Trade

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

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.”

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.

Absolute Advantage

Example on the board

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.

Comparative Advantage

A nation that specializes in the product in which they have a comparative advantage can then trade for the other product.

Barter

Pepsi and the Soviet Union

The impact of Trade on Xrates

Newer Theories

Comparative advantage comes from “factor endowment”

Factors of Production (land, labor, capital) determine which products a country can produce with an advantage

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.

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.

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.

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.

Quotas

Quotas are limits on imports

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

Arguments for Free Trade

Consume more stuff at lower prices

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

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

Recent Trade agreements

CAFTA --- Central America Free Trade Agreement

Review Sheet

Test next Wednesday