trade. growth of trade in 1991, the us exported $365 billion and imported $450 billion by 2004 those...
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Trade
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Growth of trade
In 1991, the US exported $365 billion and Imported $450 billion
By 2004 those numbers had increased to $1.151 trillion in exports and $1.398 trillion in imports
That left a trade imbalance of about $247 billion because exports < imports
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Why do Nations Trade?
Economists over the centuries have tried to explain why nations trade.
Adam Smith set the tone for our discussion when he said that “in a free market, nations trade because both will benefit.”
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Models for Trade:Absolute Advantage
Economists in the early 19th century came up with a model called: Absolute Advantage
In Absolute Advantage, one nation clearly produces more of one product while another nation clearly produces more of another.
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Absolute Advantage
Example on the board
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Models for Trade:Comparative Advantage
Economists noticed that some nations could make more of both products, and so the idea of Comparative Advantage was developed.
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Comparative Advantage
A nation that specializes in the product in which they have a comparative advantage can then trade for the other product.
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Barter
Pepsi and the Soviet Union
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The impact of Trade on Xrates
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Newer Theories
Comparative advantage comes from “factor endowment”
Factors of Production (land, labor, capital) determine which products a country can produce with an advantage
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Factor Endowment
Japan has a huge population, but a relatively small land area. They have a comparative advantage making products which require labor but not land, like electronics.
Australia, with a large land area but smaller population, produces wool, which requires land but not as much labor.
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Other Theories of Trade
Overlapping demand: It seems as though nations with similar
incomes demand similar products. So we trade with Japan, Britain and Canada more than with Nepal, India and Zaire.
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Protectionism
Despite the clear advantages to specialization and trade (more products at lower prices), many countries attempt to set up barriers to trade to protect domestic producers.
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Tariffs
One such barrier is a tariff, or a tax on imports.
The example on the board shows the impact of a tariff on prices and quantities.
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Quotas
Quotas are limits on imports
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Arguments for trade barriers
Save American jobs Stop unfair trade practices Safeguard National Security Protect Infant Industries Protect Environment Stop slave labor Tariffs raise revenue for government
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Arguments for Free Trade
Consume more stuff at lower prices
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Efforts to Promote Free Trade
GATT --- General Agreement on Tariffs and Trade– Reciprocity “give and get” – Non-discrimination one and all get same rights– Lowers tariffs and reduces quotas
WTO --- World Trade Organization– Hears complaints from members– Enforces agreements
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Regional Efforts
EU --- European Union– Create a 550 million person economic community– Common currency and no trade restrictions
NAFTA --- North American Free Trade Agreement– Canada, Mexico and the United States
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Recent Trade agreements
CAFTA --- Central America Free Trade Agreement
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Review Sheet
Test next Wednesday