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International Business Standard and Essential Question SSEIN1 The student will explain why individuals, businesses, and governments trade goods and services. Essential Question: How can globalization be both beneficial and harmful? Where was your shirt made? Item 1. Judy’s watch 2. 3. 4. 5. 6. 7. 8. 9. 10. Made in… Switzerland What is Globalization? What does it mean to you? Means different things to different people a complex phenomenon which includes a variety of topics and issues International Trade Culture Technology Migration Government Globalization Worldwide interconnectedness and interdependence of people, culture, country, business, government Some see it as a blessing, some see it as a curse… Driving Forces of Trade Technology Driving Forces of Trade Trade Policies and Agreements Open economies Trade/Globalization Controversies Migration Outsourcing/Off-shoring Culture Environmental Degradation Trade Deficits Global inequality: growth and poverty Protectionism Standard and Essential Question SSEIN1 The student will explain why individuals, businesses, and governments trade goods and services. a. Define and distinguish between absolute and comparative advantage b. Explain that most trade takes place because of comparative advantage in the production of a good or service. Essential Question- How does the use of comparative advantage increase gains from trade for two or more nations? Why do people trade? Why do people trade? It’s in their best interests. Let someone else produce something at a lower opportunity cost. Specialization – makes us more productive and efficient! Difference between absolute and comparative advantage Absolute – can produce more of a product than the other person or country. Comparative – can produce it more efficiently – at a lower opportunity cost. Law of Comparative Advantage- nations are better off when they produce goods and services for which they have a comparative advantage in supplying Absolute and Comparative Advantage Household Chores (Output per hour) Betsy Bert Dishwashing Sweeping (# of sink loads) (# of trash loads) 2 1 3 1 Absolute and Comparative Advantage Option 1 Work Together Option 2 Divide Tasks Option 3 Betsy Do All the Work Option 4 Betsy Clean Garage Bert Wash Dishes Absolute and Comparative Advantage Option 1 Option 2 Option 3 Option 4 Work Together Divide Tasks Equally Betsy Do All the Work Betsy Sweep Bert Wash 1 sink of dishes 20 minutes 30 minutes 30 minutes 60 minutes 3 loads of trash 45 minutes 180 minutes 60 minutes 60 minutes TOTAL 65 minutes 180 minutes 90 minutes 60 minutes Absolute and Comparative Advantage Comparative Advantage Agricultural Production Saratovia Robland Peanuts Cheese (in pounds per day) (in pounds) 60 30 30 12 Standard and EQ SSEIN1 The student will explain why individuals, businesses, and governments trade goods and services. c. Explain the difference between balance of trade and balance of payments. Essential Question How does balance of trade differ from balance of payments? Balance of Trade Balance of Trade- the relationship between a nation’s imports and its exports Trade Deficit- a nation imports more than it exports Trade Surplus- a nation exports more than it imports US trade deficit We sell many goods abroad, but we buy more than we sell. Large trade deficit for many decades 2010, over $419 billion Means Americans are spending more than we produce. Buying more from overseas means more dollars end up in the hands of foreigners. Foreigners own a bigger piece of our economy. They have bought American land, stocks, bonds, etc. How do we reduce the trade deficit? Buy fewer imports Sell more domestic goods abroad Appreciate the exchange rate to make our goods more expensive on the world market and make other countries’ goods less expensive by comparison. Would help reduce amount of our currency in the hands of foreigners. Danger of retaliation! Balance of Payments Balance of Payments (BOP)- an accounting of a country's international transactions for a particular time period Any transaction that causes money to flow into a country is a credit to its BOP any transaction that causes money to flow out is a debit to its BOP Parts of the BOP Current Account- Transactions that involve imports and exports Capital (Financial) Accounttransactions that involve the purchase of capital equipment, stocks, bonds, or commercial real estate Standard SSEIN2 The student will explain why countries sometimes erect trade barriers and sometimes advocate free trade. a. Define trade barriers as tariffs, quotas, embargoes, standards, and subsidies. b. Identify costs and benefits of trade barriers over time. c. List specific examples of trade barriers. e. Evaluate arguments for and against free trade. Essential Question: How do trade barriers protect some within the economy and hurt others? What is a trade barrier? Trade restriction Way to keep foreign products/services out What types of trade barriers exist? Quotas (import quota) – limits the number of goods coming into a country Tariffs – tax on imports (customs duty) Embargo- A prohibition by a government on certain or all trade with a foreign nation Subsidy- a government payment that supports a business or market Standards- prohibits or restrict the sale of any product that does not meet specific standards set by a government Advantages of Trade Barriers - PROTECTIONISM - Help American businesses. Protect American jobs Protect national security Protect “infant industries” – new ones that can’t compete. Disadvantages of Trade Barriers Limits supply of goods Increased prices for foreign goods Trade wars – restrict imports and other countries retaliate. What kind of Trade Restriction? China’s most favored nation trading status will be taken away if Congress and the President agree that the Chinese Government is guilty of human rights abuses. All Chinese imports will experience a sharp increase in taxes if China is no longer considered a most favored nation. Japanese auto firms agree to limits set in Washington D.C. on the number of Japanese automobiles that may be sold in the U.S. What Kind of Trade Restriction? U.S. State Department officials confirm that the current Administration has decided to continue the prohibition of all U.S. trade with Cuba. Congress passes a law requiring that all foreigngrown vegetables sold in the U.S. must be organically grown. U.S. Farmers are allowed to obtain irrigation water from federal dam projects at very low prices to grow rice in the California desert, if they promise to sell 90% of the rice to buyers in Asia Read the Mexican Truck Controversy The Mexican Truck Controversy Should unsafe trucks from Mexico be allowed into the United States? Can a concern for truck safety be used to discourage international trade? Might you change your mind if you discovered that the truck described was registered to a Texas resident? Would you change your mind if you knew that all Mexican trucks had to meet U.S. safety standards in order to cross the border? Do you think that people from the Teamsters Union would change their minds if they knew about the safety standards? Review of Trade Barriers How do trade barriers protect some within the economy and hurt others? Standard and Essential Question SSEIN2 The student will explain why countries sometimes erect trade barriers and d. List specific examples of trading blocs such as the EU, NAFTA, and ASEAN. e. Evaluate arguments for and against free trade. Essential Question: How is free trade both beneficial and costly? International Trading Blocs Best way to pursue comparative advantage, raise general living standards, further international peace. Increase free trade Help countries negotiate new trade agreements, resolve disputes Strengthen regional economies and relationships. Examples of trading blocs European Union – 1993 Formed to get rid of trade restrictions and tariffs among members, adopt uniform tariffs for nonmembers. Originally the Common Market (1957) Has a Parliament and council with representatives from each nation. Has own flag, anthem, celebrates Europe Day May 9 Replaced individual currencies with a single currency – the euro. (except for UK) Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, Netherlands, UK) Examples of trading blocs ASEAN – Association of Southeast Asian Nations 1967 Promote growth of the region (economically, socially, culturally) Promote regional peace and stablity (abide by UN charter) Assist each other in training, research and education. Collaborate in industry, agriculture and expansion of trade. ASEAN Member Countries Examples of trading blocs NAFTA (North American Free Trade Agreement) 1994 Eliminate all tariffs and trade barriers between Canada, Mexico, and US by 2009. Largest free trade zone in the world. Opponents worry about loss of American jobs b/c of lower wages and fewer restrictions in Mexico. Supporters claim it will create jobs in US because of increased exports to Mexico and Canada. Statistics so far show increased trade, but not increased jobs. Pros and Cons of free trade Pros Best way to pursue comparative advantage Raises general standard of living International peace Competition leads to efficient production Lower prices Cons Need to protect American businesses and jobs Need to protect new industries Protect national security Unemployment in countries with inefficient, costly production. Pros and Cons of Protectionism Cons Pros If the foreign country can do it Protects workers who more efficiently, we benefit would be hurt by from lower prices they can foreign competition. offer. Less incentive for new Protects new industries to be efficient and industries competitive while protected. Keeps vital industries Once a business has tariff going that we would protection it’s hard to take it away. need in event of war. Some industries claim to be essential and get help when they may not be. Higher prices for imports Job loss in export industries that face retaliatory trade barriers. Standard Standard- SSEIN3 The student will explain how changes in exchange rates can have an impact on the purchasing power of individuals in the United States and in other countries. a. Define exchange rate as the price of one nation’s currency in terms of another nation’s currency. b. Locate information on exchange rates. c. Interpret exchange rate tables. d. Explain why, when exchange rates change, some groups benefit and others lose. Essential Question: How does the strength of the dollar impact trading with other nations? Essential Question How does the strength of the dollar impact trading with other nations? What is an exchange rate? Value of a foreign nation’s currency in terms of the home nation’s currency. How do changes in exchange rates affect international trade? Appreciation- Increase in value of a currency means the currency has become stronger. The country’s exports become more expensive in other countries. Other countries will import fewer products from that country. Foreign products will be less expensive for consumers in the country with the strong currency, so consumers will buy more foreign products. How do changes in exchange rates affect international trade? Depreciation- the value of a nation’s currency decreases The nation’s exports become less expensive in other countries. Other countries will import more from that country. Foreign goods will cost more in the country with the weak currency, they will buy less foreign products. What about U.S.?? Strong dollar – exports decline – imports rise. Weak dollar – exports rise – imports decline Exchange Rate Systems Fixed exchange rate – governments try to keep the value of their currencies constant against one another. They “peg” their currency to the value of one central currency. Flexible exchange rate – determined by supply and demand. (US dollar) MIX – most countries today use a mix of the two Balance of trade and the effect of changes in the exchange rates Balance of trade – relationship between a nation’s imports and its exports. Large difference = trade imbalance Export more than import = positive trade balance Import more than export = negative trade balance Nations want to maintain a balance of trade – value of imports equal to value of exports. Balancing Trade Protects Value Balancing trade protects the value of the currency. Imbalance means the value of the currency falls. Can correct this by limiting imports or increasing the number or quality of exports. Remember Strong dollar = exports decline – imports rise Weak dollar = exports rise – imports decline