Trading with Other Nations
Benefits of Trade
-Creates Jobs (when new export industries are created or expanded)
-Cheaper (goods created through competition from imported goods)
-Efficient use of Resources (specialization)
Absolute Advantage-country produces more
US
Canada
Total
Shoes
Shirts
100
80
180
80
75
155
Comparative Advantage-a country can produce a product at a lower
opportunity cost.
Example
Lance Armstrong
Country
Wheat
Fruit
x
100 bags
100 boxes
y
1 bag
50 bags
Countries will not trade unless a comparative advantage exists.
Foreign exchange rate
The value of one countries currency in relation to another country’s
currency.
Fixed-tied to a stable currency like the dollar. (Called hard currency)
Floating-based on supply and demand
Value of dollar is based on demand for U.S. goods and services
Marginal Floating-central bank controls the value if it gets too low or too
high.
BIG MAC
In local
IN US
US
BRAZIL (rael)
China (Yen)
Mexico (peso)
2.49
3.60
10.50
21.90
2.49
1.55
1.27
1.25
Pricing
Country
US$
Australia .6478
Brazil
.5299
Japan (yen) .00905
Currency
1.5438
1.8870
111.06
Strong vs weak
1.00 US dollar .67 Euro
1.00 US dollar to 86.43yen
1.00 US dollar to 80.00 yen
Strong dollar means we import more, our dollar buys more.
Makes our trade deficit go up because we are buying more imports.
Our dollars leave the US and going to foreign countries.
Creates a trade deficit.
Because foreign countries have more US dollars they are able to invest more
in the US.
Balance of Trade- deals with Imports and Exports. How much we are selling
and buying.
Balance of Payments- deals with imports and exports and money being
invested back into the country.
Weak Dollar
Export more-foreign currency buys more US goods
Dollars stay in US
Creates trade surplus
Because foreign countries have fewer US dollars they invest less.
BARRERS TO TRADE
Tariffs-taxes that increase the price of imports.
Quotas-limits the number of specific goods that can enter the country.
Embargo-refusal to trade goods.
Standards-all goods must meet certain standards to enter a country.
FREE TRADE VS PROTECTIONISM
Free Trade-allows for trade without barriers.
Protectionism-puts in place. (Protecting US companies)
Job security (outsourcing of jobs)
Economic Security (depending on other countries put us at a disadvantage)
Infant or new Industries (starting new industries is expensive, can’t compete
easily)
FREE TRADE
Improved products (competition makes us better.)
Lower prices due to specialization and comparative advantage.
Helps exporters (if we place restrictions, what will foreign countries do to
us.)
GATT-Bilateral agreement
WTO-world trade organization
NAFTA-north American Free Trade Agreement
CAFTA-Central American Free Trade Agreement
ASEAN-association south East Asian
EU-European union