intro to economics - trade
TRANSCRIPT
-
7/31/2019 Intro to Economics - Trade
1/28
International Trade
Dr. Katherine Sauer
A Citizens Guide to Economics
ECO 1040
-
7/31/2019 Intro to Economics - Trade
2/28
Overview:
I. Why do Nations Trade?II. Trade Pattern
III. Trade Balance
IV. Trade Barriers
V. Free Trade
VI. Fair Trade
-
7/31/2019 Intro to Economics - Trade
3/28
Productivity is what makes us rich.
Specialization is what makes us productive.
Trade allows us to specialize.
-
7/31/2019 Intro to Economics - Trade
4/28
I. Why do nations trade?
Why do nations export?- individuals/firms produce more than can be consumed at
home
- sellers could receive a higher price in a foreign market
Why do nations import?
- some goods cant be produced at home (or not enough)- some goods are produced at a lower cost or more
efficiently elsewhere
- consumers like variety
-
7/31/2019 Intro to Economics - Trade
5/28
Due to differences in supply conditions, a country may be
able to produce more of a good at a lower cost.
- superior technology- large factor (resource) endowments
Absolute advantage is the ability to produce a good at the
lowest cost.
It implies a potential trade pattern.
ex: tropical countries produce and export bananas
coastal countries produce and export seafood
It gives an incentive to specialize in the production of a
particular good and export it.
-
7/31/2019 Intro to Economics - Trade
6/28
Absolute advantage alone is not sufficient to fully explain
international trade.
- The opportunity cost ofproducing an item may
exceed the cost oftrading for it.
International trade is based on comparative advantage.
Comparative Advantage is the ability to produce at thelowest opportunity cost.
-
7/31/2019 Intro to Economics - Trade
7/28
Countries with a relative abundance oflow-skilled labor
tend to specialize in and export items having low-skilled
labor as a major cost component.
Countries with a relative abundance ofcapital tend tospecialize in and export items having capital as a major
cost component.
-
7/31/2019 Intro to Economics - Trade
8/28
When countries specialize in producing goods they have
comparative advantage in, and then trade those goods,they can consume more goods and services than they
could produce on their own.
In a nutshell, this is why international trade can be goodfor all countries involved.
However, even though trade benefits the nation as a
whole, there are winners and losers among producers
and consumers.
-
7/31/2019 Intro to Economics - Trade
9/28
II. Trade Pattern
- what a country imports and exports and who its trading
partners are
India
exports: engineering goods, gems/jewelry, textiles,agricultural goods, chemicals (US, China, UAE, UK)
imports: petroleum, capital goods, gold & silver,
electronics, gems (US, Belgium, China, Singapore)
-
7/31/2019 Intro to Economics - Trade
10/28
Chile
exports: copper, fruit, paper products (US, Japan,
China, South Korea, Netherlands)
imports: intermediate goods, capital goods,consumer goods (Argentina, US, Brazil, China,
Germany)
-
7/31/2019 Intro to Economics - Trade
11/28
III. Trade Balance
The trade balance is the difference between the value of a
countrys exports and the value of its imports.
If exports > imports, then there is a trade surplus.
If exports < imports, then there is a trade deficit.
-
7/31/2019 Intro to Economics - Trade
12/28
Most economists dont believe that trade
deficits/surpluses are inherently good or bad.
The economic impact of a surplus or deficit depends on
the specific circumstances surrounding it.
-
7/31/2019 Intro to Economics - Trade
13/28
Trade Deficit is a Bad Thing for the Economy (Trade
Surplus is Good)
- signifies economic weakness because it reflects an
excessive reliance on foreign products
- represents an expenditure offuture growth because
whenever a nation purchases more than it produces,
funds that could have been used for investment
(future growth) are being used for consumption in
the present
- large trade deficits create conditions favorable for
an economic crisis
-
7/31/2019 Intro to Economics - Trade
14/28
Trade Deficit Shows the Economy is Doing Well
- consumers can enjoy a higher standard of living than if
they were limited to domestically produced goods
- could be a sign of economic strength because imports
are known to increase during times of economic growth
In industrial countries, trade deficits have not sparkedeconomic crisis.
-
7/31/2019 Intro to Economics - Trade
15/28
Trade Surplus may not be Good
A trade surplus could mean a country is too reliant on
foreign demand for its goods.
The surplus could be the result of an undervalued
currency.
-
7/31/2019 Intro to Economics - Trade
16/28
IV. Trade Barriers
Governments often manipulate trade to achieve various
economic, political, and diplomatic objectives.
Types of Trade Barriers
1) tariff: tax on imports
2) export subsidies : involves a transfer of funds from the
government to an export producer
- encourages exports- helps domestic industry (props up domestic price)
-
7/31/2019 Intro to Economics - Trade
17/28
3) Other ways ofrestricting imports
a. quota: a limit on the quantity of a good that can be
imported
b. tariff rate quota: a tariff with two levels
- lower tariff for imports within the quota
- higher tariff for imports that exceed the quota
-
7/31/2019 Intro to Economics - Trade
18/28
c. trigger price mechanism: the government sets a
price floor (legal minimum price) that triggers
government intervention to reduce imports if the
world price falls too low- low world price hurts domestic firms because
more is imported --- a price too low may wipe
out the domestic industry
-
7/31/2019 Intro to Economics - Trade
19/28
d. technical barriers: barriers imposed on imports for
health or safety reasons
e. anti-dumping duties: tariff-like charges imposed on
imports that are sold at less than fair value by the
exporter
f. countervailing duties: tariff-like charges imposed on
imports that are unfairly subsidized by the exporter
government
-
7/31/2019 Intro to Economics - Trade
20/28
g. Voluntary Export Restraints (VER): an export quota
voluntarily imposed by the exporter country at the
request of the importing country
h. other: anything else that the government can think of
ex: require disassembling of an item before it
can be imported
-
7/31/2019 Intro to Economics - Trade
21/28
V. Free Trade: goods and services can flow freely
between nations without government imposed barrierslike tariffs, quotas, VERs, etc.
-
7/31/2019 Intro to Economics - Trade
22/28
The World Trade Organization
The WTO is the global organization dealing with therules of trade between nations.
These rules of trade are the result ofnegotiations
between member countries.
- 150 member countries
- HQ in Geneva, Switzerland
- a successor to the General Agreement on Tariffs and
Trade (GATT)
- formed on January 1, 1995
-
7/31/2019 Intro to Economics - Trade
23/28
The main goal of the WTO is to help international tradeto flow smoothly, freely, fairly, and predictably.
This is accomplished by:
- administering trade agreements
- acting as a forum for trade negotiations
- settling trade disputes
- reviewing national trade policies
-
7/31/2019 Intro to Economics - Trade
24/28
VI. Fair Trade
Fair Trade: a social movement to ensure that producers
of exports in developing nations
- receive a fair price for their product- have safe, healthy working conditions
- use environmentally sustainable practices
-
7/31/2019 Intro to Economics - Trade
25/28
Background:
Competition in global commodity markets has
decreased prices over time.
- between 1970 and 2000, the main agricultural
exports for developing nations (sugar, cotton,cocoa, coffee) fell in price by 30-60%
Prices for commodities are volatile in general.
- bumper crops, crop disasters, demand changes
The international rural poor are the people who suffer
when commodity prices are low/volatile.
-
7/31/2019 Intro to Economics - Trade
26/28
A. Proponents of Fair Trade
- support the theory and principles offree trade
- claim that in many cases, there are market failures
which prevent the benefits of free trade from working
- rural farmers dont have good information
- rural farmers are at the mercy of the middlemen- rural farmers dont have access to credit
- argue that there should be a government mandated
minimum price (price floor) for agricultural goods
-
7/31/2019 Intro to Economics - Trade
27/28
B. Critics of Fair Trade
- usually recognize the idea of Fair Trade is based on the
best ofintentions
- argue that price floors cause market distortions
-a price floor holds the price artificially high
- this encourages more production
- more production can lead to excess supply
- excess supply leads to downward pressure on
price in the non Fair Trade market
- argue that Fair Trade is not a long-term solution
-
7/31/2019 Intro to Economics - Trade
28/28
What did you learn today?
Please explain 2 concepts from todays class.