Chapter 17 International Trade 1. Absolute and Comparative Advantage 2. Trade Barriers and Agreements 3. Measuring Trade How might scarcity divide our world or bring our world together? Should free trade be encouraged?
Resource Distribution and Specialization Factors of Production how much land, labor, and capital Natural Resources along with climate and geographic location, help determine what goods an economy produces. Capital and Labor also shape a region s economy; along with the proper education Unequal Resource Distribution availability of resources differs greatly from one country to another Specialization and Trade - Importing -items coming into country Exporting -items leaving the country
Resource Distribution India Peru United Kingdom United States Total Square 3,287,590 1,285,220 244,820 9,826,630 Arable land (%) 48.83 2.88 23.23 18.01 Natural Resources Coal, iron ore, manganese, mica, bauxite, titanium ore, diamonds, petroleum Copper, silver, gold, petroleum, timber, fish, iron ore, coal, phosphate, potash, natural gas Coal, petroleum, natural gas, iron ore, lead, zinc, gold, tin, limestone, salt, arable land Coal, copper, lead, uranium, gold, iron, mercury, nickel, potash, natural gas, petroleum Population 1.1 billion 28,674,757 60,776,238 301,139,947 Labor Force 509.3 million 9.21 million 31.1 million 151.4 million Literacy Rate 61% 87.7% 99% 99% Telephones 215.85 million 10.83 million 103.26 million 405 million Airports 341 268 471 14,858
1. Absolute and Comparative Advantage Absolute Advantage - the ability to produce more of a given product using a given amount of resources Comparative Advantage - the ability to produce a product most efficiently given all the other products that could be produced law of comparative advantage - a nation is better off when it produces goods and services for which it has a comparative advantage
Productivity and Opportunity Cost Carlos Jenny T Shirts per hour 6 1 Birdhouses per hour 2 1 Opportunity coast of one T-Shirt 1/3 birdhouse 1 birdhouse Opportunity Cost of one Birdhouse 3 T-Shirts 1 T-Shirts
Comparative Advantage and World Trade Countries which have the lower opportunity cost in producing a good has a comparative advantage in producing that good. Comparative advantage the ability to produce a good at a lower opportunity cost that that of another nation Interdependence - the shared need of countries for resources, goods, services, labor, and knowledge supplied by other countries
The United States and Trade The United States enjoys a comparative advantage in producing Many goods and services. What is the U.S. position as an importer and exporter? The United States as an importer - world s top importer (15% of the world s total trade) The United States as an exporter - world third largest exporter, close behind Germany and China The United States is also the world leading exporter of services, including data processing, financial services, and medical care.
The Effects of Trade Employment Specialization and Job Loss Trade allows nations to specialize in producing a limited number of goods while consuming a greater variety of goods However, specialization leads can lead to job loss within in our country, but job opportunities in others Trade and Employment in the United States Comparative advantage of nations affect the economic wellbeing of workers living in those nations Example-robotics in automobile industry in Japan led to cheaper cars being sold in the United States and hurt American car manufacturing
2. Trade Barriers and Agreements Trade Barriers - trade restrictions on foreign items coming into the country tariff - tax on imported goods Import quota - set limit on the amount of a good that can be imported Sanctions - actions a nation or group of nations takes in order to punish or put pressure on another nation Embargo - a ban on trade with a particular country
60 Average Tariff Rate, 1900 to 2005 50 40 30 Tariff Rate 20 10 0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Effects of Trade Barriers Increased prices on foreign goods Trading Wars - a cycle of escalating trade barriers Beef Wars In 1985, the European Union enacted a ban on importing meal derived from animals treated with growth hormones. The U.S. cattle industry objected. What followed became known as the Beef War. More and more products were affected as each side refused to give in. 1985-EU bans beef importation 1989-U.S. imposed tariff on tomatoes, citrus fruits, pasta, ham 1996-World Trade Organization orders the EU to remove beef ban 1999-EU refuses to lift ban, U.S. doubles tariff on Truffles, tomatoes, chocolate, pork, liver pate, fruit juices, jam, mustard, yarn, lanolin
Arguments for Protection Protectionism - the use of trade barriers to shield domestic companies from foreign competition Protecting jobs it shelters workers in industries that may be hurt by foreign competition infant companies - early stages of development safeguard national security certain industries may require protection because their products are essential to defending the country
Trade Agreements Free trade - lowering or eliminating protective tariffs and other trade barriers between two or more nations World Trade Organization -1995, WTO uniting global trade and making it more free; works to ensure countries comply with General Agreement on Tariff and Trade (GATT) negotiate new trade agreements and to resolve trade disputes The European Union - agreement to abolish tariffs and trade restrictions among member nations (1957 six western European nations set up the Common Market by 1993 formed EU and became largest trading bloc in the world; 2008 includes 27 nations NAFTA - North American Free Trade Agreement - region where a group of countries agree to reduce or eliminate trade barriers; U.S. and five Central America countries
The Role of Multinationals Large corporations that sells goods and services throughout the world Example-an automobile industry might design its cars in the United States and import parts made in Asia to an assembly plant in Canada Many goods are produced globally. Many things are designed here, but produced elsewhere to curb the cost of labor This may hurt the host nation.
3. Measuring Trade The difference in a dollar from one country to the next International trade is more complex than buying and selling within one country because of the world s many currencies and their changing values.
Foreign Exchange Exchange Rates - the value of a nation s currency in relation to a foreign currency Appreciation - increase in the value of currency Depreciation - decrease in the value of currency Foreign Exchange Markets - system of financial institutions that facilitate the buying and selling of foreign currencies
Foreign Exchange Rates Foreign Exchange Rates 1.69 10.65.065 7.52 15.28 6.63 7.449 Chin 1.46 1 15.54.095 10.98 22.29 9.68 10.93 Mex.09.06 1.006.71 1.43.62.70 Euro 15.34 10.52 163.47 1 115.44 234.41 101.81 114.97 Jap.13.09 1.42.008 1 2.03.88.99 Cana.07.04.69.004.49 1.43.49 U.K.15.10 1.60.009 1.13 2.30 1 1.12 Aust.13.09 1.42.008 1.00 2.04.88 1 U.S. Chinese Mexican Euro Japan ese Canadian U.K. Aust U.S.
Exchange Rate Systems Fixed Exchange Rates - governments try to keep the values of their currencies constant against one another Flexible Exchange Rate system - exchange rate is determined by supply and demand Foreign Buyers are taking advantage of a weak dollar to pick up real-estate bargains Country United Kingdom Australia OPEC Ireland Japan U.S. Dollars $5.068,000,000 $4,356,000,000 $775,000,000 $678,000,000 $496,000,000 Germany $422,000,000 Spain $100,000,000
Balance of Trade The relationship between the value of a country s exports and the value of its imports trade surplus - situation in which a nation exports more goods and services than it imports trade deficit - situation in which a nation exports less goods than it imports balance of payment - the value of all monetary transactions between a country s economy and the rest of the world
The United States Trade Deficit The United States imports more than it exports, resulting in a trade deficit began in the 1970 s when OPEC increased the price of oil 2000 1500 1000 Imports Exports 500 0 1960 1965 1970 1975 `1980 1985 1990 1995 2000 2005
International Trade As the dollar becomes stronger American exports decline As the dollar becomes weaker American Exports Rise
Two International Trade Organizations European Union Reduction or elimination NAFTA 27 nations of Europe of trade barriers 3 nations of North America 12 member use common currency Increased trade No common legislative body Parliament and Council Controversy with Independent tariff policies Uniform Tariffs for non members other countries