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and South-Western are trademarks used herein under license.
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Trade Terminology
• Exports
– Value of goods and services sold to foreigners
• Imports
– Value of goods and services purchased from
foreigners
• Trade balance
– Value of nation’s exports minus imports
• Trade deficit
– Amount by which nation’s trade balance is in deficit
• Imports exceed exports
• Trade surplus
– Amount by which nation’s trade balance is in surplus
• Exports exceed imports
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Country Export and Import Data
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Absolute Advantage
• Country can produce a good at lower resource
cost than another country
– Example: Growing coffee in Brazil and growing barley
in United States
• Brazil can produce coffee at lower resource cost than can
United States because it has better climate to do so
• United States is better suited for growing barley at lower
resource cost than is Brazil due to better weather, proper
land, machinery, and technology
– With United States specializing in barley and Brazil specializing
in coffee, both countries would produce more total output than
if each country tried to produce both goods
» Larger total output means larger total consumption: each
country could benefit from specialization and trade
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Comparative Advantage
•
Country can produce a good at lower opportunity cost than another country
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Comparative Advantage (cont.)
• From Table 9-2:
– Opportunity cost of producing two floppy disks in U.S. is one pair
of shoes (2:1 ratio)
– Opportunity cost of producing two floppy disks in Greenland is
two pairs of shoes that will not be produced (1:1 ratio)
• Because U.S. gives up fewer shoes when producing floppy disks,
has comparative advantage in floppy disk production
– Opportunity cost of producing two pairs of shoes in U.S. is four
floppy disks (1:2 ratio)
– Opportunity cost of producing two pairs of shoes in Greenland is
only two floppy disks (1:1 ratio)
• Greenland has comparative advantage in shoe production
– If U.S. specializes in floppy disk production, and Greenland specializes
in shoe production, two countries will be able to come up with rate of
exchange in trade that will be mutually beneficial
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Production Possibilities Curve
13-7
Consumption Possibilities Curve
•
Shows alternative combinations of maximum amounts of two products that
can be consumed within country during particular time period
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The Basis for Advantage
• Factors that may determine why one country is
better at producing a good than another country:
– Weather and climate
– Labor productivity
• While skills and education are important determinants of
labor productivity, even more important are capital and
technology used in conjunction with labor
– As a result, U.S. workers are generally higher productive
– Quality and availability of land
– Capital equipment
– Technology
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No Trade vs. Free Trade
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The Effects of Free Trade
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Restrictions to Free Trade
• Two common types of trade restrictions
are quotas and tariffs
– Quota
• Restriction on quantity of imported good
– Tariff
• Tax on imported good
• Purpose of most U.S. trade restrictions is
to force or encourage American
consumers to buy more American-made
products and fewer foreign counterparts
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The Effects of Trade Restrictions
13-13
Less-Developed Countries (LDCs)
•
Problems that people of less-developed
countries (LDCs) experience with trade:
1. Lack of diversity in exports
2. Reliance of many LDCs on primary commodities
(unprocessed raw material and agricultural
products) for export
3. Overreliance on important imports from other
countries
4. Globalization has created opportunities for local and
foreign companies to exploit local workers, including
children, in production of goods for export
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Problems with Primary Commodities
• Have experienced a problem known as
declining terms of trade
– Price of country’s exports declines relative to
price of imports
• Prices for these types of products are
often very unstable
– Inelastic demand characterizes markets for
many primary commodities
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Problems with Primary Commodities (cont.)
•
Supply for primary commodities tends to fluctuate a lot
– Combination of fluctuating supply and inelastic demand results in large
fluctuation in price
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Politics and Trade
• United States has restricted trade (in past
and present) with several countries to
bring about political goals
– Cuba
– Iran
– Sudan
– Libya
– North Korea
– China
– Vietnam
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International Trade Agreements
• North American Free Trade Agreement (NAFTA)
– Agreement between United States, Canada, and Mexico
allowing more equal access to one another’s markets
•
•
•
•
•
European Union (EU)
Mercosur
Andean Community
ASEAN
General Agreement on Tariffs and Trade (GATT)
– International trade agreement, first negotiated in 1947, that has
included efforts to reduce tariff barriers among countries of world
– Replaced by World Trade Organization (WTO)
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The Economic Left and the Economic Right
• THE ECONOMIC LEFT
(Liberal)
– Concerned about effects
of free trade on U.S.
workers and businesses
– Argue that government
intervention in form of
quotas and tariffs is
necessary to protect U.S.
citizens from “unfair”
trade practices in foreign
countries
– Concerned about effects
of globalization on less
developed countries
• THE ECONOMIC
RIGHT (Conservative)
– Generally favor free trade
– Feel free trade results in
efficiencies that arise in
general from free markets
– Concerned about
inefficiencies with trade
restrictions
– Promote freer markets for
international trade
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Appendix: Exchange Rate Determination
• Exchange rate is price of one country’s
currency in terms of another country’s
currency
– Always a relative value
• Most of industrialized world uses flexible
(floating) exchange rate system
– Exchange rates are determined on basis of
demand and supply
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Appendix: The Dollar and the Peso
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Appendix: Appreciation and Depreciation
•
Appreciate: Value of one country’s currency increases relative to
•
another country’s currency
Depreciate: Value of one country’s currency decreases relative to
another country’s currency
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Appendix: Economic Policy
• Economic policy in United States (or any other
country) can have impact on exchange rates
– Trade restrictions on imports
• If U.S. purchases of imported good decline, so does demand
for foreign currency with which to pay for good
– As demand for foreign currency falls, value of that currency
decreases (and relative value of dollar increases)
» Rising value of dollar makes exports more expensive to
foreign consumers, who will likely purchase fewer of them
– Interest rates
• If U.S. interest rates rise relative to interest rates in other
countries, U.S. financial markets now become more attractive
to foreign investors
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Appendix: International Management
of Exchange Rates
• Group of Eight (G-8)
– Eight countries (United States, Canada, Britain,
France, Italy, Germany, Japan, Russia) that
coordinate policies in effort to influence exchange
rates
• Major goal of G-8 is to stabilize exchange rates of major
world currencies within acceptable range of one another
• Six Markets Group (Asian G-6)
– Six (original) countries (United States, Japan, China,
Singapore, Australia, Hong Kong) that coordinate
financial policies
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