Chapter 7 Section 1
Global Economics
Objectives
•Describe how international trade benefits consumers.
•Explain the significance of currency exchange rates.
•Analyze the impact of the U.S. trade deficit.
1
Imports and Exports
-Imports: is a product
brought in for sale from
a foreign country
*Fuel
* Bauxite
-Exports: is a product sent to
a foreign country for sale
*Automatic data and
processing equipment
Types:
Manufactured goods - wireless phones
Producer goods – Automobile parts
Agricultural goods - Bananas
Services - Accounting
Raw materials – like petroleum and iron
2
Why might Nations Trade?
•If one nation lacks a resource it may spark a trade with one
that has it.
•To specialize in a certain good rather than manufacturing
several goods. Adam Smith, an 18th century Scottish
economist proved this effective.
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Benefits of Trade
Ways International Trade Benefits You and Others
•Consumer Choices
•Increased Competition
•Expanded Markets
•Benefit workers they employ
•International Relations
•Prosperity and Peace
4
Currencies and Trade
•If two countries with different currency want to do
business with one another the buyer must convert its
money to the sellers currency.
5
Exchange Rates
• The cost of one currency expressed in
terms of another currency is called
exchange rate.
• At one time, currency exchange rates
were fixed. They were set by
governments and rarely changed.
6
Flexible Exchange Rates
• Under this system, the price of buying a
particular currency rises and falls from day to
day because of demand and supply.
• For importers and exporters, flexible exchange
rates can make the cost of doing business
unpredictable.
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Factors Affecting Exchange Rates
cont.
• Changes in interest rates
• A country that offers high interest rates
increases the demand of currency.
• A currency’s value is also effected by
economic and political stability.
• The U.S. is considered a stable nation so
other investors around the world often
prefer to invest with us.
8
How Exchange Rates Affect Trade
• The strength or weakness of nation’s
currency affects the willingness of other
countries to trade with the nation.
• If the U.S. dollar is weak, exports from
the U.S. tend to increase.
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Understanding the Trade Deficit
• Balance of Trade~ difference between
value of a nation’s exports and it’s
imports
• Trade Deficit~ negative balance of trade
–Occurs if country spends more on
imports
10
Understanding the Trade Deficit
• Balance of payments~ an accounting of all
financial transactions that involve other
countries and financial dealings
• All imports/exports recorded in balance of
payments with the goal equally zero
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The U.S. Trade Deficit
• U.S. has had a trade deficit almost every year
since 1970’s
• Some people think the trade deficit is harmful
because of the increase in foreign investment
and are concerned with unemployment
• Some people see foreign investment not as a
problem, but as a sign that the U.S. economy is
strong enough to attract investors and is
prosperious.
12
Chapter 7 Section 2
Trade Restrictions and Agreements
Objectives
•Describe methods used to restrict international trade.
•Analyze arguments in favor of protectionism and free trade.
•Explain the impact of major trade agreements.
13
Ways to Restrict Trade
• Tariff – tax on imports
• Most common trade restriction
• Discourages from buying out of country
1. Revenue-used for government
revenue
2. Protective-straight to the producer
14
Ways to Restrict Trade
• Quota - a government limit on the
quantity or value of a certain imported
product
15
Ways to Restrict Trade
• Embargo - government order prohibiting
trade
• Specific product or country
• Used for political reasons
16
Protectionism Versus Free Trade
Protectionism-a policy of using trade restrictions to protect
domestic business from foreign competition.
Free Trade-a policy of minimizing trade restrictions.
17
Arguments for Protectionism
• National Security
• Job Security – imported products costs less than
those made in U.S. because workers from other
countries are paid less
• Infant Industries
• Environmental Protection
• Unfair advantages
18
Arguments for Free Trade
•
•
•
•
Effects on Export
Effect on consumers – more for their money
Benefits of Specialization
Benefits of Competition – Can improve
production efficiency, quality of products, and
lower prices
• Alternatives
19
International Trade Agreements
• Between WW1 and WW2 international trade
was hindered by different countries practice of
protectionism.
• In order to increase trade many countries began
to adopt a free trade policy after WW2 to
decrease trade barriers.
20
GATT and the WTO
• World Trade
Organization (WTO)
– An international
organization that
governs trade
between over 140
nations.
• General Agreement
on Tariffs and Trade
(GATT)
– Signed by 90
countries in 1941
– Promotes
international trade.
– New GATT signed in
1994 to reduce or
remove trade
barriers.
21
North American Free Trade
Agreement
• NAFTA
– Wide ranging regional trade agreement
between U.S., Canada, and Mexico to give
legal protections to investors and
international business.
– Started January 1, 1994
22
European Union
• Organization of European nations
– Goal is to create a unified and strong market
– Euro is the European Union’s common
currency.
23
Technology
•making the world smaller.
Media influence
Companies
•Multi-National- companies with divisions in more than two
countries
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