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International Trade
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A. Closed economy- does not engage in trade or other economic interaction with other countries. Very rare.
• Open economy- free and unfettered trade. Also rare.
• Most economies give protection to certain domestic industries.
• Interdependence- All nations need to trade with other nations to get natural resources.
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B. How do nations benefit from trade?• Economists compare a country’s economic
strengths in relation to another country. • Absolute advantage- country has the ability to
produce more of a good than another country. • Comparative advantage- ability to produce a
product at a lower opportunity cost than other producers.
• Comparative advantage can help determine what products a country should specialize in.
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C. Barriers to trade• Why do some countries restrict trade?• Most countries use some tactics to protect
domestic industries. • Protectionism- protecting domestic industries.• Foreign competitors can not sell their products
freely within one’s country
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D. Reasons for protectionism
1. National security- military goods must be produced domestically so they cannot be cut off during war.
2. Infant industries- new industries in a country must be protected. Many developing nations use this argument.
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3. Reactionary protectionism- protecting our industries because other nations are maintaining trade barriers.
• Trade war -used to describe an escalating pattern of trade barriers in response to others.
4. Also, trade barriers are imposed to protect jobs or for nationalistic reasons.
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E. Protectionist Trade Barriers1. Tariff- tax on imported goods (makes them more expensive)• the most common protectionist tool
2. Import Quota- limit on the number of units of a particular good that may be imported.
3. Voluntary Export Restriction (VER)- suggested limit on units to prevent a future quota
4. Subsidy- redistributes income from the general taxpaying public to non-competitive firms.
• Allows domestic producers to sell goods at a lower price than competitive foreign producers.
5. Embargo- simply not trading at all with a certain country (usually for idealistic reasons (U.S. v. Cuba)
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The relationship between a nation’s imports and its exports is called its balance of trade.
Balance of Trade
• When a nation exports more than it imports, it has a trade surplus.
• When a nation imports more than it exports, it creates a trade deficit.
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Free Trade
• Trade agreements- explain conditions where countries will trade with each other (these will tell if trade will be totally free or if tariffs or quotas will be imposed)
• EU (European Union)- between most of the nations of Europe (universal currency Euro)
• NAFTA (North American Free Trade Agreement)- between Canada, Mexico, and the United States
• ASEAN (Association of Southeast Asian Nations)- a political and economic organization of countries located in Southeast Asia.
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Major Trade Organization Members
EU
CARICOM
MERCOSUR
ASEAN
NAFTA
PACIFIC OCEAN
ATLANTIC OCEAN
INDIAN OCEAN
PACIFIC OCEAN
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Exchange Rates
• Exchange rates move up and down as a reflection of the worth of a nation’s currency in comparison to another.
1. Fixed exchange rates- price of currency is tied to that of a stable currency of a developed country (such as the dollar, euro, or British pound )
2. Floating exchange rates- value determined by supply and demand (Ex. US, Japan, Canada)
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The following table shows an example of exchange rates.
Foreign Exchange Rates
U.S. $
U.S. $
Australian $
U.K. £
Canadian $
¥en
Euro
Mexican nuevo peso
Chinese renminbi
1
1.541
0.6252
1.478
114.3
0.9516
9.33
8.28
Aust $ U.K. £ Canadian $ ¥en Euro Mexican NP Chinese renminbi
0.6489
1
0.4057
0.9593
74.19
0.6175
6.06
5.37
1.599
2.465
1
2.365
182.9
1.522
6.3
13.25
0.6764
1.042
0.4229
1
77.34
0.6436
6.3
5.6
0.01
0.01
0.01
0.01293
1
0.01
0.08
0.07
1.051
1.62
0.657
1.554
120.2
1
9.81
8.7
0.11
0.17
0.07
0.16
12.24
0.1
1
9.8
0.12
0.19
0.08
0.18
13.81
0.11
1.13
1
Reading an Exchange Rate Table
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Currency Appreciation
• Currency Appreciation- a country’s currency is able to buy more units of another nation’s currency
Results…..• U.S. citizens can buy
more foreign goods with their money (U.S. currency is stronger)
• Exporters will sell less goods (they are more expensive for foreign consumers to buy)
• If you plan to go on a cruise around the world, now’s the time!!!
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Currency Depreciation
• Currency
Depreciation- if a currency depreciates it is able to buy fewer units of foreign currency than previously.
Results……• Exporters will sell more
goods (they are cheaper for foreign consumers to buy
• U.S. citizens can buy less foreign goods with their money (the other currency is stronger)
• Bad time to go on vacation overseas!!!!
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Demand for U.S. Currency
Increases if…….• U.S. interest rates go up on
bonds (foreign investors want to invest)
• U.S. productivity goes up compared to rest of world
• U.S. goods and services are demanded more than those from other countries
• U.S. economy is believed to be stable
• Remember, it is always relative, but any of these will make the value of the dollar go up!!!!!