The Benefits of World Trade
► 13%
of GDP is from imports
► Imports
– goods bought from other
countries for domestic use
► Chief
imports – oil, bauxite, raw materials,
electronics, tvs, coffee, chocolate, & pepper
Benefits of Trade
► Exports
– goods sold to other countries
► Export business employs many Americans
► Chief exports – technology, food, &
entertainment
► Nations differ in the types and amount of
factors of production
► US is highly skilled and technological
compared to other nations (India &
Malaysia)
Absolute Advantage
► Absolute
Advantage – ability of one country, using
the same quantity of resources as another, to
produce a particular product at a lower absolute
cost
► Example – bananas grown in Brazil vs. France
► Specialization – concept that a nation should
produce & export a limited assortment of goods
for which it is particularly suited in order to remain
profitable
Financing World Trade
► Different
countries use different currencies.
► Exchange rate – the price of one nation’s
currency in terms of another nation’s
currency.
► Foreign exchange markets – markets
dealing in buying and selling foreign
currency for businesses that want to import
goods from other countries
Financing World Trade
Fixed rate of exchange – system under which a national
government sets the value of its currency in relation to a
single standard
► IMF – International Monetary Fund – offers monetary
advice and provides loans to developing nations
► Fixed rate allows importers and exporters to know value of
currency
► Devaluation – lowering a currencies value in relation to
other currencies by government order
► Fixed rate was impractical due to constant changes in
international economic climate
►
Financing World Trade
► Flexible
exchange rate – arrangement in
which the forces of supply & demand are
allowed to set the price of various
currencies
► Exchange rate is determined by supply and
demand.
► Depreciation – fall in the price of a currency
through the action of supply and demand
Financing World Trade
► Balance
of trade – difference between the
value of a nation’s imports and exports
► Weak currency = more exports – countries
can buy more goods from a country with
weak currency because their money
exchanges at a higher rate
► Strong currency = more imports – strong
currency will allow a country to buy more
goods from countries with weak currencies
Financing World Trade
► Trade
deficit – when the value of goods
coming into a country is greater than those
leaving the country
► U.S. has had trade deficits most years since
the early 1970s
► Deficit means foreigners are investing in a
country
► Dollars are in demand because of their
stability
Restrictions on World Trade
► Challenges
to international trade:
 Different currencies
 Different languages
 Different cultures
Barriers to World Trade
► Three
major barriers to world trade
 1.
tariffs – tax placed on imported goods – major
source of federal funds until early 1900s – raise price of
foreign goods to protect domestic goods
 2.
import quota – restriction imposed on the
number of units of a particular good that can be
brought into the country (sugar, shoes, & clothes
 3.
embargo – complete restriction on the import or
export of a particular good – often they are instituted
for political reasons
Arguments Against Free Trade
► Protectionists
– people who argue for trade
restrictions to protect domestic industries
► 1. Job Security – jobs lost if foreign competitors
sell products for less
► 2. National Economic Security – certain industries
are crucial to national economy such as oil, steel,
etc.
► 3. Infant Industries – protection needed for new
infant industries until it can become strong enough
to compete in the world market
Arguments for Free Trade
► 1.
Improved Products – competition forces
a country to improve productivity and
technology which raises the standard of
living
► 2. Export Industries – millions in the U.S.
are employed due to exports
► 3. Specialization & Comparative Advantage
– allows countries to take advantage of
what they are good at producing
Trade Agreements
► GATT
– General Agreement on Tariffs & Trade –
trade agreements made with many countries after
WW II
► WTO – World Trade Organization – over 130
nations established in 1993 that replaced the
GATT
► NAFTA – North American Free Trade Agreement controversial agreement between the U.S.,
Canada & Mexico
► EU – European Union – organization of European
nations that encourages economic integration as a
single market
Characteristics of Developing Nations
► Poorest
Americans earn more than the
average in the rest of the world.
► .5 the world’s population lives at the
subsistence level (just enough to survive)
► 35 of 185 countries are considered
developed
► Developed nations – nations with relatively
high standards of living & economies based
more on industry than agriculture
Characteristics of Developing Nations
► Developing
Nations – nations with little
industrial development and relatively low
standards of living.
► Per capita GDP is used to measure a
nation’s prosperity.
► Developed nations have a GDP roughly
between $12,000 and $29,000 per year
5 Characteristics of Developing
Nations
► 1.
Low GDP – may have natural & human
resources, but lack equipment, financing and
knowledge
► 2. Agricultural Economy – subsistence agriculture
– growing just enough food to take care of a
family’s needs – no crops to support an industrial
workforce
► 3. Poor Health Conditions – malnutrition, few
doctors or hospitals, little medicine & high infant
mortality rate (death rate of infants during first
year)
5 Characteristics of Developing
Nations
► 4.
Low Literacy Rate – percentage of
people who are able to read and write. No
$ to build schools & kids work. No people
to work in professional jobs.
► 5. Rapid Population Growth – leads to lack
of housing & food. U.S. growth rate is 1%.
3.6% will double population in 20 years
Weak Property Rights
► Lack
of property rights limits ability to
improve land and develop farms or
businesses.
The Process of Economic
Development
► Three
stages of economic development
1. Agricultural
2. Manufacturing
3. Service Sector
Financing Economic Development
► Basic
problem is financing necessary to
provide the equipment and training to
improve standard of living.
► Domestic saving is difficult because people
are barely subsiding.
► Two basic outside sources of aid
 1.
 2.
Foreign investment
Foreign aid
Foreign Investment
► Attracted
by low wages, few regulations and
abundant raw materials
► Companies often set up branch offices
► Risks include
 Political instability
 Terrorism
 Nationalization – placement of industries under
government ownership
 Some citizens resent control by foreign companies
Foreign Aid
► Foreign
aid – money, goods and services given by
governments and private organizations to help
other nations and their citizens
► 3 Types
 1.
Economic assistance – loans and outright grants
of money or equipment to other nations
 2.
Technical assistance – aid in the form of
engineers, teacher and technicians to teach skills to
individuals
 3.
Military assistance – aid given to a nation’s
armed forces
 Other aid includes emergency assistance
Foreign Aid
► U.S.
provided much aid to rebuild Europe
after WW II.
► Today aid is sent throughout the world
► $8.1 billion in aid in 1998 which was a
fraction of GDP compared to other nations.
► The U.N. and World Bank provide aid using
American $
► IMF provides aid and many countries are
defaulting on foreign loans.
Foreign Aid
► Foreign
 1.
 2.
 3.
aid is given for 3 reasons
Encourage international trade
Politics
Help protect a nation’s security (Israel)