TRADE BARRIERS EXCHANGE RATES Buying and selling goods

TRADE, BARRIERS, EXCHANGE RATES

§ Buying and selling goods and services from or to other countries. § The purchase of goods and services from other countries = IMPORTS § U. S. dollars flow out of the country making our money worth less (depreciate) § Makes the price of foreign goods look more expensive § Makes U. S. goods appear cheaper § The sale of goods and services to other countries = EXPORTS § U. S. dollars stay in the U. S. which can make our money worth more (appreciate) § Makes the price of foreign goods look cheaper/cost less § Makes U. S. goods appear more expensive

§ To gain benefits – trade is voluntary so both the importer and exporter benefit § Consumers also benefit from lower prices on products § Who does NOT benefit? § Domestic producers of a product who will have to compete against similar products imported into their country

§ Because of: § Resources § Raw Materials § Skilled labor force § Capital resources § Favorable geographic location § Countries produce different things § Who produces what and why? § Absolute Advantage § Comparative Advantage

§ Economic basis for specialization and trade § It is the fundamental force that generates trade § If individuals and countries specialize in producing the goods in which they have the comparative advantage (lower opportunity cost) and trade for the goods in which others have the comparative advantage, BOTH countries are better off

§ NAFTA (North American Free Trade Agreement): § Established free trade (no tariffs or barriers) between the U. S. , Mexico, and Canada § Trade with each other first § EU (European Union): § Established free trade between 28 European nations § Common currency – the Euro § Largest trading bloc § ASEAN (Association of Southeast Asian Nations): § Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei, Vietnam, Lao PDR, Myanmar, and Cambodia § Promote economic growth, social progress, and cultural development § Partnership to strengthen the foundation for a prosperous and peaceful community § WTO (World Trade Organization): § Promotes world trade § Settles disputes between governments § Organizes trade negotiation § Provided assistance and training for developing countries

Good or Bad? NAFTA Jobs Lost and Gained due to NAFTA

§ The balance of trade is the difference between a country’s imports and exports (X-M) § A Trade Deficit occurs when imports are greater than exports § The U. S. consistently has a trade deficit § Reduces the value of our currency (money depreciates) § Can have an effect on employment § A Trade Surplus occurs when exports are greater than imports

§ A record of the trade between the U. S. and the rest of the world expressed in monetary terms § The difference between the value of exports and the value of imports PLUS any other monetary transactions between nations § The balance of payments is usually a larger number than the balance of trade

§ A tax on imported goods § Protective: a tariff high enough to protect domestic industries that are not efficient § Revenue: a tariff high enough to generate revenue for the government without discouraging imports § Consumers of imported goods are worse off (price goes up) § U. S. producers of the imported good are better off (the price of the imported good becomes more competitive with the domestic good) § Examples: § a tax of 15% makes jewelry from Mexico more expensive than jewelry made in the U. S. § Paper clips retail for less than one cent. Tariffs on Chinese paper clips can reach as high as 126%

§ The government completely prohibits the import of a good/service § Nations refuse to trade with each other because they disagree with that nation’s policies § Ex: § U. S. and Cuba § U. S. and N. Korea

§ Financial assistance granted by government for promoting something beneficial to the public § Government makes payments to a local supplier in order to reduce the production costs of the supplier § Ex: The sugar industry asks the government to provide financial assistance to make it possible to sell its products overseas at a lower price that will compete well in other countries

§ Limits placed on quantity of a product that can be imported into the country § Ex: Korea may export only 15, 000 automobiles a year to the U. S.

§ Usually intended to ensure the safety of imported goods and make sure that goods comply with local laws § Expectations for minimal levels of quality § Ex: Toys from China have to use lead free paint

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FOR (protectionism) § NATIONAL DEFENSE § Forces countries to make a variety of products so we don’t become dependent on others § INFANT INDUSTRIES § Protect new industries from foreign competition § PROTECTING DOMESTIC JOBS § Protect jobs within the U. S. § Protect from cheap domestic labor § KEEPING MONEY AT HOME § Keeps money in the U. S. § Buys less imports § HELPING THE BALANCE OF PAYMENTS § Less money leaves our country AGAINST § NATIONAL DEFENSE § Supply is smaller, so prices go up § Less competition = higher prices § Companies are less efficient § INFANT INDUSTRIES § When they get trade barriers they do not want to give them up after they become developed industries § PROTECTING DOMESTIC JOBS § When inefficient industries are not producing and are facing foreign competition, they should be forced to become efficient § KEEPING MONEY AT HOME § Money leaving the U. S. comes back when people buy American made products § HELPING THE BALANCE OF PAYMENTS § When money comes back to the U. S. this helps with employment § Money paid in terms of exports

§ A foreign exchange market is the market in which participants are able to buy, sell, exchange, and speculate on currencies § Foreign exchange markets are made up of banks, commercial companies, investment firms, and brokers § Appreciate = strengthen § U. S. exports appear to be more expensive § Imports to the U. S. appear to be cheaper § Depreciate = weaken § U. S. exports appear to be cheaper § Imports to the U. S. appear to be more expensive § If the exchange rate between the dollar and the peso goes from 10 pesos/dollar to 15 pesos/dollar, the dollar is appreciating and the peso is depreciating § If the exchange rate between the dollar and the peso goes from 10 pesos/dollar to 5 pesos/dollar, the dollar is depreciating and the peso is appreciating

§ Exchange rates are determined by the demand for and the supply of currencies on the foreign exchange market § The demand supply of currencies is in turn determined by: § Appreciation: A rise in the value of $ in relation to other currencies – each $ buys more of the other currency § Depreciation: A fall in the value of $ in relation to other currencies – each buys less of the other currency

§ To convert pounds to dollars ($) § Multiply the British Pound amount by the $ rate § One pound = $1. 90 § 5. 70 pounds x 1. 90 = $10. 83 § To convert $ into pounds – divide by the $ rate § $3. 45 / 1. 90 = 1. 82 pounds