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Unit 4: International Trade

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michelle ashmore

on 13 April 2018

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Transcript of Unit 4: International Trade

Unit 4: International Trade
Why do we trade?
Economic Systems
So, the US dollar
appreciates or depreciates compared to other nations
Who Do We Trade with?
free trade agreements among nations in a region.

goals: reduce/eliminate barriers, increase specialization and efficiency, common currency, building infrastructure
(North American Free Trade Agreement)
arrangement between the US, Canada, and Mexico to reduce barriers in trade
(European Union)
28 European nations that share a currency and minimal barriers to trade
(Association of Southeast Asian Nations)
10 SE Asian nations agree to decrease barriers
Import Quota
limit on the # of goods that can be imported
ban on all goods from a nation
tax on imported goods
a minimum quality that a product must have to be imported
the restrictions placed on trade with other nations.

some are self-imposed while others are forced by the exporting nation.
Is Trading a good idea?
International Currency...
how is the US doing?
choice of job, what to buy, what to sell, etc.
make the best goods
voluntary exchange
producers and consumers choose who we want to exchange/trade/barter with
do what is best for you
we can own the factors of production
profit motive
the goal is to make money!
*self inflicted
allows domestic producers to have advantage!
* self inflicted
Absolute v Comparative Advantage
trade allows for an increased variety of goods available
EXPORT = what is sold to other nations

IMPORT = what is bought from other nations
balance of trade = when a nation imports as much as it exports

trade surplus= more # exports than # imports

trade deficit = more # imports than # exports

Absolute advantage:

the ability of a nation to make more of a product than another nation.
Comparative advantage:

the ability of a nation to produce a good at a lower opportunity cost than another nation
which nation has
Absolute advantage
in cars?
in trucks?

country B
country B
Which country has comparative advantage
in cars?
in trucks?

will they trade?
country A
and country B
no. they have comparative advantage in the same thing (cars) so they will both focus on making cars
likes trade (agreements)
improves efficiency
consumers have variety
lowest possible prices
increase trade agreements (NAFTA, ASEAN, EU)
increase barriers, restrict trade
Gov't should protect national security. can't rely on other nations for vital goods (oil, military)

help our infant companies from foreign competition

put trade barriers in place

balance of trade and payments
First we need to look at our money in common terms to see how much trade will cost.
exchange rate: our nations currency in terms of another nations currency.
look for the part of the table that =1USD
(or USD in foreign currency)

FOREIGN TO USD = problem / chart

USD TO FOREIGN = problem x chart
when you get home from a trip... you DIVIDE your laundry
when you go on a trip you multiply your bags with soveniers
1) 50 USD in Euros

2) 100 Australian dollars in USD

3) Adams decides to go to Great Britain this summer because she loves English tea. She brings $50 to buy souvenirs. How much will she have in pounds?

4) When Joe gets home from Iceland with 25 krona, how much will he have to buy dinner at McDonald's?
Appreciation - increase in the value of our $ compared to other nations (our $ is Stronger)

Depreciation - decrease in the value of our $ compared to other nations (our $ is Weaker)
some benefit from Appreciation of $
When the US $ is strong:
import more (cheaper to buy stuff)
travel abroad more
export less ( our stuff is more expensive)
US companies operate overseas (outsourcing)

* buy more, sell less (deficit)
Some benefit from depreciation
When the US $ is weak...
import less (their stuff is expensive)
travel abroad less (stay within US)
export more (our stuff is cheaper)
foreign companies come to US to produce

*buy less, sell more (surplus)
TRADE too much?
Products Under US Import Quotas:
products with more than 65% sugar content
Peanuts and peanut butter
Many specific dairy products (e.g. powdered milk, baby formula)
Animal feed
Wire rod
Ethyl alcohol
Mandarin oranges
Csonda can grow more turnips than Queoldiola.
Csonda can make more sundials than Queoldiola.
government help
or assistance
the counter argument (wanting free trade)
Costs and Benefits of Trade barriers
Costs of trade barriers
For consumers:
For producers:
increased prices

less variety

less consumers abroad

less resources available

Benefits of Trade barriers
For consumers: For producers:

of goods are
less competition

more control over prices
foreign currency in USD USD in foreign currency
Australian Dollar 1.2867 0.77170
European Euro 0.9068 1.1026
British Pound 0.6563 1.5235
Icelandic Krona 135.1097 0.0074

the main arguments against free trade:
ratio to determine what you are giving up.
look at the price of the USD from year 1 and year 2.
in year 1 1USD costs .49 pounds
in year 2 1USD costs .52 pounds
since the USD was more expensive for people holding British pounds, the USD appreciated compared to the pound.
Try the Danish Krona.
year 1 1USD = 5.17 krona
year 2 1USD = 4.83 krona
since the USD cost less for people holding krona in year 2, the USD depreciated compared to the USD
1. protecting infant industries

use trade barriers to help new businesses establish without too much big competition
but how do we know which companies will make it?
2. protect national security -

maintain industries critical to nation's security... don't outsource. This is why we have an embargo!
how do you determine which company is vital to national security?
3. protect domestic employment -

don't outsource jobs. developing nations will work for less $
but doesn't domestic production cause prices to be higher?
4. protect workers in developing countries from unfair labor practices -

by limiting the outsourcing, we limit the unfair labor practices that occur
but wouldn't they be without jobs entirely without our outsourcing?
5. protecting the environment in developing nations -

the less developed nations have more lax environmental standards, so we should reduce the trade with these nations
won't trade help the nations develop and then the environmental standards will increase?
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