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Chapter 17

Chapter 17. Resources for Global Trade. Chapter 17.1. Absolute and comparative advantage. Learning Target: U se the concepts of absolute and comparative advantage to explain why goods and services are produced in one nation or locale versus another. Student success criteria:

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Chapter 17

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  1. Chapter 17 Resources for Global Trade

  2. Chapter 17.1 Absolute and comparative advantage

  3. Learning Target:Use the concepts of absolute and comparative advantage to explain why goods and services are produced in one nation or locale versus another. Student success criteria: Students can explain why nations trade due to absolute and comparative advantage.

  4. Why Nations trade

  5. We trade because we need stuff and…. • We specialize in particular goods/services • What is France known for?

  6. How do we know what a country or state specializes in? • What do they export? • And if you want to know what they need or want? • That would be their imports • But what if you can do it all yourself?

  7. Extent of trade • Trade is beneficial even for countries like the US that can literally produce everything it needs. • One reason is the basis for trade itself. If a product can be produced more cheaply somewhere else – then that product will likely be traded. • This can be more explicitly explained by looking at absolute and comparative advantage.

  8. Absolute vs. comparative advantage • Absolute Advantage is a country’s ability to produce more of a given product than another country can produce. • Comparative Advantage is a county’s ability to produce a given product relatively more efficiently than another country by doing it at a lower opportunity cost.

  9. So let’s look at one product: Coffee • Can the United States grow coffee? • Could other states also grow coffee? • Yes, Georgia and Florida are possibilities.

  10. So why don’t other states grow coffee commercially? • Comparative advantage • Cheaper labor • Better climate • Longer growing season, etc. • But there is no way Hawaii can grow all the coffee we demand • So coffee is something we trade for

  11. What country would likely have absolute advantage as well as comparative advantage for coffee?

  12. Another example… • First off we have 2 countries that each produce 2 products • If Alpha produces just coffee it can produce 40 lbs. • If Beta produces just coffee, it can produce 6 lbs. • Who has absolute advantage? • If both produce just cashews, Alpha can produce 8 lbs and Beta 6 lbs • Absolute advantage goes to? Alpha Alpha

  13. So should beta pack up their marbles and go home? • NOOOOOO….. • Because Beta has COMPARATIVE ADVANTAGE for one product

  14. Now let’s look at the PPF for Alpha and beta Beta's opportunity cost of producing 1 pound of cashews is 1 pound of coffee—whereas Alpha would have to give up 5 pounds of coffee to produce the same amount of cashews. Beta has a comparative advantage in the production of cashews because it is the lower-cost producer.

  15. The Gains from Trade…

  16. Increased world production When production is up, what happens to price?

  17. Increased political stability • Cooperation in international economic affairs comes BEFORE political cooperation. • Are they still enemies?

  18. Faster economic growth • Access to necessary raw materials (Japan would be screwed without this) • A bigger marketplace – increases choice which increases competition which is good for buyers and sellers • Homework: • Get an article on the current issues regarding US trade tariffs, read and annotate – be ready to explain your article Thursday.

  19. Chapter 17.2 Barriers to International trade

  20. Learning Target:Assess the impact of trade policies (i.e. tariffs, quotas, export subsidies, product standards and other barriers), on domestic activity and world trade. Student success criteria: Students can explain the purpose of and outcomes of trade barriers using examples from current events.

  21. Restricting International trade • Tariffs: A tax placed on imports to increase their price in the domestic market • Quota: A limit placed on the quantity of a product that can be imported.

  22. Turn and talk • What is the difference between a protective tariff and a revenue tariff? • Create an example for each that is DIFFERENT from what is in the book. • Why would the government institute a quota? • How do quotas positively impact business while negatively impacting consumers?

  23. Other barriers • In your small group – come up with an example for each of the following barriers without repeating the examples from the book • Embargos • Inspections • Licenses • Health concerns • Nationalism and culture

  24. Arguments for protection • Protectionists: People who favor trade barriers to protect domestic industries • Free traders: prefer fewer or NO trade restrictions. • 6 arguments FOR protectionism:

  25. 1. Aiding National defense • If a country becomes too specialized and therefore too dependent on other countries from which it imports – that could be a threat to that nations’ security. Why? • Because if a nation you depend upon for goods/services ends up in a war – you end up without those goods. Or worse, you end up in conflict with a nation you depend upon – you are in real trouble. This happened to Japan in WWII when the US placed an oil embargo on them.

  26. 2. Promoting infant industries

  27. 3. Protecting domestic jobs US now produces less than 1% of the worlds steel – protectionists say we could have prevented that.

  28. Keeping the money at home (limits imports) • not really an effective argument as the money that is sent overseas from purchases of foreign products is returned when they purchase our goods. • Helping the Balance of payments • Again money from exports stimulates the US economy so this really isn’t a good argument • Supporting National Pride • Harley Davidson’s were protected for awhile • France only allows a certain percentage of movies from US

  29. The free trade movement • Smoot-Hawley Act – created a global halt to trade because tariffs were so high (up to 70%). Nations retaliated with their own tariffs… • Reciprocal Trade Agreements Act – reduced tariffs up to 50% if other countries “reciprocated”. • Most favored nation clause was also in act

  30. The WTO • GATT (General Agreement on Tariffs and Trade) 23 countries • Trade Expansion Act of 1962 expanded the president of the US power to negotiate tariff reductions • By the early 1990’s – more than 100 countries • Now managed by the WTO • Enforces trade agreements signed under GATT • Settles trade disputes between nations • Organizes trade negotiations and provides technical assistance and training for developing countries • 159 countries • Trade is flourishing

  31. nafta • Stands for? • Pre NAFTA – exports to Mexico from US had an average 10% tariff • ½ the goods imported had a 4% tariff the other ½ were duty free • US, Mexico and Canada agreed to a phase out of all tariffs – completed phase out in 2008 • World’s largest free trade area • Some jobs were lost in US but overall the increase in trade has been an unqualified success

  32. Chapter 17.3 Foreign Exchange and Trade deficits

  33. Learning Target:Describe how interest rates in the United States impact the value of the dollar against other currencies (such as the Euro), and explain how exchange rates affect the value of goods and services of the United States in other markets. Student success criteria: Students can determine exchange rates for different currencies.

  34. Financing International Trade • In order for our “global economy” to work – different currencies have to be bought and sold before any actual goods can be exchanged. • If a company in Japan wants to purchase I-pads – they must pay Apple in US dollars – so they “purchase” US dollars with their Yen. This is all done on the foreign exchange market.

  35. Foreign exchange rates update in real time… The price of one country’s currency or the “foreign exchange rate” is quoted in two ways. First column – what another currency is worth in US currency Second column – what a US dollar buys in a foreign currency

  36. Fixed Exchange Rate • The value of your money is measured in gold – literally. • People would buy things from another country (using their currency – not exchanging it) and the money was worth a portion of that countries actual gold reserve. • That worked out fine until we became a global economy and countries holding US dollars actually wanted real GOLD in exchange. • Nixon took us off the gold standard.

  37. Flexible Exchange Ratesaka floating exchange rate • Supply and demand determine the value of currency. As the supply of one countries currency increases the value of it decreases. • How does that work? • We buy a ton of goods that are from China. • To buy them we first have to exchange our dollars for yuan. • The more dollars we exchange for yuan – the more dollars there are in the marketplace for money (the exchange) • What happens to price when supply goes up?

  38. So what happens to the Yuan? • So glad you asked… • While the supply of US dollars is going up and the value of the dollar is going down… • The supply of yuan is going down so the value is going up? • Wouldn’t that mean that the Chinese money would go further on American products and American goods would be cheaper for them than their own products? • That would be correct – except it doesn’t work that way for China

  39. $$$$$$$$$$$$ - The more there is the “weaker” the dollar is (makes American products cheaper to buy for foreign nations) ¥¥¥¥ - The less there is available – the “stronger” the yuan should be (so Chinese products should get more expensive for US citizens and other foreign nation’s citizens). But China artificially controls the value of their currency and they do not participate in the flexible exchange system. This keeps Chinese products cheap and other nation’s products expensive. BOOOOO!

  40. Trade deficits and surpluses • A trade deficit is when country A imports more from country B than it exports (like us and China) • A trade surplus is when country A exports more to country B than it imports (like us and Canada)

  41. All my life’s a circle… • When the dollar is strong foreign goods become cheaper. We buy more imported goods and more US dollars become available in the exchange market. This is great for businesses that import foreign goods. Not so great for businesses trying to sell American products to other nations. • Over time – there are more US dollars in the foreign exchange markets so the value of the dollar drops (becomes “weak” and cheaper) so foreign money is worth more and export businesses thrive while import businesses aren’t so happy. • This is the cyclical nature of flexible exchange rates.

  42. What’s better? Strong or weak? • Neither – unless you are in the import/export business • A strong dollar means travel to foreign countries is cheaper and foreign goods are cheaper. • A weak dollar means travel to the US is cheaper for foreigners and US products are cheaper for them.

  43. Circle up Have your article out and be ready to explain it.

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