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International Trade
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International Trade
Resource Distribution & Specialization
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A nation’s economic patterns are based on the factors of production it
has. These may change over time
Specialization occurs when a narrow range of products are made
– Results:
–increased productivity & profit
–economic interdependence—reliance on others for products not
able to make
–Ex: Japan trades for the raw materials it uses to produce
automobiles. It then turns around & trades the automobiles for
other goods.
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Absolute & Comparative Advantages
Absolute advantage —nation’s ability to make product more
efficiently
–due to uneven distribution of production factors in different
areas
Comparative advantage —ability to produce at lower opportunity
cost
–absolute cost of product not important, just opportunity cost
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How International Trade Affects
the National Economy
Exports —goods & services produced in one country, sold in others
Imports—products produced in one country, purchased by another
Costs & benefits
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Varies by nation
Higher prices at home offset by more jobs & income
created by production that was expanded to meet the demand
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Trade Barriers
• Nations limit trade to protect domestic industries, which then leads to higher
prices & economic retaliation by other nations. Over time, industries can only
be saved by becoming competitive.
• Trade barrier — law limiting free trade among nations
– Import Quota — limits on the amount of a product that can be
imported
– Tariff—fee charged for goods brought in from another country
– Voluntary export restraint — nation’s self-imposed limit on exports
that is used to avoid a quota or tariff
– Embargo — law that cuts most/all trade with a specific country
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The Impact of Trade Barriers
Higher Prices
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Trade barriers raise prices or keep them high
In 2000, U.S. & Japan set tariffs on South Korean semiconductor
chips. Korean & domestic chip prices went up in U.S. & Japan
Trade Wars
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Trade wars often result from disagreements over quotas/tariffs
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Balance of Trade
• Balance of trade—difference between value of imports & exports
• Trade surplus—nation exports more than imports; favorable balance
• Trade deficit—nation imports more than exports; unfavorable balance
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Balance of Trade
U.S.-China Trade
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Made U.S. top destination for Chinese exports (Most Favored Nation
Status)
– China has record trade surplus of $200 billion with U.S.
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Modern Organizations to Combat Trade Barriers
Free-trade zones — areas where nations trade without protective
tariffs
Customs unions — agreements that abolish trade barriers among
members. They establish uniform tariffs for non-members
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The European Union
•established in 1993
•economic & political union; no trade barriers for members
•20% of global exports & imports
•wants to remove all barriers to international trade
• Euro — currency used by 12 of 27 member nations
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NAFTA (North American Free Trade Agreement)
•Established in 1994
•phased out trade barriers between Canada, Mexico & U.S. by 2009
•Has led to specialization, efficiency, expanded markets, new jobs
•also competitive advantage over EU and Japan
•All countries have had economic gain; trade has more than doubled
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Other Regional Trade Groups
– Mercosur, APEC
– World Trade Organization—formed in 1995 by nations that follow
GATT (General Agreement on Tariffs & Trade) – part of the UN
– OPEC — Organization of Petroleum Exporting Countries
– Cartel - group of producers that controls production, pricing &
marketing of a product
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Measuring the Value of Trade
with Foreign Exchange
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Trade needs way to set relative value of trading nations’ currencies
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Foreign exchange market — where different currencies are bought
& sold. It’s a network of major commercial, investment banks linking
world economies
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Foreign exchange rate — price of a currency in other currencies
– fixed rate of exchange—nation’s currency constant in relation to
others
– flexible exchange rate—changes along with currency’s supply,
demand
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Analyzing Tariffs—Who Wins and Who Loses?
Background
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The United States has had tariffs on sugar since the days of the early
republic.
In recent WTO talks, less-developed countries have objected to the lack of
market access for their goods and their price disadvantage.
What’s the Issue
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How do the trade barriers set up by the U.S. government affect producers
(both foreign and domestic) and consumers?
Thinking Economically
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Which argument for protection does document C seem to make? Is this
argument economically valid? Explain.
Is the difference in price shown in document B an unavoidable outcome of
the program outlined in document A? Explain.
How does U.S. government intervention in the sugar industry limit the
functioning of the economy as a free market? Use examples from the
documents in your answer.
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Reviewing Key Concepts
Explain the relationship between the terms in each of
these pairs:
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free-trade zone and customs union
EU and NAFTA
OPEC and cartel
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