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The document discusses several key aspects of international trade and globalization. It begins by defining globalization as international factors becoming more important in the world economy. It then discusses how countries specialize in certain goods and services based on their comparative advantages with natural resources. Finally, it examines major trade agreements and organizations that aim to reduce trade barriers and promote free trade, such as the WTO, EU, and NAFTA.
The document discusses several key aspects of international trade and globalization. It begins by defining globalization as international factors becoming more important in the world economy. It then discusses how countries specialize in certain goods and services based on their comparative advantages with natural resources. Finally, it examines major trade agreements and organizations that aim to reduce trade barriers and promote free trade, such as the WTO, EU, and NAFTA.
The document discusses several key aspects of international trade and globalization. It begins by defining globalization as international factors becoming more important in the world economy. It then discusses how countries specialize in certain goods and services based on their comparative advantages with natural resources. Finally, it examines major trade agreements and organizations that aim to reduce trade barriers and promote free trade, such as the WTO, EU, and NAFTA.
convey the idea that international factors are becoming a more important part of the world economy • The simplest measure of globalization is the ratio of exports to GDP – Countries with a high ratio of exports to GDP are generally more open to the world economy than countries with a low ratio GLOBALIZATION
• Globalization or the increasing
openness of an economy, means changes that are not universally positive • Globalization involves not only the goods and service but the movement of people and money as well • International transactions occur because both parties expect the transaction to improve their Resource Distribution
• The factors of production are not evenly
distributed throughout the world – Natural resources are more plentiful in some areas (Oil & gas deposits, water, timber) – Human capital is more skilled in nations with higher literacy rates – Physical capital is deeper in some nations • Better machinery • Better infrastructure allows for goods to be transported easier on new roads, bridges, etc. Resource Distribution
• The unequal distribution of resources
encourages nations to specialize – The availability of resources differs greatly from country to country • Although some countries could be self sufficient, it is to their advantage to specialize in certain areas – Ex: U.K. has double the airports as Peru despite being much smaller in size Absolute and Comparative Advantage
• Absolute advantage...when one nation can
produce a good at a lower cost than another (must decide what to produce) • Comparative advantage...the ability for a nation to produce at a lower opportunity cost – Presented by David Ricardo – The nation with the lowest opportunity cost should specialize in that product • Known as the law of comparative advantage • Nations will make more $$ selling their specific good International Trade
• Since countries may have a comparative
advantage over others, it makes sense for them to trade – Whichever nation has comparative advantage should specialize in the production of that good • The US and trade – The US is the 2nd largest importer of goods behind the European Union rd US Exports
• 3rd Largest after China & E.U.
• U.S. used be the largest exporter in the world – We used to export goods such as: comp software, medical equip, other advanced technology at a very high rate • Exportation of services is becoming greater in the global economy US Imports
• 2nd Largest behind the E.U.
• The US imports nearly $2.3 trillion in goods and services annually • In total, we import more than we export • Why do we import so many goods and services? Trade on Employment
• International trade has caused many
changes and trends in employment • Due to comparative advantage, workers need to gain certain skills in order to find employment – Ex: Japanese cars might be priced lower because of machines doing the work and not people. US car companies have been forced to lay off many people Free Trade?
• Many people argue that governments
should regulate trade in order to protect industries and jobs from foreign competition – This is known as protectionism • Many nations set up trade barriers in order to provide protectionism – Gov’ts want to protect their companies from foreign competition Trade Barriers
• Trade barriers...restrictions that prevent
foreign products or services from freely entering a country – Import quotas...limits on the amount that can be imported (US limits the amount of raw cotton coming in) – Voluntary Export Restraints...self imposed export restraint (hopes to avoid import quotas) – done to prevent binding trade barriers Trade Barriers
• Tariffs...taxes on imported goods
– Customs duty (tax on goods from abroad) – Used to encourage purchasing of domestic products • Other Trade Barriers (Informal) – Licenses • High fees or slow processing will act as barriers – Standards of production • Banning of goods produced bec of certain methods Effects of Trade Barriers
• Increased prices for foreign goods
– $20,000 USA made car or $22,000 foreign made car bec of a tariff? • Trade barriers will limit supply • Trade Wars will take place – When countries institute restrictions on each other – Usually leads to poor trade for both countries Arguments for Protectionism
• Protects jobs…protecting domestic
industry will protect jobs – We want to protect markets that have comparative advantage • Protects infant industries – Helps to reduce competition and barriers for certain start up industries – Protects national security…reduces dependence on foreign nations/products International Trade Agreements
• Recent trends are encouraging free trade
– Raises living standards – Encourages world peace – Many free trade agreements have been established – International Free Trade Agreements • Cooperation of two or more countries to reduce trade barriers (will reduce conflict) World Trade Organization
• GATT...General Agreement on Tariffs and
Trade...founded in 1948 – Reduce tariffs & expand world trade • WTO…World Trade Organization worldwide organization whose goal is freer global trade and lower tariffs - founded in 1995 to ensure GATT – Acts as a referee for trade agreements – Will negotiate new trade agreements Free Trade Zones
• Areas established by countries to reduce or
eliminate trade barriers • Two such Organizations – European Union (EU) (1957) • Set up to market & coordinate trade policies • “Euro” is used in all 28 countries – North American Free Trade Agreement (NAFTA) • Eliminates trade barriers in Canada, Mexico & USA European Union
• Regional trade organization made up of 28
member nations • Essentially developed a single market (EEC...European Economic Community) in Europe (trades w/USA A LOT!) – EU has a parliament, a flag, a council, an anthem, and currency (the euro) • Goal is to create a single economy that rivals the US – Currently the largest trading partner of the US • Canada, Mexico, and Japan are next NAFTA
• Created to eliminate all tariffs and barriers
in the region (Canada, Mexico, US) – ratified in 1994 – Largest free trade zone in world • Although there has been much controversy, NAFTA has increased trade between the three nations – Today, NAFTA is working to expand to other countries in Western Hemisphere Strength of Currency • Appreciation...increase in the value of currency: “a strong dollar” – When a currency appreciates, exports decline (US goods are more expensive) • Products are more expensive in other nations • Depreciation...decrease in the value of currency: “weak dollar” – When a currency depreciates, exports rise and imports decrease • Other nations’ products are more expensive here in the USA Exchange Rate Systems
• Fixed Exchange Rate System
governments try to keep their currency constant with one another – Requires countries to keep similar economic systems- should be plus or minus 2% of center – Ex: The euro for the EU • Flexible Exchange Rate System exchange rate is determined by supply and demand and it fluctuates – Used by most major currencies today – Accounts for day to day changes in value