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Pedal Power Goes Global
Issues Affecting International Trade
Why do Nations Export
• Sell excess production
• Obtain prices higher then prices they can
obtain domestically.
• Developing countries export so they can import
The Benefits of World Trade
• Imports supply many
goods and natural
resources
• American workers are
employed in
industries that export
products abroad.
United States Imports on a
International Scale
Absolute vs. Comparative Advantage
• Absolute advantage
– ability of country to
produce product more
efficiently than another
country.
• Comparative advantage
– ability of country to
produce product at a
lower opportunity cost
than another country.
Specialization
• Nation finds it
profitable to produce
& export a limited
assortment of goods
for which it is
particularly suited.
Fixed Exchange Rate
1945 -1970
– National governments
valued their currency in
relation to a single
standard
– Easy to compare different
currencies
• Devaluation
– lower a currency’s value in
relation to other currencies
by government order
• Fixed
– Difficult to hold exchange
rates constant in an
international economy
Flexible
Exchange Rate
• Supply & demand set
price of various
currencies
• Depreciation
– when a currency’s
price falls due to supply
and demand
• Political or economic
instability can affect
currency value
Balance of Trade
• Positive
– Exports > Imports
• Negative
– Imports > Exports
•A trade deficit is not always harmful
because it encourages foreigners to invest in
the U.S. economy
US Trade Deficit Increases by Most
Since 1999
The trade deficit in the U.S. widened in
September by the most in a decade,
reflecting rising demand for imported oil
and automobiles as the economy
rebounded from the worst recession
since the 1930s.
Exports
• Machinery and equipment,
industrial supplies, non-auto
consumer goods, motor
vehicles and parts, aircraft
and parts, food, feed and
beverages.
Imports
• Non-auto consumer goods,
fuels, production machinery
and equipment, non-fuel
industrial supplies, motor
vehicles and parts, food,
feed and beverages.
Gross Domestic Product
• Indicator of economy’s health
• Three major components
– C = Household purchases of final consumer goods
and services
– G = government purchases of goods and services
– I = purchases of businesses of capital goods,
– X = Net exports = exports - imports
GDP = C + G + I +X
Final v. Intermediate Goods
•Final Goods and
Services
–
–
–
–
–
–
Manicures
Bread
Cruise missile
New factory
Dresses
Increase in
automobile
inventory
•Intermediate Goods
– Window glass in
new automobiles
– Lumber in a new
house
– Screws used in a
cruise missile
– Flour for making
bread
– Cloth for making
dresses
GDP Goods & Services at
Final Destination
•Who buys haircuts, bread & dresses?
•Who buys cruise missiles?
•Who buys a new factory or builds up an inventory of
unsold products such as automobiles?
Households, Government Businesses
families,
individuals
Economic Forecasting
Measurements of Income
• National Income (NI) - total earned by
everyone in the economy.
•
•
•
•
•
wages and salaries,
income of self-employed people,
rental income,
corporate profits,
interest on savings and other investments.
U.S. GDP / Total Population =
U.S. GDP Per Capita
United States GDP by Sector
United States Top Trading
Partners
Billions
60
50
40
30
20
10
0
Ways to Restrict Imports
• Tariff or taxes on
imports.
– Revenue tariffs raise
income without
restricting imports
– Protective tariffs raise
the cost of imported
goods to discourage
people from buying
imports
– Imports quotas limit
the number of units of
a particular good that
can be imported
•Embargoes are complete restrictions on
importing or exporting certain goods.
•Applied to certain countries
Arguments For or Against Free Trade
For
– Improved products
• Foreign competition
– Export industries
• Restrictions may jeopardize jobs
– Specialization & Comparative
Advantage
• Provides improved goods at
lower prices
Against
• Protectionists
– Job security
• Loss of jobs
– National Economic Security
• Protect oil industry from
foreign competition
– Infant, new industries
• Tariffs & quotas to allow to
compete in world market
Trade Agreements
• The General Agreement on Tariffs and Trade
(GATT)
– U.S. & 22 countries in 1947
– Promoted liberalization of trade
– Nations agree on tariff reductions that benefit all
members
• The World Trade Organization (WTO) was
established in 1993 to replace GATT
– Farthest-reaching global trade agreement in history –
140 nations
• Encourages trade
• Administers global trade agreements
• Resolves disputes when they arise
Regional Trade Agreements
1993 North America Free
Trade Agreement 1993
– United States
– Canada
– Mexico
• Links 439 million people
• Eliminate tariff barriers
• Mexican exports have doubled
- $115 billion
• Potentially led to loss of
879,000 U.S. jobs
• Traffic delays along border
– World Trade Bridge – 10,000
trucks a day
European Union
27 current members
• Economic integration as
single market
– Common currency - Euro
– Barrier free market for goods
& services
– 370 million European
consumers