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INTERNATIONAL TRADE

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by

Brad Hayes

on 19 April 2017

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Transcript of INTERNATIONAL TRADE

INTERNATIONAL TRADE
The key to INTERNATIONAL TRADE is SPECIALIZATION
A country has an
absolute advantage
when it can produce more of something
using the same amount of resources
as another country.
ABSOLUTE AND COMPARATIVE ADVANTAGE
BARRIERS TO TRADE
FOREIGN EXCHANGE RATES
(FOREX MARKET)

EXCHANGE RATE=The price of one country's currency interms of another country's currency.
TRADE BARRIERS
VS.
FREE TRADE

Most international trade is not only in GOODS, but SERVICES
Ex. Banking, financial planning, insurance, Software design, etc.
International Trade equally important to all countries--poorest & richest
If you want to know what a country specializes in—look at its exports
Countries tend to specialize in what they are good at doing.
comparative advantage, and world production increases this way.
Modern trade theories state that the world is better off if countries
specialize
in their
comparative advantages.
A country has a
comparative advantage
when they can produce a product at a
LOWER OPPORTUNITY COST
than another country
Since nobody is on the GOLD STANDARD anymore, MOST exchange rates are now...
FLEXIBLE or FLOATING RATES
--Rates that change based on supply and demand.
For most of the 1900's, the world depended on
FIXED EXCHANGE RATES
--A system where rates were based on gold, and never changed.
http://www.xe.com/ucc/
Pros-Trade has increased,cheaper products, economic growth for Mexico
Cons-Domestic companies can't compete. Loss of American jobs to Mexico
NAFTA-US, Mexico, and Canada
COMMON ARGUMENTS FOR PROTECTIONISM (HAVING TRADE BARRIERS)
1. Other countries can produce things cheaper. This forces American companies to hire workers overseas (outsourcing) and ship the product back for FREE.
2. When Americans purchase foreign goods, our dollars leave the country.
3. Having Free Trade could cause national security issues.
4. We can't control the standards of things made in other countries. Safety issues.
COMMON ARGUMENTS FOR FREE TRADE
(HAVING NO BARRIERS TO TRADE)
1. Free trade allows us to focus on Comparative Advantage and export more valuable things.
2. Free trade increases the variety and amount of goods available to domestic consumers.
3. Consumers get things at lower prices with Free Trade.
4. Free Trade forces domestic companies to be more innovative and efficient.
Tariff-A tax on an imported good or service.
It increases the price of a foreign made product in comparison to a domestic made product
Quota-The maximum amount of a good which may be imported.
Embargo-A government order restricting or banning trade of certain products or anything from a certain country.
Standards-Having minimal levels of safety or quality that must be met. Could mean acquiring a license or certification of quality.
FIRST 2:15 or so...
STOP AT 6:10
PRACTICE!!!!
Types of Trade Blocs
(Blocs DO NOT BLOCK!!!)
Free Trade Area
All trade barriers among the members are removed. All members are free to import and export goods and services among themselves.
Continue to maintain independent trade policies with non-member countries.--NAFTA
Common Market
In a common market, the members eliminate internal trade barriers, adopt common external trade barriers and allow free movement of resources, for example labor, among member countries.-MERCOSUR
Economic Union
Members eliminate internal barriers, adopt common external barriers, allow free movement of resources, and adopt a uniform set of economic policies/currency.--European Union (EU)
http://www.visualcapitalist.com/interactive-mapping-flow-international-trade/
http://www.visualcapitalist.com/mapped-global-shipping-routes-250-million-data-points/
BALANCE OF TRADE VS.
BALANCE OF PAYMENTS

REMEMBER, NET EXPORTS IS
X , or (X-M)

N
TRADE DEFICIT
=Importing more than exporting
TRADE SURPLUS
=Exporting more than importing
http://atlas.cid.harvard.edu/explore/tree_map/export/lby/all/show/2014/
Balance of trade
includes only goods and service --
Easier view
Balance of payments
considers ALL international transactions --
More complete view

Q-In recent years, would this be positive or negative for the U.S.?
US sells cars to Mexico
Mexico buys tractors from Canada
Canada sells syrup to the U.S.
Japan buys Fireworks from Mexico

For all these transactions, there are different national currencies.
Each country must be paid in their own currency
The buyer (importer) must exchange their currency for that of the sellers (exporter).

How the FOREX WORKS
In the FOREX market we only look at two countries/currencies at a time
Ex: US Dollars and Euros
We examine the price of one currency in terms of the other currency. Ex:$3 = €2
The Exchange Rate depends on which currency you are converting.

If you need more dollars to buy one euro (the price for a euro increases)?
Ex: From $3=€2 to $6=€2
The U.S. Dollar DEPRECIATES relative to the Euro.

If you need less dollars to buy one euro (the price for a euro decreases)
Ex: From $3= €2 to $1= €2

The U.S. Dollar APPRECIATES relative to the euro.

Appreciation-
The increase of value of a country's currency with respect to a foreign currency

Less units of dollars are needed to buy a single unit of the other currency.

The dollar is said to be “Stronger”
Depreciation
- The loss of value of a country's currency with respect

More units of dollars are needed to buy a single unit of the other currency.

The dollar is said to be “Weaker”
This HURTS American consumers of foreign goods
This HURTS foreign consumers of American Goods
DEPRECIATION OF CURRENCY
APPRECIATION OF CURRENCY
http://atlas.media.mit.edu/en/visualize/tree_map/hs92/export/usa/all/show/2015/
http://atlas.media.mit.edu/en/visualize/tree_map/hs92/export/mwi/all/show/2015/
Because they buyer is using "Stronger" currency that ends up in the exporters pocket
Full transcript