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Chapter 7 Section 1

Global Economics

Objectives

•Describe how international trade benefits consumers.

•Explain the significance of currency exchange rates.

•Analyze the impact of the U.S. trade deficit.

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Imports and Exports

-Imports: is a product brought in for sale from a foreign country

*Fuel* Bauxite

-Exports: is a product sent to a foreign country for sale

*Automatic data and processing equipment

Types:

Manufactured goods - wireless phonesProducer goods – Automobile partsAgricultural goods - BananasServices - AccountingRaw materials – like petroleum and iron

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Why might Nations Trade?

•If one nation lacks a resource it may spark a trade with one that has it.

•To specialize in a certain good rather than manufacturing several goods. Adam Smith, an 18th century Scottish economist proved this effective.

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Benefits of Trade

Ways International Trade Benefits You and Others•Consumer Choices

•Increased Competition

•Expanded Markets

•Benefit workers they employ

•International Relations

•Prosperity and Peace

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Currencies and Trade

•If two countries with different currency want to do business with one another the buyer must convert its money to the sellers currency.

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Exchange Rates

• The cost of one currency expressed in terms of another currency is called exchange rate.

• At one time, currency exchange rates were fixed. They were set by governments and rarely changed.

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Flexible Exchange Rates• Under this system, the price of buying a

particular currency rises and falls from day to day because of demand and supply.

• For importers and exporters, flexible exchange rates can make the cost of doing business unpredictable.

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Factors Affecting Exchange Rates cont.

• Changes in interest rates

• A country that offers high interest rates increases the demand of currency.

• A currency’s value is also effected by economic and political stability.

• The U.S. is considered a stable nation so other investors around the world often prefer to invest with us.

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How Exchange Rates Affect Trade

• The strength or weakness of nation’s currency affects the willingness of other countries to trade with the nation.

• If the U.S. dollar is weak, exports from the U.S. tend to increase.

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Understanding the Trade Deficit

•Balance of Trade~ difference between value of a nation’s exports and it’s imports

•Trade Deficit~ negative balance of trade

–Occurs if country spends more on imports

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Understanding the Trade Deficit

• Balance of payments~ an accounting of all financial transactions that involve other countries and financial dealings

• All imports/exports recorded in balance of payments with the goal equally zero

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The U.S. Trade Deficit

• U.S. has had a trade deficit almost every year since 1970’s

• Some people think the trade deficit is harmful because of the increase in foreign investment and are concerned with unemployment

• Some people see foreign investment not as a problem, but as a sign that the U.S. economy is strong enough to attract investors and is prosperious.

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Chapter 7 Section 2

Trade Restrictions and Agreements

Objectives

•Describe methods used to restrict international trade.

•Analyze arguments in favor of protectionism and free trade.

•Explain the impact of major trade agreements.

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Ways to Restrict Trade

• Tariff – tax on imports

• Most common trade restriction

• Discourages from buying out of country

1.Revenue-used for government revenue

2.Protective-straight to the producer

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Ways to Restrict Trade

• Quota - a government limit on the quantity or value of a certain imported product

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Ways to Restrict Trade

• Embargo - government order prohibiting trade

• Specific product or country

• Used for political reasons

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Protectionism Versus Free Trade

Protectionism-a policy of using trade restrictions to protect domestic business from foreign competition.

Free Trade-a policy of minimizing trade restrictions.

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Arguments for Protectionism

• National Security• Job Security – imported products costs less than

those made in U.S. because workers from other countries are paid less

• Infant Industries• Environmental Protection• Unfair advantages

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Arguments for Free Trade

• Effects on Export• Effect on consumers – more for their money• Benefits of Specialization• Benefits of Competition – Can improve

production efficiency, quality of products, and lower prices

• Alternatives

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International Trade Agreements• Between WW1 and WW2 international trade

was hindered by different countries practice of protectionism.

• In order to increase trade many countries began to adopt a free trade policy after WW2 to decrease trade barriers.

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• World Trade Organization (WTO)– An international

organization that governs trade between over 140 nations.

• General Agreement on Tariffs and Trade (GATT)– Signed by 90 countries

in 1941

– Promotes international trade.

– New GATT signed in 1994 to reduce or remove trade barriers.

GATT and the WTO

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North American Free Trade Agreement

• NAFTA– Wide ranging regional trade agreement

between U.S., Canada, and Mexico to give legal protections to investors and international business.

– Started January 1, 1994

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European Union

• Organization of European nations

– Goal is to create a unified and strong market– Euro is the European Union’s common

currency.

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Technology

•making the world smaller.

Media influence

Companies

•Multi-National- companies with divisions in more than two countries