INTERNATIONAL TRADE
UNIT 14
Exports and Imports as a Percentage of U.S.
Gross Domestic Product
Exports, Imports and the Balance of Trade
IMPORTS > EXPORTS =
TRADE DEFICIT
IMPORTS < EXPORTS =
TRADE SURPLUS
USA has a TRADE
DEFICIT!
Other have a TRADE SURPLUS!
Exports, Imports and the Balance of Trade
Current Balance of Trade
INTERNATIONAL TRADE:
WHY TRADE IN THE FIRST PLACE?
ADVANTAGES OF TRADE
This is a theory.
COMPARATIVE ADVANTAGE:
The theory of Comparative Advantage explains
why it can be beneficial for two countries to trade.
 A country may be able to produce more of an
item because it trades with another country.
 Basically, since the country does not have to
use resources to produce two goods for the
nation, it can focus solely on one good and
trade for the other good.
EXAMPLES:
USA (cars) and Costa Rica (fruits)
Japan (electronics) and USA (raw materials)
ADVANTAGES OF TRADE
COMPARATIVE ADVANTAGE:
The theory of Comparative Advantage explains why it can be
beneficial for two countries to trade.
DVD
Players
Personal
Computers
UK
20
5
Japan
40
20
Total Output
60
25
Before-Specialization
ADVANTAGES OF TRADE
COMPARATIVE ADVANTAGE:
The theory of Comparative Advantage explains why it can be
beneficial for two countries to trade.
DVD
Players
Personal
Computers
UK
40
0
Japan
24
28
Total Output
64
28
After-Specialization
ADVANTAGES OF TRADE
COMPARATIVE ADVANTAGE:
The theory of Comparative Advantage explains why it can be
beneficial for two countries to trade.
After-Trade
UK
Japan
Total Output
18
DVD
Players
Personal
Computers
22
6
42
22
64
28
6
ADVANTAGES OF TRADE
COMPARATIVE ADVANTAGE:
Before-Specialization
UK
Japan
Total Output
After-Trade
UK
Japan
Total Output
DVD
Players
20
40
60
Personal
Computers
5
20
25
DVD
Players
22
Personal
Computers
6
42
64
22
28
ADVANTAGES OF TRADE
ABSOLUTE ADVANTAGE:
This is a statement!
A country has an Absolute Advantage if it can
produce MORE of the good than another country
can, with less resources.
EXAMPLE: France can produce 10 liters of wine in 30
hours. Italy can produce 10 liters of wine in 20 hours.
 Italy has an absolute advantage over France.
EXAMPLE: Philippines can produce clothing with less
resources (money) used than the USA.
 Philippines has an absolute advantage over the
USA in clothing production.
WHY WE TRADE SUMMARY
There are two ways to compare the ability of two
countries that produce a good.
1. The country that can produce a good with a
smaller quantity of inputs has an absolute
advantage.
2. When two countries both produce items for the
propose of trading with each other and this
results in a less opportunity cost due to
specialization, these countries have a
comparative advantage.
4 BARRIERS TO
INTERNATIONAL TRADE
INTERNATIONAL TRADE BARRIERS
1.) TARIFFS:

A tariff is a tax placed on imports (goods
coming into the country).

It must be paid before goods can be taken
off a ship. (makes foreign products more
expensive)

The down-side:
Who is hurt by
tariffs?
US consumers of
Foreign products
Good source of income for government.
So if the government wants to PROTECT DOMESTIC
(US) businesses, what should it do to this tariff?
ANSWER: They should increase it because this makes it LESS
PROFITABLE buying from oversea producers. Very
Dangerous!
This action by the
US producers & consumers will be more
government is also known
likely to get goods from DOMESTIC (USA)
as a PROTECTIONIST
PRODUCERS.
TRADE POLICY
INTERNATIONAL TRADE BARRIERS
2.) QUOTA: (or maximum amount)
 A quota has the same effect on imports.
 Instead of imposing a tax on imports the
government sets a LOW quota on imports/exports.
 So, only a limited amount of imports can come
into/out of the country.
So if the government wants to PROTECT DOMESTIC
businesses, what should it do to this quota?
ANSWER: They should decrease it
because this makes a limited amount
of imports in the country, which will
increase the price of those imports.
Very Dangerous!
This action by the
government is also known
as a PROTECTIONIST
TRADE POLICY
INTERNATIONAL TRADE BARRIERS
Other Barriers to Trade:
OPEC: Organization of Petroleum Exporting Countries


Cartel Members: Algeria, Angola, Indonesia, Iran, Iraq, Kuwait,
Libya, Nigeria, Qatar, Saudi Arabia, UAE, and Venezuela
OPEC enforces Production Quotas on member countries.
What would this do to the $ of oil when production
quotas are set low and demand is high?
INTERNATIONAL TRADE BARRIERS
Price is USD per barrel of oil
OPEC: Organization of Petroleum Exporting
Countries
Year
Adjusted for
Inflation Price
1946
1958
1966
1974
1980
1992
1998
2001
2003
2004
2005
2006
2007
2008
17.26
21.83
20.06
39.77
95.50
28.81
15.35
27.29
28.10
36.05
50.64
61.08
67.23
145.75
INTERNATIONAL TRADE BARRIERS
3.) EMBARGOS:
 An embargo shuts down all imports from a country.
 Instead of imposing a tax on imports the government
sets a quota (or maximum amount) on imports.
 So, only a limited amount of imports can come into
the country.

EXAMPLE: CUBA & USA
So if the government wants to PROTECT DOMESTIC
businesses, should it enact an embargo?
ANSWER: No because this will cause less
competition since there are fewer imports, thus
possibly increasing the price of domestic
items. Americans will reduce spending and
domestic businesses may suffer.
This action by the
government is also known
as a PROTECTIONIST
TRADE POLICY
4. Standards/Quality
Some nations will only accept goods
meeting a certain quality into their
country
 This may limit trading partners
 Examples– U.S. doesn’t want leadbased painted toys, Germans are
selective of beer imports, England will
only accept grass-fed beef

HOW TO PROMOTE
FREE INTERNATIONAL
TRADE?
FREE INTERNATIONAL TRADE
In order to eliminate barriers to trade
such as tariffs & quotas countries will
establish trade organizations and charge less
(or no) tariffs and set no quotas.
Such as NAFTA
North American Free Trade
Agreement
(Formed in 1993)
What’s the Next Big Thing?
Free Trade Area of the Americas
FTAA
1. Mexico
2. Canada
3. USA
FREE INTERNATIONAL TRADE
Free Trade Area of the Americas: FTAA
Antigua and Barbuda
Bahamas
Barbados
Belize
Bolivia
Canada
Colombia
Costa Rica
Dominica
Dominican Republic
Ecuador
El Salvador
Grenada
Guatemala
Guyana
Panama
Paraguay
Peru
Saint Kitts and Nevis
Saint Lucia
Saint Vincent and the
Grenadines
Suriname
Trinidad and Tobago
United States
Uruguay
Haiti
Honduras
Jamaica
Mexico
Nicaragua
All the above are countries that have
expressed interest in the FTAA.
FREE INTERNATIONAL TRADE
E.U. (European Union) is a trade organization.
FREE INTERNATIONAL TRADE
A.S.E.A.N is a trade organization.
Association of Southeast Asian Nations
FREE INTERNATIONAL TRADE
W.T.O is a trade organization.
World Trade Organization
INTERNATIONAL TRADE
In-class Questions
1. What is the advantage of NAFTA or ASEAN?
• Free trade can increase the flow of goods from other countries,
giving consumers more LOWER PRICE choices.
2. What is a disadvantage of no tariffs?
• No tariffs might result in hurting US producers. If consumers
can now get cheaper goods from another country, then they will
not buy US goods.
3. Who is hurt by tariffs?
• Foreign companies that operate in the US (Nissan)
• US consumers who like foreign products (and also domestic
products)
EXCHANGING CURRENCY
EXCHANGE RATES:
 The exchange rate between two currencies shows how
much one currency is worth in terms of the other.
 For example an exchange rate of 120 Japanese Yen
to the U.S. Dollar means that ¥120 is worth the same
as $1. How does this relationship affect trade?
EXAMPLE QUESTION:
Over the course of one year, the Japanese Yen depreciates compared
to the Euro. Which two groups of people would benefit the most from
this occurrence?
A European consumer of European goods
B Japanese consumers of European goods
C European consumers of Japanese goods
D Japanese consumers of Japanese goods
EXCHANGING CURRENCY
EXCHANGE RATES:
QUESTION: What country (America or Mexico) would
benefit from a appreciated (strong) U.S. dollar?
ANSWER: If the U.S. dollar is appreciated, this means that
American goods and services are more expensive
to Mexico. At the same time, making Mexican
goods cheaper to U.S. consumers.
 So this decreases spending on U.S. goods and decreases
American GDP.
 More US spending will go to the cheaper Mexican products
because your money goes further in Mexico.
MEXICO COULD BENEFIT!
EXCHANGING CURRENCY
EXCHANGE RATES & THE STRONG DOLLAR PROBLEM
1) What is a “strong dollar”?
The value of the dollar is appreciating.
 ..or the value of the dollar rises compared to
other currencies.
 …or more foreign currency is necessary to
purchase U.S. dollars.
2) Who is aided by a strong US dollar?
Strong US dollars
would lower fuel
prices, but more
money would flow
out of the US.
 U.S. CONSUMERS because the prices of foreign
goods and services are lower since the US Dollar
goes further in terms of foreign currency.
3) Who is hurt by a strong US dollar?
 U.S. PRODUCERS because they can’t compete
with lower-priced foreign products.
 U.S. EXPORTERS because they can’t compete
with lower-priced imports.
Weak US dollars
would promote
foreign investment in
America and more
countries would buy
US products.
What we find is that a WEAK dollar can be a good thing.
CALCULATING EXCHANGE RATES
Let’s say you traveled to Japan and took $500 in U.S.
currency. When you exchanged the $500 in Japan, you
would receive about… $500 x 118.96 = 59,480 ¥
Let’s say you traveled to US and took £550 pounds. When
you exchanged the £550 pounds in US, you would receive
about…
£550 x 2.0292 = $1116.06
CALCULATING EXCHANGE RATES
Let’s say you traveled to Japan and took £8000
pounds. When you exchanged the £8000 in Japan, you
would receive about…
£8000 x 2.0292 = $16,233
$16,233 x 118.96 = 1,931,077 ¥
CALCULATING EXCHANGE RATES
Price of a D.S. in Japan is about 6,000 yen. What
would be the price if you could buy it in US dollars?
Average Price in US dollars
$130.00
6,000¥ x .0084 = $50.00
CALCULATING EXCHANGE RATES
SIMPLE FORMULA:
PRICE OF FOREIGN ITEM
EXCHANGE RATE COMPARED TO USD
Colombian Peso
Good or Service
Price in Foreign Currency
USD in Foreign
Currency
Price in U.S.
Dollars
Nike Shoes
95,000 Colombian pesos
2,362.28
$40.16
Jeans
45,000 Colombian pesos
2,362.28
$19.05
10k Gold Necklace
8,000 Colombian pesos
2,362.28
$3.89
Wisdom Teeth
Removal
420,000 Colombian pesos
2,362.28
$177.82
5500 total square
foot Home in
downtown Colombia
with pool
1,016,750,000 Colombian
pesos
2,362.28
$430,461.47