subsistence Agricultural Economy – subsistence agriculture – growing just enough food to agriculture – growing just enough food to take care of a family’s needs – no crops to take care of a family’s needs – no crops to support an industrial workforcesupport an industrial workforce

► 3.3. Poor Health Conditions – malnutrition, Poor Health Conditions – malnutrition, few doctors or hospitals, little medicine & few doctors or hospitals, little medicine & high infant mortality rate (death rate of high infant mortality rate (death rate of infants during first year)infants during first year)

5 Characteristics of Developing 5 Characteristics of Developing NationsNations

►4.4. Low Literacy Rate – percentage of Low Literacy Rate – percentage of people who are able to read and write. people who are able to read and write. No $ to build schools & kids work. No No $ to build schools & kids work. No people to work in professional jobs.people to work in professional jobs.

►5.5. Rapid Population Growth – leads Rapid Population Growth – leads to lack of housing & food. U.S. growth to lack of housing & food. U.S. growth rate is 1%. 3.6% will double rate is 1%. 3.6% will double population in 20 yearspopulation in 20 years

Weak Property RightsWeak Property Rights

►Lack of property rights limits ability to Lack of property rights limits ability to improve land and develop farms or improve land and develop farms or businesses.businesses.

The Process of Economic The Process of Economic DevelopmentDevelopment

►Three stages of economic Three stages of economic developmentdevelopment

1.1. AgriculturalAgricultural

2.2. ManufacturingManufacturing

3.3. Service SectorService Sector

Financing Economic Financing Economic DevelopmentDevelopment

►Basic problem is financing necessary Basic problem is financing necessary to provide the equipment and training to provide the equipment and training to improve standard of living.to improve standard of living.

►Domestic saving is difficult because Domestic saving is difficult because people are barely subsiding.people are barely subsiding.

►Two basic outside sources of aidTwo basic outside sources of aid 1.1. Foreign investmentForeign investment 2.2. Foreign aidForeign aid

Foreign InvestmentForeign Investment

► Attracted by low wages, few regulations and Attracted by low wages, few regulations and abundant raw materialsabundant raw materials

► Companies often set up branch officesCompanies often set up branch offices► Risks includeRisks include

Political instabilityPolitical instability TerrorismTerrorism Nationalization – placement of industries under Nationalization – placement of industries under

government ownershipgovernment ownership Some citizens resent control by foreign Some citizens resent control by foreign

companiescompanies

Foreign AidForeign Aid

► Foreign aid – money, goods and services Foreign aid – money, goods and services given by governments and private given by governments and private organizations to help other nations and their organizations to help other nations and their citizenscitizens

► 3 Types3 Types 1.1. Economic assistance – loans and outright Economic assistance – loans and outright

grants of money or equipment to other nationsgrants of money or equipment to other nations 2.2. Technical assistance – aid in the form of Technical assistance – aid in the form of

engineers, teacher and technicians to teach skills engineers, teacher and technicians to teach skills to individualsto individuals

3.3. Military assistance – aid given to a nation’s Military assistance – aid given to a nation’s armed forcesarmed forces

Other aid includes emergency assistanceOther aid includes emergency assistance

Foreign AidForeign Aid

►U.S. provided much aid to rebuild Europe U.S. provided much aid to rebuild Europe after WW II.after WW II.

►Today aid is sent throughout the worldToday aid is sent throughout the world►$8.1 billion in aid in 1998 which was a $8.1 billion in aid in 1998 which was a

fraction of GDP compared to other fraction of GDP compared to other nations.nations.

►The U.N. and World Bank provide aid The U.N. and World Bank provide aid using American $using American $

► IMF provides aid and many countries are IMF provides aid and many countries are defaulting on foreign loans.defaulting on foreign loans.

Foreign AidForeign Aid

►Foreign aid is given for 3 reasonsForeign aid is given for 3 reasons 1.1. Encourage international tradeEncourage international trade 2.2. PoliticsPolitics 3.3. Help protect a nation’s security Help protect a nation’s security

(Israel)(Israel)