Economics LAP 4Economics LAP 4

ObjectivesObjectives

Explain why international trade is needed.Explain why international trade is needed.

Describe issues in international trade.Describe issues in international trade.

Explain why international tradeExplain why international tradeis needed.is needed.

ObjectiveObjective

May be in the same countryMay be in the same country

Often, in different parts of the worldOften, in different parts of the world

• Why trade with someone they never see?Why trade with someone they never see?

To get the best products at the lowest pricesTo get the best products at the lowest prices

To get products available only from other To get products available only from other countriescountries

• Producers benefit because buyers represent Producers benefit because buyers represent new, profitable markets.new, profitable markets.

• Economic journeys occur when producers and Economic journeys occur when producers and buyers trade.buyers trade.

• Both the producers and buyers should benefit Both the producers and buyers should benefit from international trade.from international trade.

• Will you?Will you?

Types of TradeTypes of Trade

DomesticDomestic

Occurs when producers and buyers are locatedOccurs when producers and buyers are locatedin the same countryin the same country

Example:

Fresh pears grownin Oregon and

marketed in Ohio

InternationalInternational

Takes place when a product is produced in one country Takes place when a product is produced in one country and consumed in anotherand consumed in another

Television sets Television sets are often made are often made

in Japan or in Japan or South Korea.South Korea.

Shoes are often Shoes are often made in made in

Malaysia or Malaysia or China.China.

Stereo Stereo speakers are speakers are

built in built in Canada.Canada.

Countries can import or export Countries can import or export goods and services.goods and services.

Imports are goods or services Imports are goods or services that are bought from producers that are bought from producers

in other countries.in other countries.

ImportsImportsExportsExports

Exports are goods or services that Exports are goods or services that businesses sell to other countries.businesses sell to other countries.

Buyers of exports include:Buyers of exports include:

• Individuals (importers)Individuals (importers)

• BusinessesBusinesses

• GovernmentsGovernments

General Examples:General Examples:

• The United States exports The United States exports manufactured goods, manufactured goods, chemicals, and food.chemicals, and food.

• Canada exports machinery Canada exports machinery and transportation equipment.and transportation equipment.

The Tucci family of Seattle imports The Tucci family of Seattle imports LavAzza coffee, the largest selling LavAzza coffee, the largest selling coffee in Italy. Originally operated coffee in Italy. Originally operated from the family’s garage, the from the family’s garage, the growing business, known as Italia growing business, known as Italia Imports, sells other items including Imports, sells other items including distributorships to other people.distributorships to other people.

Most countries have government agencies that Most countries have government agencies that regulate imports to make sure that imports:regulate imports to make sure that imports:

• Meet legal requirementsMeet legal requirements

• Are safe for consumersAre safe for consumers

Exporters find markets for their goods and Exporters find markets for their goods and services in other countries.services in other countries.

• They must comply with local and They must comply with local and foreign trade regulations.foreign trade regulations.

• They are responsible for shipping They are responsible for shipping the goods to their foreign the goods to their foreign importer.importer.

• National, regional, and local National, regional, and local government agencies help government agencies help exporters find new customers.exporters find new customers.

Businesses can benefit by engaging in Businesses can benefit by engaging in international trade.international trade.

Example:Example:

If you and a friend have If you and a friend have the exact same CD the exact same CD collection, there would be collection, there would be no reason to trade CDs.no reason to trade CDs.

If you and your friend had If you and your friend had 10 different titles in your 10 different titles in your respective collections, you respective collections, you could trade your less could trade your less favorite CDs for ones that favorite CDs for ones that you like. Both you and you like. Both you and your friend benefit from your friend benefit from this trade.this trade.

Businesses can benefit by engaging in Businesses can benefit by engaging in international trade.international trade.

Countries have different resources and trade to get Countries have different resources and trade to get other resources they need.other resources they need.

A country might produce some goods better or A country might produce some goods better or more cheaply because of:more cheaply because of:

Easy access to Easy access to raw materialsraw materials

Up-to-date Up-to-date technologytechnology

Workers with Workers with special skillsspecial skills

Countries are generally more efficient when they produce Countries are generally more efficient when they produce goods and services for which their resources are best suited.goods and services for which their resources are best suited.

Types of Trade AdvantagesTypes of Trade Advantages

An absolute advantage occurs when one nation has the An absolute advantage occurs when one nation has the ability to produce a good or service with fewer resources ability to produce a good or service with fewer resources than another nation.than another nation.

Countries specialize in products they can make at a Countries specialize in products they can make at a lower cost than other countries.lower cost than other countries.

U.S.-based Boeing manufactures U.S.-based Boeing manufactures large passenger aircraft. Australia large passenger aircraft. Australia doesn’t have the resources to doesn’t have the resources to produce passenger jets. Therefore, produce passenger jets. Therefore, the U.S. has an absolute trade the U.S. has an absolute trade advantage over Australia in jet advantage over Australia in jet production.production.

Types of Trade AdvantagesTypes of Trade Advantages

Comparative advantage occurs when a country can Comparative advantage occurs when a country can produce a product at a more efficient level than other produce a product at a more efficient level than other nations.nations.

Italy and Portugal can Italy and Portugal can produce high-quality produce high-quality shoes and cheese.shoes and cheese.

Because labor costs are lower, Because labor costs are lower, Portugal has an economic Portugal has an economic advantage over Italy in shoe advantage over Italy in shoe production.production.

If Italy has more resources If Italy has more resources and is more efficient in and is more efficient in cheese-making, they have cheese-making, they have a comparative advantage a comparative advantage in cheese production.in cheese production.

Portugal would benefit by producing more shoes than it needs Portugal would benefit by producing more shoes than it needs so it could trade with Italy for cheese. Similarly, Italy could still so it could trade with Italy for cheese. Similarly, Italy could still make shoes but would benefit more by making cheese and make shoes but would benefit more by making cheese and trading it to Portugal for shoes.trading it to Portugal for shoes.

Specific benefits of international trade include:Specific benefits of international trade include:

A better variety A better variety or quantity of goods or quantity of goods

and servicesand services

An improved An improved standard of living for standard of living for the citizens in both the citizens in both

countriescountries

Access to and availability Access to and availability of scarce resources, such of scarce resources, such as oil and diamondsas oil and diamonds

Lower prices for Lower prices for goods and services goods and services

due to increased due to increased competitioncompetition

Possible exchange Possible exchange of ideas and of ideas and technology among technology among countriescountries

Enhanced relations Enhanced relations among trading among trading

countriescountries

Increased income for the Increased income for the shipping and/or airline shipping and/or airline industry due to increased industry due to increased freight and tourismfreight and tourism

Describe issues in international trade.Describe issues in international trade.

ObjectiveObjective

Factors Affecting International TradeFactors Affecting International Trade

Technological Technological advancements such as advancements such as satellites, cell phones, satellites, cell phones, and the Internet help and the Internet help

bring the world “closer bring the world “closer together” and foster together” and foster international trade.international trade.

A Nation’s Bank AccountA Nation’s Bank Account

A nation uses an annual accounting record (balance of payments) to A nation uses an annual accounting record (balance of payments) to track all of its monetary transactions with other countries and includes:track all of its monetary transactions with other countries and includes:

ExportsExports

ImportsImports

Foreign aidForeign aid

Business Business investment investment

abroadabroad

Money Money spent by spent by touriststourists

A Nation’s Bank AccountA Nation’s Bank Account

Two components make up the balance of trade.Two components make up the balance of trade.

Money comingMoney cominginto the country into the country

(exports and money (exports and money spent by tourists)spent by tourists)

increases balance of payments.increases balance of payments.reduces the balance of payments.reduces the balance of payments.

Money going out of the countryMoney going out of the country(imports, foreign aid, and (imports, foreign aid, and

business investment abroad)business investment abroad)A nation creates a A nation creates a

favorable balance by favorable balance by having more money having more money

coming in than going out.coming in than going out.

The balance of trade is the difference between the The balance of trade is the difference between the two components of a nation’s balance of payments.two components of a nation’s balance of payments.

A trade surplus exists A trade surplus exists when the country when the country

exports more goods exports more goods than it imports.than it imports.

A trade deficit exists A trade deficit exists when a country imports when a country imports more than it exports.more than it exports.

A nation can have a positive balance if other monies A nation can have a positive balance if other monies coming in offset the trade deficit.coming in offset the trade deficit.

CompetitionCompetition

Competition forces companies to keep prices low and Competition forces companies to keep prices low and produce better products.produce better products.

American automakers American automakers compete with car compete with car manufacturers in Japan, manufacturers in Japan, Mexico, Germany, and Mexico, Germany, and South Korea. This has South Korea. This has led to changes in U.S. led to changes in U.S. business practices.business practices.

Businesses must continue to evaluate their products to Businesses must continue to evaluate their products to stay competitive.stay competitive.

CompetitionCompetition

Competition is good for the economy.Competition is good for the economy.

Keeps the economyKeeps the economylean and efficient. Forces lean and efficient. Forces

companies to produce companies to produce quality products or be quality products or be

forced out.forced out.

Factors affecting a country’s ability to compete Factors affecting a country’s ability to compete worldwide include:worldwide include:

• InflationInflation

• High unemployment levelsHigh unemployment levels

• Government supportGovernment support

• New, emerging economiesNew, emerging economies

CompetitionCompetitionChallenges that nations face in terms of competition Challenges that nations face in terms of competition include:include:

Training their workforce to competeTraining their workforce to competein the global economyin the global economy

Investing in Investing in factories and factories and

equipmentequipmentObtaining adequate Obtaining adequate

wages for all workerswages for all workers

Protecting the Protecting the environmentenvironment

Finding new trading Finding new trading partners and dealing partners and dealing with trade barrierswith trade barriers

Strength of a Nation’s CurrencyStrength of a Nation’s Currency

Currency values “float” or Currency values “float” or change in relation to change in relation to currency of other countries currency of other countries due to economic factors and due to economic factors and political events.political events.

Examples:Examples:

Consumers, investors, Consumers, investors, and tourists lost and tourists lost confidence in the confidence in the Argentine peso after Argentine peso after two Argentine two Argentine presidents resigned in presidents resigned in 10 days. As a result, 10 days. As a result, the peso experienced the peso experienced a 70% drop in value.a 70% drop in value.

In the 1990s, the U.S. dollar In the 1990s, the U.S. dollar was worth 20 to 30 cents was worth 20 to 30 cents more than the Canadian more than the Canadian dollar. American tourists dollar. American tourists could get more for their could get more for their money, which increased money, which increased tourism and helped the tourism and helped the Canadian economy.Canadian economy.

Strength of a Nation’s CurrencyStrength of a Nation’s Currency

Strong currency values increase imports from countries with Strong currency values increase imports from countries with weak currency values because foreign goods are less weak currency values because foreign goods are less expensive to buy.expensive to buy.

Because the Japanese Because the Japanese yen is one of the yen is one of the strongest currencies strongest currencies in the world, the in the world, the Japanese are able to Japanese are able to buy more imported buy more imported goods that cost less.goods that cost less.

A weak currency will generally decrease imports but will A weak currency will generally decrease imports but will increase exports.increase exports.

The Chinese government sets The Chinese government sets the value of its Chinese yuan the value of its Chinese yuan artificially low. Chinese artificially low. Chinese exports are high and imports exports are high and imports are low. The Chinese must are low. The Chinese must pay more for imported goods pay more for imported goods than people in other than people in other countries.countries.

To overcome exchange rates, some European countries To overcome exchange rates, some European countries use the same currency.use the same currency.

Some European Some European countries using the countries using the euro believe it euro believe it increases competition, increases competition, lowers prices, and lowers prices, and creates a predictable creates a predictable and stable economy.and stable economy.

Cultural and Political DifferencesCultural and Political Differences

Cultural differences include:Cultural differences include:

• LanguageLanguage

• ReligionReligion

• ValuesValues

• CustomsCustoms

• Social relationshipsSocial relationships

Political systemsPolitical systems

• International traders must be aware International traders must be aware of the stability of a country’s of the stability of a country’s political system.political system.

• They should know the protection a They should know the protection a country affords foreign traders.country affords foreign traders.

Government Control of International TradeGovernment Control of International Trade

International trade affects a country’s economy.International trade affects a country’s economy.

Imported products Imported products provide citizens with provide citizens with more choices and more choices and usually lower prices.usually lower prices.

Exported products Exported products provide citizens more provide citizens more domestic jobs.domestic jobs.

Protectionism occurs when a nation’s government Protectionism occurs when a nation’s government attempts to control trade with other countries.attempts to control trade with other countries.

Reasons for protectionism:Reasons for protectionism:

• To avoid trade deficitsTo avoid trade deficits

• To protect domestic industries against To protect domestic industries against foreign competitionforeign competition

Government Control of International TradeGovernment Control of International Trade

Results of protectionism:Results of protectionism:

• Provides more employmentProvides more employment

• Reduces competitionReduces competition

• Causes consumers to pay higher Causes consumers to pay higher prices at homeprices at home

• Creates trade problems with other Creates trade problems with other nationsnations

Governmental Control of International TradeGovernmental Control of International Trade

Trade barriers that governments use to limit trade:Trade barriers that governments use to limit trade:

Tariffs:Tariffs:

Taxes onTaxes oncertain goodscertain goods

Quotas:Quotas:

Limits placed on Limits placed on amount of exports amount of exports

or imports that or imports that move into or out of move into or out of

a countrya country

Licenses:Licenses:

Permits that nations use to Permits that nations use to regulate the amount of regulate the amount of

imports or exports into or out imports or exports into or out of their countryof their country

Product standards:Product standards:

Specifications that products Specifications that products must meet before they can be must meet before they can be

imported into a countryimported into a country

Product Product StandardsStandards

U.S. carsU.S. cars

CubaCuba

Embargo:Embargo:

Barrier that suspends Barrier that suspends all import-export trade all import-export trade with another countrywith another country

Government Support of International TradeGovernment Support of International Trade

Establish organizationsEstablish organizations

The European The European Union has united Union has united its members into its members into one economy.one economy.

Global organization that deals with the rules of Global organization that deals with the rules of trade between nationstrade between nations

Government Support of International TradeGovernment Support of International Trade

Create trade agreementsCreate trade agreements

The North American Free The North American Free Trade Agreement (NAFTA) Trade Agreement (NAFTA) has eliminated almost all has eliminated almost all trade barriers between trade barriers between Canada, U.S., and Mexico.Canada, U.S., and Mexico.

The mission of the General The mission of the General Agreement on Tariffs and Agreement on Tariffs and Trade (GATT) is to expand Trade (GATT) is to expand world trade and improve world trade and improve international trade relations.international trade relations.

Government Support of International TradeGovernment Support of International Trade

Use other methods of improving international Use other methods of improving international trade relations:trade relations:

Trade centers:Trade centers:

Offices and display rooms in Offices and display rooms in major foreign cities that assist major foreign cities that assist importers and exportersimporters and exporters

Trade missions:Trade missions:

Groups of business executives Groups of business executives and government officials who and government officials who travel to foreign countries to travel to foreign countries to promote trade between two promote trade between two countriescountries

Trade talks:Trade talks:

Communication channel Communication channel that helps settle disputes that helps settle disputes and improve the climate for and improve the climate for international tradeinternational trade

Government Support of International TradeGovernment Support of International Trade

Encourages growth of multinational Encourages growth of multinational corporations (MNCs)corporations (MNCs)

Organizations that conduct business in several countriesOrganizations that conduct business in several countries

• The United States imports just over 64 percent of its oil supply.

• Variety of factors affect what is paid at the gas pump.

• How can U.S. lower its dependence on oil imports?Drill in Alaska?Use less oil by driving fuel-efficient vehicles?

Discussion Questions

1. Should the U.S. keep relying on other countries to supply its oil?

2. Should the U.S. tap into its own natural resources?

3. Can the U.S. balance its resource needs and protect its natural environment?

• Select a product that you would like to import and sell.

• Conduct research to find countries or businesses that produce the item.

• Determine if any of the countries are subject to embargoes by accessing the Internet:

http://treas.gov (U.S.)http://www.dfait-maeci.gcca/trade/sanctions-en.asp (Canada)

• Determine how the identified embargoes would affect your ability to buy and sell the product.

MarkED

Acknowledgements

Original DeveloperChristopher C. Burke, MarkED

Version 1.0

Copyright © 2005MarkED Resource Center

Digital-based photography sources:

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