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Economics Unit 7: The Global Economy
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Economics Unit 7: The Global Economy
A. Why Nations Trade
1. b/c nations believe that the
products they receive are worth
more than the products they give up
2. specialization allows people to focus on what they
do best
B. The Basis for Trade
1. Absolute & Comparative Advatage
1. 1776 Adam Smith in his book Wealth of Nations
argues for importing cheaper goods made abroad.
2. Absolute Advantage
c a. def.- country's ability to produce a given
product more efficiently than another country
b. 1st discussed by Adam Smith
3. Comparative Advantage
a. def- country's ability to produce a
given product relatively more
efficiently than another country;
production at a lower opportunity cost
C. The Gains from Trade
1. Comparative advantage is based on the assumption
that everyone will be better off by specializing in the
products they produce best.
C. The Gains from Trade
2. specialization & trade increases the total world
output
3. Nations that have strong trade relations have
increased political stability & cooperation
4. Economists like to see increased
trade b/w nations b/c
it tends to lower potential
hostilities b/w nations
5. Gains from trade also help an economy to
grow.
C. The Gains from Trade
A. Restricting International Trade
1. Tariffs & Quotas are two ways trade has
been restricted.
2. tariff- tax placed on imports to increase
their price in the domestic market.
2. Barriers to
International Trade
a. protective tariff- tariff high enough to
protect less-efficient domestic industries
b. revenue tariff- tariff high enough to
generate revenue for gov. w/o actually
prohibiting imports
c. In the past, tariffs were used for
revenue
3. Quotas
d. Today, tariffs are used to protected selected groups over others.
1. ex. steel tariffs- used by Bush in 2002 to protect the American steel
industry; caused the price of domestic steel to rise
2. ex. Obama used a 35% tariff to protect union workers; caused the
price of all tires to rise.
3. Quotas- limits on the amt. of a good that is allowed to be imported
a. Foreign goods sometimes cost so little that high tariffs don't work to
protect markets.
b. In those cases nations will use quotas.
c. Successful? Maybe
4. Other Barriers
4. Other Barriers
a. embargoes- gov. order prohibiting the movements of goods to a
particular country
b. inspections- process by which imported goods are subject to a more
rigorous process than domestic goods.
c. licenses- requiring a license to operate/import
d. health concerns- problems with GMOs
e. nationalism and culture
B. Arguments for Protection
1. Protectionists- people who want to protect domestic producers against
foreign competition w/tariffs, quotas, & other trade barriers.
2. Free traders- people who prefer fewer trade restrictions
3. Protectionists argue that:
a. countries can become too specialized making them too dependent on
other countries
b. the infant industries argument- new & emerging industries should be
protected from foreign competition
c. tariffs & quotas protect domestic jobs from cheap foreign labor.
d. keeping the money at home
e. balance of payments
1. def.- difference b/w money pd. to &
money received from other nations in
trade;
2. protectionists policies help w/ trade deficits
f. national pride
C. The Free Trade Movement
B. Arguments for Protection
1. trade barriers to protect domestic industries &
jobs works only if the other countries don't
retaliate
2. In the 1930's Congress passed the
Smoot- Hawley Tariff Act that raised
imported goods to over 70%
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3. International trade came
to a stand still
4. 1934, passed the Reciprocal Trade
Agreements Act, which allowed it to reduce
tariffs up to 50% if the other country does
the same
C. The Free Trade Movement
5. Most Favored Nation Status (MFN)- trade law
allowing a 3rd country to enjoy the same tariff
reductions the US negotiates w/another
country.
6. WTO
a. 1947- General Agreement on Tariffs
& Trade (GATT) signed by
23 countries.
b. GATT is now administered by the
World Trade Organization (WTO).
c. WTO settles trade disputes b/w nations,
negotiate trade agreements, provides
technical assistance, & training for
development
C. The Free Trade Movement
7. NAFTA
a. North American Free Trade Agreement
b. reduces tariffs b/w Canada, US, & Mexico