Global Interdependence

Obj. 9.05-.06Chapter 26, Sect. 1 and Chapter 27, Sect.1

International TradeSolves the problem of scarcityNations trade to obtain goods &

services they cannot produce efficiently◦Eat fruit in the winter (U.S.)◦Buy a computer with an operating system &

components developed in the U.S. (South Africa, Vietnam, etc.)

Exports◦Goods sold in another country

Imports◦Goods purchased from other countries

Four Reasons Nations Trade

1. Comparative Advantage: The ability of a country to produce a good at a relatively lower cost than another country can

2. Specialization◦Using scarce resources to produce those

things that they produce better than other countries

◦Can lead to over-production; producing more goods than can be consumed by all the people of a country Surplus exported to other nations

3. Create Jobs◦By exporting goods, companies can take

larger orders for a good than just producing for their nation alone

4. Factors of production◦Based on natural resources that are needed

where they cannot be accessed or do not exist Saudi Arabia (oil)

◦Can be based on sources of capital or labor U.S. (Airplanes, weapons or educated

workers)

Restrictions on Trade

Tariff◦Tax on imported goods◦Goal is to make imports more

expensive than similar goods produced domestically (cars)

Quotas◦Limits on the amount of foreign

goods imported◦Used when higher prices on imports

do little to stop individuals from purchasing them

Free Trade Zones-Agreement b/w multiple nations

to eliminate tariffs on goods & restrictions on number imports & exports

NAFTA (North American Free Trade Agreement) 1994

◦ Canada, U.S. And Mexico◦ Eliminate barriers over

timeEuropean Union (EU) 2002◦ 27 member nations◦No trade barriers,16 EU nations

use one currency “the Euro”

Globalization (interdependence)We live in an era where nations are

dependent upon one another for: goods & services (products)natural resources and labor (factors of

production)Trade b/w nations is a process of

competition and cooperation

Trade Agreements

The cost of most trade barriers are higher than their benefits Fiscally and politically

Most countries aim to achieve free trade◦ Countries join together with a few key trading

partners to increase trade◦ WTO (World Trade Organization)

Oversees trade among many nations of the world

Negotiates trade rules Helps developing nations Settles trade disputes Critics say it favors corporations over nations

Balance of TradeExchange rate: the price of a nation’s currency

in terms of another nation’s currencyBalance of trade: the difference b/w the value

of a nation’s imports and it exportsTrade surplus: positive balance of tradeTrade deficit: negative balance of trade

◦Can devalue a nation’s currency in terms of exchange rate

◦Leads to surplus of money in the exporting nation

◦Devalued currency can lead to decrease in incomes and employment in the importing nation

Benefits of Global TradePositive:

◦Businesses can make more profit◦Greater competition b/w businesses

can lead to lower prices and more choices

Negative: ◦Competition may force out weak

companies which can impact national economies (U.S. car industry)

◦May lead to protectionism: countries place tariffs on imported goods

Global IssuesGrowing economic inequality b/w rich and

poor nationsWarfare and famine often leads to refugees:

people who leave their nation unwillinglyDue to a lack of economic opportunity in

developing nations, there is increased immigration: people leaving their nation willingly to live in an industrialized one

United Nations (UN): since 1947 has promoted internationalism to help support economic development & foster parity b/w industrialized and developing world

Industrialized nations◦US, UK, Germany, Japan, Canada, France

◦Have natural resources such as coal or iron (or access to it)

◦Large industries◦Consume much of the world’s

natural resources

Developing Nations◦Chad, Belize, Albania

◦Often have few natural resources

◦Cannot feed their population

◦Manufacture few products

◦Low life expectancy (40 yrs.) and literacy

Saudi Arabia, Venezuela, India

Possess great wealth of natural resources

Many were once colonies of industrialized nations

May be developing industry and human capital

Use your notes to answer1. Why do nations trade with each other?2. What is the difference between an import and

an export?3. How does comparative advantage influence

trade?4. How do tariffs and quotas restrict trade?5. What is NAFTA? Why do countries engage in

free trade?6. Describe one positive and one negative

aspect of global trade.7. Name 2 industrialized and 2 developing

nations. What are the characteristics of these nations?