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PRESENTATION ON INTERNATIONAL TRADE

2002 Prentice Hall Business Publishing

Principles of Economics, 6/e

Karl Case, Ray Fair

International Trade
All economies, regardless of their size, depend to some extent on other economies and are affected by events outside their borders.

The internationalization or globalization of the U.S. economy has occurred in the private and public sectors, in input and output markets, and in business firms and households.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair

Exchange Rates
When trade is freeunimpeded by government-instituted barrierspatterns of trade and trade flows result from the independent decisions of thousands of importers and exporters and millions of private households and firms. To understand these patterns we must know something about the factors that determine exchange rates.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair

Exchange Rates
An exchange rate is the ratio at which two currencies are traded. The price of one currency in terms of another. For any pair of countries, there is a range of exchange rates that can lead automatically to both countries realizing the gains from specialization and comparative advantage. Exchange rates determine the terms of trade.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair

Exchange Rates
Domestic Prices of Timber (Per Foot) and Rolled Steel (Per Meter) in the United States and Brazil
UNITED STATES BRAZIL

Timber Rolled steel

$1 $2

3 Reals 4 Reals

The option of buying at home or importing will depend on the exchange rate.

2002 Prentice Hall Business Publishing

Principles of Economics, 6/e

Karl Case, Ray Fair

Exchange Rates
If exchange rates end up in the right ranges, the free market will drive each country to shift resources into those sectors in which it enjoys a comparative advantage.

Only those products in which a country has a comparative advantage will be competitive in world markets.

2002 Prentice Hall Business Publishing

Principles of Economics, 6/e

Karl Case, Ray Fair

Trade Barriers: Tariffs, Export Subsidies, and Quotas


Protection is the practice of shielding a sector of the economy from foreign competition. A tariff is a tax on imports.

Export subsidies are government payments made to domestic firms to encourage exports. Closely related to subsidies is dumping. A firm or industry sells products on the world market at prices below the cost of production.
A quota is a limit on the quantity of imports.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair

Trade Barriers: Tariffs, Export Subsidies, and Quotas


The Smoot-Hawley tariff was the U.S. tariff law of the 1930s, which set the highest tariff in U.S. history (60 percent). It set off an international trade war and caused the decline in trade that is often considered a cause of the worldwide depression of the 1930s. The General Agreement on Tariffs and Trade (GATT) is an international agreement singed by the United States and 22 other countries in 1947 to promote the liberalization of foreign trade.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair

The Case for Free Trade


The case for free trade is based on the theory of comparative advantage. When countries specialize and trade based on comparative advantage, consumers pay less and consume more, and resources are used more efficiently. When tariffs and quotas are imposed, some of the gains from trade are lost.

2002 Prentice Hall Business Publishing

Principles of Economics, 6/e

Karl Case, Ray Fair

The Gains from Trade


When world price is $2, domestic quantity demanded rises, and quantity supplied falls. U.S. supply drops and resources are transferred to other sectors.

2002 Prentice Hall Business Publishing

Principles of Economics, 6/e

Karl Case, Ray Fair

The Case for Protection


Protection saves jobs Some countries engage in unfair trade practices Cheap foreign labor makes competition unfair Protection safeguards national security

Protection discourages dependency


Protection safeguards infant industries
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair

2002 Prentice Hall Business Publishing

Principles of Economics, 6/e

Karl Case, Ray Fair