International Trade

Chapter 17

ExportsGoods and services sold to other countries.

Countries export what they specialize in.

ImportsGoods and services that one country buys from another country.

It can be cheaper for a country to import a product than to manufacture it.

This is why we have absolute and comparative advantage.

Absolute AdvantageThis is when a country can produce a product more efficiently than another country.

ExampleHawaii has the perfect climate to grow pineapples.

Georgia does not have a great climate to grow pineapples.

T/f, Hawaii has an absolute advantage over Georgia in growing pineapples.

Comparative AdvantageAbility to produce a product relatively more efficiently, or at a lower opportunity cost.

ExampleHawaii is great at producing pineapples, but they are also great at producing coconuts.

Puerto Rico is also great at producing pineapples and coconuts.

Hawaii can produce pineapples and coconuts cheaper and easier than Puerto Rico.

Hawaii can produce pineapples and coconuts at a lower opportunity cost than Puerto Rico can.

Restricting Trade

TariffQuota

TariffTax placed on imports to increase their price in the domestic market.

2 TypesProtective tariff – tariff high

enough to protect less-efficient domestic industries.

Revenue tariff – tariff high enough to generate revenue for the government without actually prohibiting imports.

QuotasKeeps foreign goods out of the country.

Can be as low as 0 to keep everything out.

Need quotas because sometimes even high tariffs can’t keep certain foreign goods from being imported.

ExamplesBush administration put a quota on steel.

This protected American steel jobs, but it made steel cost more.

EmbargoCompletely restricts all trade with a particular country.

Involuntary

Trade ProtectionProtectionists – favor trade barriers that protect domestic industries

Free Traders – favor fewer or even no trade restrictions

5 Arguments1. National Defense

2. Promoting Infant Industries

3. Protecting Domestic Jobs

4. Keeping the Money at Home

5. Balance of Payments

National DefenseArgue that nations without trade barriers become too dependent on other nations.

Might need supplies for wartime and could be unable to get them.

Infant IndustriesNew industries should be protected from foreign competition

Want trade barriers (for at least a short time)

Domestic JobsTariffs and quotas protect domestic jobs from cheap foreign labor.

Most used argument.

Keeping Money at HomeLimiting imports will keep American money in the United States.

Counter-argument: American money that goes abroad will come back anyways.

Balance of PaymentsDifference between the money paid and received from other nations when they engage in international trade.

WTOWorld Trade Organization

Created in 1974 by 23 countries

Signed the GATT (General Agreement on Tariffs and Trade)

WTO is an international agency that administers previous GATT trade agreements, settles trade disputes, organizes trade organizations, and provides technical assistance and training for developing countries.

NAFTANorth American Free Trade Agreement

Between Mexico, Canada, and the U.S.

Proposed by Bush Sr. and finalized by Clinton in 1993

Reduces tariffs among the 3 countries.

Helps ensure that we stay trading partners.

Example of free trade theory.

Foreign ExchangeThe changing of foreign currencies when goods and services are bought and sold

Exchange RateFix the price of one currency so you can compare it to another.

$1.00 (U.S. $) = .84 cents (Euro)

Trade DeficitWhen the imports exceed the number of exports.

The U.S. has a trade deficit right now.

Trade Surplus

When exports exceed imports.