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International TradeKey Concepts: Economic Interdependence involves producers in one nation that depend on producers in other nations to supple them with certain goods and services

Why it Matters: Nations choose to produce some things and trade for others.

Resource Distribution and Specialization Nations economic patterns based on factors of production it has Patterns change over time (U.S. agriculture to technology)Specialization occurs when narrow range of products are made; this leads to: Increased productivity and profitEconomic interdependence-reliance on others for products not made

SpecializationCosta Rico exports bananas; wet climate bananas needRelatively low wages are beneficialProduction is labor intensiveNew Zealand exports wool, lamb and muttonHas temperate climate, H2O, open grasslands needed for grazingHas low population density, scientific breeding, mechanized processing

David Ricardo: Comparative AdvantageTrading in OpportunityEnglish Economist 1772-1823In his time: international trade was based on absolute advantageRicardo showed nations can benefit from comparative advantageProduce products it can make at lower opportunity cost that othersAbsolute and Comparative AdvantageAbsolute advantage: nations ability to make product more efficientlyDue to uneven distribution of production factors in different areasComparative advantage: ability to produce at lower opportunity costAbsolute cost of product not important, just opportunity costAbsolute and Comparative AdvantageAbsolute Advantage ExamplesAustralia produces more iron ore and steel than China with same laborAustralia has absolute advantageBefore Ricardo, logic held Australia should not trade for eitherComparative Advantage ExamplesLaw of comparative advantage: countries gain when produced items they are most efficient at producingAnd are at the lowest opportunity costIf Australias ratio of steel to iron ore is 1:15 tons and Chinas is 1:3, China has comparative advantage in steel production

Advantages of Free TradeIf China, Australia specialize, set trade ratio steel to iron ore 1:4China gets 4 tons of iron ore for 1 of steelAustralia gets 1 ton of steel for 4 of iron ore: cost 5 beforeSpecialization, trade raise nations production ratios, world output Increased output is mark of economic growthInternational Trade Affect the National EconomyExports: goods and services produced in one country, sold in othersImports: products produced in one country, purchased by anotherCosts and benefits of international trade vary by nationEconomists examine impact of exports and imports on prices and quantity.Impact #1: Exports on Prices and QuantityIf a country begins exporting product, foreign buyers increase total demandDemand curve shifts right, sets higher equilibrium priceHigher prices at home offset by more jobs and incomeCreated by production expanded to meet demand

Impact #2: Imports on Prices and QuantityImports shift supply curve right, lower equilibrium priceLower prices lead domestic producers to offer less of the productImprove efficiency, worker productivity, customer serviceTrade gives consumers increased selection of goods , lower pricesGives producers new markets, chance for more profit

The U.S. in the World EconomyU.S. is worlds largest exporter; exports more services than importsTourism, transportation, architecture, construction, information systemsAlso worlds largest importer; imports more goods than it exportsOil and refined oil products, machinery, raw materialsMain trading partners: Canada , China, Japan

Trade BarriersMost nations pass trade limit laws to protect domestic industriesLaws lead to higher prices, economic retaliation by other nationsIn long run, industries can only be saved by becoming competitiveTrade restrictions are basically a political issueTrade BarriersTypes of BarriersTrade barrier: law limiting free trade among nations; most mandatoryQuota: limits on the amount of a product that can importedDumping: sale of product in other country at lower price than at homeHurts domestic producers; gives consumers lower prices

Type of Trade BarriersTariff: fee charged for goods brought from another countryRevenue tariff: tax on imports, specifically to raise moneyRarely used todayProtective tariff: tax on imported goods to protect domestic products Raise price of goods more cheaply elsewhereImpact of Trade BarriersTrade Barriers may temporarily save domestic jobsLack of competition promotes inefficiency, higher pricesTrade limits can lead to trade war:Succession of increasing trade barriers between nationsImpact of Trade Barriers#1: Higher PricesTrade barriers raise prices or keep them highIn 2000, U.S. & Japan set tariffs on S. Korean semiconductor chipsKorean and domestic chip prices went up in U.S. & Japan#2: Trade WarsTrade wars often result from disagreements over quotas or tariffsCan result over other issuesEU banned U.S. hormone-treated beef, U.S. set 100% tax on many EU foods

Arguments for ProtectionismProtectionism: use of trade barriers to protect domestic industriesPurpose: to protect jobs, national security, infant industries (new industries unable to compete with larger, established competitors)Arguments for Protectionism#1: Protecting Domestic JobsU.S. workers upset over jobs lost to countries with cheaper laborTrade barriers generally protect inefficient production, prices higherLaid-off voters influenced government to fund job training programs

Arguments for Protectionism#2: Protecting Infant IndustriesProtection expected to allow new industries to grow until competitiveUsed by developing nations to keep out goods from developed countriesCritics say freedom form competition maintains perpetual infancy; And need for perpetual supportArguments for Protectionism#3: Protecting National SecurityNational security affects industries considered vital for safetyEnergy industry considered vital by most nationsPolitical differences exist over which industries are truly vital2006 Dubai forced to abandon deal to operate several port facilitiesCritics doubted security concerns, worried over interference with tradeForeign Exchange Market

Rates of ExchangeIn 1800s, early 1900s gold standard determined value of currenciesFixed rate of exchange: nations currency constant in relation to othersPost WWII to 1970s: currencies pegged to USD: 1 oz gold = $35Flexible rate of exchange (floating rate): changes along with currencys supply, demandRegulates foreign exchange, balancing imports and exportsStrong and Weak CurrenciesTrade-weighted value of the dollar - international value of U.S. dollarMeasured by FedWeak dollar makes imported goods more expensiveEasier for domestic goods to competeExports become cheaper, easier to sellStrong U.S. Dollar

Balance of TradeBalance of Trade: difference between value of imports and exportsBalance of payments: all transactions between nation and rest of worldIncludes government and private transactions, both trade and investmentTrade surplus: nation exports more that imports; favorable balanceTrade deficit: nation imports more than exports; unfavorable balance

Balance of TradeU.S. China TradeChina undergone one of the most rapid industrialization in historyHas pegged yuan at fixed rate vs. dollar; keeping yuan weakMade U.S. top destination for Chinese exportsChina has record trade surplus of $200 billion with U.S.

1770-1870: U.S. had deficit in products; surplus in capital investments1870-1920: paying back debt; was exporting > importing1920-1945: had surplus in exports; deficit in foreign investment1945-1980: deficit in merchandise; deficit in foreign investmentToday: surplus in foreign investment; merchandise deficitThe U.S. Trade Balance

Modern International InstitutionsRegional and World OrganizationsFree-trade zones: areas where nations trade without protective tariffsCustoms unions: agreements that abolish trade barriers among members Establish uniform tariffs for non-membersSome trade groups called common marketsThe European Union1957: six European nations created Common Market: became EU in 1993European Union: economic and political union; no barriers for membersEuro: currency of the EU; used by 12 of 27 member nationsEU has 20% of global exports and imports; worlds biggest traderSets low tariffs; wants to remove all barriers to international tradeNorth American Free Trade AgreementAdopted 1994 Also known as NAFTAPhases out trade barriers between Canada, Mexico & U.S.Has led to specialization, efficiency, expanded markets, new jobsAlso competitive advantage over EU and JapanAll countries have had economic gainTrade has more than doubled

Other Regional Trade GroupsVarious groups formed to specialize, promote free trade, stay competitiveMercosur: South America ASEAN: Southean Asian Nations APEC: Asian Pacific Market SADC: South Africian Development CommunityOPEC (Organization of Petroleum Exporting Countries)OPEC is a cartelGroup of producers controls production, pricing, marketing of a product

Other Regional Trade GroupsWorld Trade Organization1944 Allied nations formed General Agreement on Tariffs and Trade (GATT)WTO formed in 1995 by nations that follow GATTNegotiates, administers trade agreementsResolves disputesMonitors policies of 149 membersGives support to developing countriesWTO successful to varying degreesMultinationals Bring Changes Key ConceptsMultinational corporations affect many different nationsMust deal with different sets of tariffs, labor restrictions, taxesOften bring jobs and technology to developing nationsBoost overall levels of international tradeInternational Trade W/in MultinationalsIntrafirm trade is trade between various divisions of a multinationalExchange of goods between two parts of the companyCoordination of production between parts of the multinationalMaterials or parts sent to overseas affiliate count as exportsIntrafirm imports count as imports in balance of tradeMultinational ExampleWorld Wide CellularMines raw materials in AustraliaManufactures phones in South KoreaMarkets phones in EuropeProvides customer service from India