International Trade

A. Closed economy- does not engage in trade or other economic interaction with other countries. Very rare.

• Open economy- free and unfettered trade. Also rare.

• Most economies give protection to certain domestic industries.

• Interdependence- All nations need to trade with other nations to get natural resources.

B. How do nations benefit from trade?• Economists compare a country’s economic

strengths in relation to another country. • Absolute advantage- country has the ability to

produce more of a good than another country. • Comparative advantage- ability to produce a

product at a lower opportunity cost than other producers.

• Comparative advantage can help determine what products a country should specialize in.

C. Barriers to trade• Why do some countries restrict trade?• Most countries use some tactics to protect

domestic industries. • Protectionism- protecting domestic industries.• Foreign competitors can not sell their products

freely within one’s country

D. Reasons for protectionism

1. National security- military goods must be produced domestically so they cannot be cut off during war.

2. Infant industries- new industries in a country must be protected. Many developing nations use this argument.

3. Reactionary protectionism- protecting our industries because other nations are maintaining trade barriers.

• Trade war -used to describe an escalating pattern of trade barriers in response to others.

4. Also, trade barriers are imposed to protect jobs or for nationalistic reasons.

E. Protectionist Trade Barriers1. Tariff- tax on imported goods (makes them more expensive)• the most common protectionist tool

2. Import Quota- limit on the number of units of a particular good that may be imported.

3. Voluntary Export Restriction (VER)- suggested limit on units to prevent a future quota

4. Subsidy- redistributes income from the general taxpaying public to non-competitive firms.

• Allows domestic producers to sell goods at a lower price than competitive foreign producers.

5. Embargo- simply not trading at all with a certain country (usually for idealistic reasons (U.S. v. Cuba)

The relationship between a nation’s imports and its exports is called its balance of trade.

Balance of Trade

• When a nation exports more than it imports, it has a trade surplus.

• When a nation imports more than it exports, it creates a trade deficit.

Free Trade

• Trade agreements- explain conditions where countries will trade with each other (these will tell if trade will be totally free or if tariffs or quotas will be imposed)

• EU (European Union)- between most of the nations of Europe (universal currency Euro)

• NAFTA (North American Free Trade Agreement)- between Canada, Mexico, and the United States

• ASEAN (Association of Southeast Asian Nations)- a political and economic organization of countries located in Southeast Asia.

Major Trade Organization Members

EU

CARICOM

MERCOSUR

ASEAN

NAFTA

PACIFIC OCEAN

ATLANTIC OCEAN

INDIAN OCEAN

PACIFIC OCEAN

Exchange Rates

• Exchange rates move up and down as a reflection of the worth of a nation’s currency in comparison to another.

1. Fixed exchange rates- price of currency is tied to that of a stable currency of a developed country (such as the dollar, euro, or British pound )

2. Floating exchange rates- value determined by supply and demand (Ex. US, Japan, Canada)

The following table shows an example of exchange rates.

Foreign Exchange Rates

U.S. $

U.S. $

Australian $

U.K. £

Canadian $

¥en

Euro

Mexican nuevo peso

Chinese renminbi

1

1.541

0.6252

1.478

114.3

0.9516

9.33

8.28

Aust $ U.K. £ Canadian $ ¥en Euro Mexican NP Chinese renminbi

0.6489

1

0.4057

0.9593

74.19

0.6175

6.06

5.37

1.599

2.465

1

2.365

182.9

1.522

6.3

13.25

0.6764

1.042

0.4229

1

77.34

0.6436

6.3

5.6

0.01

0.01

0.01

0.01293

1

0.01

0.08

0.07

1.051

1.62

0.657

1.554

120.2

1

9.81

8.7

0.11

0.17

0.07

0.16

12.24

0.1

1

9.8

0.12

0.19

0.08

0.18

13.81

0.11

1.13

1

Reading an Exchange Rate Table

Currency Appreciation

• Currency Appreciation- a country’s currency is able to buy more units of another nation’s currency

Results…..• U.S. citizens can buy

more foreign goods with their money (U.S. currency is stronger)

• Exporters will sell less goods (they are more expensive for foreign consumers to buy)

• If you plan to go on a cruise around the world, now’s the time!!!

Currency Depreciation

• Currency

Depreciation- if a currency depreciates it is able to buy fewer units of foreign currency than previously.

Results……• Exporters will sell more

goods (they are cheaper for foreign consumers to buy

• U.S. citizens can buy less foreign goods with their money (the other currency is stronger)

• Bad time to go on vacation overseas!!!!

Demand for U.S. Currency

Increases if…….• U.S. interest rates go up on

bonds (foreign investors want to invest)

• U.S. productivity goes up compared to rest of world

• U.S. goods and services are demanded more than those from other countries

• U.S. economy is believed to be stable

• Remember, it is always relative, but any of these will make the value of the dollar go up!!!!!