Economics: International Economics: International TradeTrade

International TradeInternational Trade

Warm-upWarm-up• What do you think the term global

interdependence means? • Answer: nations around the world are connected

and depend on each other. • In what ways are nations interdependent? • Answer: Nations depend on each other for

resources, workers, assistance for things such as national disasters, we share the same environment, war & conflict resolution etc.

The Global Economy

• Participants in the global economy range from individuals who may invest directly in foreign companies or real estate to giant multinational corporations that employ tens of millions of workers. (Richard Remy 732).

• Do you or your parents drive a foreign car? Check the labels of your shirts and shoes. Where were they made?

• We are participants in the global economy too!

Global Economic Activities

• Investments

• Banking and financial services

• Currency exchange

• Real Estate

• TRADE!!!!!!!!!!!!!!!!!!!TRADE!!!!!!!!!!!!!!!!!!!

International Trade

• Why did the United States emerge as an economic giant after WWII?

International Trade

• The U.S. did not experience the devastation and destruction like those nations in Europe and Asia.

• These nations depended on the U.S. for goods and resources.

• Therefore, we became the prominent actor in international trade!

Purpose of Trade

• 1. To obtain goods and services that a nation cannot produce themselves. Example: The U.S. imports industrial diamonds from other countries because we do not have deposits of such minerals.

• 2. Comparative advantage- Each country should produce those goods it can make more efficiently and purchase those that other nations produce more efficiently.

Purpose of Trade

• 3.To Create Jobs- The global market for cars is greater than the market in the U.S. alone. There will be more jobs if American automakers can sell their products abroad.

Comparative Advantage

• "If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage. " (Book IV, Section ii, 12)

• Adam Smith, Wealth of Nations• Source: http://internationalecon.com/v1.0/ch40/40c000.html

Comparative Advantage

• If our country can produce some set of goods at lower cost than a foreign country, and if the foreign country can produce some other set of goods at a lower cost than we can produce them, then clearly it would be best for us to trade our relatively cheaper goods for their relatively cheaper goods. In this way both countries may gain from trade.

• Source: http://internationalecon.com/v1.0/ch40/40c000.html

Barriers to International Trade

• What problems do you think international trade can cause for domestic companies and workers?

• Answer: Loss of jobs, decline in business• What pressure does this put on our

representatives in government? • Answer: It forces them to make regulations

on imported goods.

Restrictions on International Trade

1.1. TariffsTariffs- taxes placed on imports to increase their price in the domestic market.

• Example: The U.S. threatened to impose tariffs on China if they did not end the illegal copying of intellectual property (ideas) like music and video compact discs.

2. QuotasQuotas-- Limits on the quantities of a foreign product that may be imported.

What do you suppose the cartoonist is What do you suppose the cartoonist is

trying to tell his readers about free trade?trying to tell his readers about free trade?

Trade Restrictions

3. DumpingDumping- selling products in another country below their manufacturing cost or below their domestic cost in order to drive other products out of a market.

What do you think will happen once the competition is destroyed?

Answer: Prices will increase!

Trade Restrictions4. 4. Non-tariff barriersNon-tariff barriers- very strict health, safety, or

other regulations that must be met before a foreign product can be offered for sale in a county.

5. 5. Embargoes-Embargoes- to totally ban trade with a specific country

Financing Trade

• Balance of Trade or Balance of Balance of Trade or Balance of Payments-Payments- the difference between the value of a country’s imports and exports.

• This measures the flow of money in and out of a country.

• A country has a trade deficit when the value of products it imports is greater than the value of the products it exports.

What term best represents this political cartoon?

Assessment

• Without using your notes, explain each term below.

• Comparative Advantage• Tariffs• Quotas• Embargoes• Trade deficit• Non-tariff barriers