Chapter 7.1

Trade Between Nations

Imports

• A product brought in for sale from a foreign country

Exports

A product sent to a foreign country for sale

Imports and Exports can be:

Consumer goods Producer goods Agricultural products Raw materials Services

Copyright National Council on Economic Education. Reproduction for Educational Use is

Granted

Figure 5A: Components of Exported Goods and Services (2003 to-date)

Consumer Goods9%

Autos, Vehicles, Parts and Engines

8%

Industrial Supplies and Materials

17%

Capital Goods, not Autos34%

Food, Feed and Beverages

5%

Services30%

Other3%

Figure 5B: Components of Imported Goods and Services(2003 to-date)

Services16%

Food, Feed andBeverages

4%

Other3%

Consumer Goods23%

Autos, Vehicles, Parts and Engines

14%

Industrial Supplies and Materials

21%

Capital Goods, not Autos25%

Why Nations Trade?

• One country has natural resources that another country lacks or has in short supply.

The U.S. has very little of the mineral bauxite (used for making aluminum). Almost all of the bauxite used in the United States today is imported.

Why Nations Trade?

Nations can increase productivity and wealth by specializing in what they produce more efficiently and trading for goods they produces less efficiently

Benefits of Trade

Consumer choices:• Some consumer goods would not be

available Increased competition:

• Foreign trade brings additional competitors to the marketplace

• Benefit of increased competition? Expanded markets:

• Business that produce goods and services for export to other countries benefit from an expanded market for their products

Benefits of Trade

International relations:• Countries that export many goods

and services to the U.S. are likely to want to promote good relations with the U.S. government

Prosperity and peace• U.S. consumers buy imports, they

send dollars abroad. (The other country can prosper)

Currencies and Trade

When two countries with different currencies want to do business with one another, the buyer must convert its money to the sellers currency• A hospital in Mexico wants to buy

medicine from a U.S. company would exchange its currency, pesos, for U.S. dollars. ( A bank would perform the currency exchange)

Exchange Rate

The cost of one currency expressed in terms of another currency

What is our dollar worth??? • http://finance.yahoo.co

m/currency?u

Factors affecting Exchange Rates

Changes in interest rates Economic and political stability Supply and Demand Amount of National Debt Trade Deficit

How exchange rates affect trade

If the U.S. dollar is weak, exports from the U.S. tend to increase• Why?

• Other countries get a bargain rate when converting their currency to U.S. dollars

Understanding the trade deficit

Balance of Trade:• Difference

between the value of a nation’s exports and it imports

Trade deficit

When a country spends more in imports than in receives for exports; US has a trade deficit

Balance of Payments

An accounting of all its financial transactions that involve other countries during a particular time period.

End of 7.1

Chapter 7.2

Trade Restrictions and Agreements

Ways to Restrict Trade

Tariff: a tax on imports• There are different types of tariffs

• Revenue tariff: intended simply as a source of gov’t ___________

• Protective tariff: larger (up to 62%)• The tariff is paid by the importer, who then adds it to

the price charged to consumers. The much higher price of imported goods discourages consumers from_____________

revenue

buying

Ways to Restrict Trade Continued

Import Quota: government limit on the quantity or value of certain imported product• The U.S. government has placed quotas on

peanuts, cotton, sugar, and cars• It raises consumer ________________prices

Ways to Restrict Trade

Embargos: gov’t order prohibiting trade. It can apply to a specific type of product or to trade with a specific country

Protectionism Versus Free Trade

Protectionism: Policy of using trade restrictions to protect domestic businesses from foreign competition

Free Trade: Policy of minimizing trade restrictions

Arguments for Protectionism

National security: Certain kinds of computers, software, and nuclear technology cannot be exported without gov’t approval

Job security: If companies that can’t compete against cheaper foreign products, they are forced out of business and U.S. workers lose their job

Environmental protection: Trade restrictions against countries that have few environmental laws could reduce the demand for their products, reducing pollution

Unfair advantages: Gov’t can place a high tariff on imported goods of a country that tries to sell their product below market cost.

Arguments for Free Trade

Effect on exports: Other countries often retaliate with their own trade restrictions

Effect on consumers: Free trade allows for more consumer choices

Benefits of competition: Competition from imports can spur U.S. firms to improve their production efficiency and the quality of their products

Trade Agreements

General Agreement on Tariffs and Trade (GATT): Goal was to reduce or remove trade barriers• In 1947, 90 countries signed this

World Trade Organization (WTO): international organization that governs trade between over 140 nations. They agree to specific rules that guarantee certain trade rights and lower trade barriers

North American Free Trade Agreement (NAFTA) regional trade agreement between

the U.S., Canada, and Mexico• Went into affect on 01/01/94

• Designed to give legal protections to investors and international businesses in all three countries

• Under NAFTA trade is ______________growing

European Union

Organization of independent European nations whose goal is to create a unified and strong market

End of 7.2