Download International Trade

International
Trade
Chapter 17
Why Nations Trade
• Resource distribution
– Natural endowments
– Natural resources
– Human capital
– Physical capital
– Economic activity patterns
– Unequal resource distribution
Advantage
• Absolute advantage: ability to
produce more of a given product
using a given amount of resources
• Comparative Advantage: produce
a product most efficiently, given all
other products that could be
produced (opportunity cost)
– David Ricardo: law of comparative
advantage
US and Trade
• Imports
– Capital goods
– Industrial supplies,
materials
– Consumer goods
– Food, feeds,
beverages
– Automotive vehicles
– Engines
• Exports
– Capital goods
– Industrial supplies
and materials
– Consumer goods
– Food
– Feed
– Automotive vehicles
– Engines
Trade and Employment
• Specialization
• Productivity
– Physical capital
– Education
– Government subsidies (health
insurance)
Trade Barriers and
Agreements
• Trade Barriers
– Import quota
– Voluntary export restraint (VER)
– Standards / Quality tests / safety
regulations
– Customs duty
Effects of Trade Barriers
• Increase prices of foreign goods
• Trade wars
• Resource allocation
Arguments for
Protectionism
• Protecting jobs
• Protecting infant industries
• Safeguarding national security
International Agreements
• Reciprocal Trade Agreement Act
1934: reduce tariffs by 50%
– MFN - most favored nation status,
Congress grants
– Normal trade relations (NTR): all
nations pay same tariff
World Trade Organization
• 1948: GATT
• 1995 WTO
– Ensure compliance with GATT
– Acts as referee
European Union
• EU
– 1957: Common Market
– 1986: eliminated tariffs, formed
European Economic Community (EEC)
– 2002: Euro
North American Free
Trade Agreement
• 1994 NAFTA
• Canada, Mexico, USA
• Eliminate all tariffs and other trade
barriers
• Eventual include all of the
Americas
Other Regional Trade
Agreements
• APEC:Asia Pacific Economic
Cooperation (Pacific Rim)
• MERCOSUR: Southern common
Market (Brazil, Argentina,
Paraguay, Uruguay)
• CARICOM: Caribbean Community
and Common Market
Role of Multinationals
• Products: parts imported from
around the world; assembled in
country
• Designed in USA made overseas;
sold internationally (NIKE)
• MNCs have more power than
nation states
Measuring Trade
• Exchange Rates
– Foreign exchange
– Determining exchange (s/d)
– Strong / weak currencies
• Appreciation - increase in purchasing
power
• Depreciation - decrease in purchasing
power
FOREX MARKET
• Foreign exchange market
– Strong dollar - buys more foreign
currency - buy more foreign goods
– Weak dollar - buys less foreign
currency - buy fewer foreign goods
Exchange Rate Systems
• Fixed exchange rates system
• Bretton Woods Conference
– International Monetary System
– Cooperation
– Currency stabilization
• Flexible Exchange Rate
– Supply and demand
Euro
• Abolish different currency
• Stimulates trade & economic
activity
Balance of Trade
• The relation between a nation’s imports
and exports
– Trade surplus: Ex > Im
– Trade deficit: Ex < IM
– USA trade deficit
• Global economy: is it important?
• Reducing trade deficit
– Purchase fewer goods from abroad
– How long will foreigners be willing to buy our debt?
» Bonds
» imports