Basics of Foreign Trade Why do Countries Engage

Basics of Foreign Trade

Why do Countries Engage in Trade? • Countries trade with each other when, on their own, they do not have the resources, or capacity to satisfy their own needs and wants. • By developing their scarce resources, countries can produce a surplus, and trade this for the resources they need. • International trade is at the heart of the global economy and is responsible for much of the development and prosperity of the modern industrialized world.

Attitudes Toward Trade Liberalization • Trade liberalization is the removal or reduction of barriers on the free exchange of goods between nations. • Seeks to emphasize open borders and free trade principals.

Basic Attitudes Toward Trade Protectionism • The deliberate attempt to limit imports or promote exports by putting up barriers to trade • Usually aimed at protecting a nation’s industries from foreign competition

Importance of Trade in the United States • The US is the world’s largest exporter. • The US is also the world’s largest importer. • The United States’ main trading partners are Canada, Mexico, and Japan.

Important Global Trade Agreements European Union (EU) • An economic and political alliance of 28 European nations that was created by a formalized agreement signed in 1993. • Its designed purpose is to work gradually toward the economic and political unification of Europe. North American Free Trade Agreement (NAFTA) • Trade agreement between Canada, Mexico and the United States that was signed into law in 1994. • NAFTA essentially eliminated almost all tariffs among the three nations, allowing for the seamless flow of goods and supplies across borders.

The United States Trade Deficit The Trade Deficit • The United States has run a trade deficit since the early 1970 s. Why the Trade Deficit? • Imports of foreign oil as well as Americans’ enjoyment of imported goods account in part for the large American trade deficit. Reducing the Trade Deficit • Tariffs and Quotas are often used to raise prices of foreign-made goods and urge consumers to buy domestic goods.

Balance of Payments • A country’s balance of payments accounts summarize its transactions with the rest of the world.

• Measure of money inflows (injections) and outflows (leakages) between the United States and the rest of the world -Inflows are referred to as CREDITS -Outflows are referred to as DEBITS

Current Account • Current Accounts- record a nation’s exports and imports of goods and services. It also includes net investment income and net transfers. Financial Account • Financial Accounts- record the flows of money from the purchase and sale of assets domestically and abroad.

Transactions on the U. S. Balance of Payments Credit + 1. Harley-Davidson USA purchases $25 million in production machinery from a Japanese company. 2. André Prenoor, U. S. entrepreneur, invests $50 million to develop a theme park in Malaysia. 3. A Chinese company sells $1 million worth of berets to the U. S. Army. 4. BMW pays $1 million to a U. S. shipper for transporting cars from Germany to the United States. 5. Each month, Ima Grent, who recently arrived in the United States, sends half her paycheck to her sister in Poland. Debit – Current account Financial account

Credit + 6. Bank of America pays $5 million in interest to French depositors. 7. Senor Ramos from Spain buys a shopping center in Florida. 8. A Brazilian investor buys five $10, 000 U. S. Treasury bonds. 9. German tourists spend $3 million in the United States; U. S. tourists spend $5 million in Germany. 10. Brit-Discz, a London record store, spends $10, 000 on CDs by the Generic Gurls, a U. S. kiddy -pop group. 11. Sam Boney, U. S. ice-rink magnate, buys stock in a Chilean ice-rink chain. Debit – Current account Financial account

Modeling the Financial Account • We can gain insight into the motivations for capital inflows that are the result of private decisions using the loanable funds model.

Loanable Funds Markets in Two Countries Key Observations: Financial Capital will flow from Britain to the US because of the higher Real ir. (ie…Bonds, Currency) Investment in Physical Capital will flow US to the Britain because of the lower Real ir should eventually settle to an equilibrium rate of 4%