Why Nations Trade Trade between nations will occur when one country can provide something another country can not or will not provide. This could be due to: A lack or bounty or natural resources. A lack or bounty of human capital (an uneducated and unskilled population vs. educated and skilled for example) A lack or bounty of physical capital (machinery or factories) Shifts in economic activity patterns (such as the shift to a white collar labor force in the USA)
Trade might occur because of absolute advantage, or the ability of one nation to produce more of a given product using a given amount of resources. Some countries are just better at making certain things than others.
Example: They have access to the same amount of resources. Rubber Chickens Fake VomitCountry A 6 2Country B 1 1 Country A is just more productive
Trade might occur because of comparative advantage, or the ability of one nation to produce a product more efficiently given all the other products that could be produced.
Example: It takes Country A one week to make one spaceship and Country B four weeks to make a spaceship. Country A takes six weeks to make nuclear reactor and Country B only takes three weeks. Country A would be better off focusing on spaceships and Country B would be better off focusing on reactors. The two countries would specialize and trade with each other. Country A’s opportunity cost to build spaceships is far lower than Country B’s, but B’s opportunity cost to build reactors is lower than A’s. The Law of Comparative Advantage: The idea that a nation is better off producing goods and services for which it has a comparative advantage.
The US and Trade: The US enjoys a comparative advantage in producing many goods and services, but in some cases other countries have the advantage or an absolute advantage. As a result the US is the largest exporter and importer of goods and services in the world.
The Shift in the US: The US has shifted from blue collar to white collar because trade has allowed for specialization and because education and skill tends to be higher in the US than in many other countries. The US focuses on innovation, heavy equipment, specialized equipment, technology, and services. The US is no longer interested in the manufacturing of many goods and trades for those goods.
Many barriers regulate theexchange of goods betweenthe US and other nations. Trade Barrier: A means of preventing a foreign product or service from freely entering a nation’s territory. Usually results in higher prices. Forms: ◦ Import Quota: A limit on the amount of a good that can be imported into a country. ◦ Voluntary Export Restraint (VER): A self imposed limitation on the number of products shipped to a particular country. ◦ Custom Duty: A tax on certain items purchased abroad. ◦ Tariff: A tax on imported goods. Trade Wars: A cycle of increasing trade restrictions between two countries.
A full-blown trade row erupted between the US and China after Beijing accused Washington of “rampant protectionism” for imposing heavy duties on imported Chinese tyres and threatened action against imports of US poultry and vehicles after after Barack Obama signed an order to impose a new duty of 35 per cent on Chinese tyre/tire imports on top of an existing 4 per cent tariff.
Arguments forProtectionism, or the use ofbarriers. Job protection. Infant industry protection. National Security.
Many agreements encourage trade between the US and other nations. They are often pushed by and are in the best interest of multinationals.
The European Union (EU): A regional trade organization made up of European nations. The goal is a common market with one currency called the Euro.
North American Free Trade Agreement (NAFTA): An agreement to create a free trade zone on the North American continent. It has eliminated many barriers and tariffs between the members. The members are the USA, Canada, and Mexico. Special judges have been created to deal with disputes and over the course of time more tariffs are to be removed. The agreement can not override national and state environmental, security, health, and
The Balance of Trade Nations seek to maintain a balance of trade to protect its economy and the value of its currency. When a trade imbalance occurs it can slow or harm the economy. This is the relationship between exports and imports.
Trade Surplus The result of a nation exporting more than it imports. This can impact the balance or trade and in turn the economy and the value of a currency.
Trade Deficit The result of a nation importing more than is exports.
The US Deficit The US is currently carrying the largest deficit in history. This condition has been going on since the early 1970’s. The US is importing many goods and not exporting as many.
Deficit Issues Is this good or bad? What are these goods being imported in? Foreign investment, is it a problem? (Loans covering debt)
Tracking Economic Levels ofDevelopment Development: The process by which a nation improves the economic, political, and social well being of its people. Developed Nation: A nation with a high average level of material well being. Less Developed Country (LDC): A nation with a low level of material well being. The Economic Indicators will be used to look at a country and classify it.