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Untitled Flashcards Set

Growth in world Trade

  • Nations are trading more and trading a greater portion of their GDP

  • Freezones: Companies can produce goods for export and avoid standard corporate taxes


Trends in US Trade

  • US imports and exports have increased substantially

  • Overall US trade balance has moved more and more negative

  • Trade deficit often grows during economic expansions and shrings during economic recessions

  • Trade deficit is driven by a merchandise deficit and the US enjoys a trade surplus in services

  • Net Exports: Total exports of final goods and services minus total imports of final goods and services

  • Trade Balance: Difference between its total exports and total imports

  • Trade Deficit: Nation imports more than it exports

  • Business Cycle affects international trade

 - During recessionary periods, imports drop

 - As economy reovers, imports rise

 - While exports drops during recessions, trade deficit shrinks downwards

 - Trade generally expands during economic expansions and contracts during recessions



Major Trading Partners of the US

  • 60% of all US goods import come from: Taiwan, India, South Korea, UK, Germany, Japan, Canada, Mexico, China

  • Canada: Natural Gas, Oil, Motor Vehicles

  • Mexico: Coffee, Computers, Gold, Appliances, Motor Vehicles

  • China: Electronics, Toys, Clothing




Trade Balance Practice

  • Formula: Goods Exports - Good Imports

  •  $20 billion − $103 billion = −$83 billion

  • This is a trade deficit. Imports exceed exports, and the trade balance is negative.



How does international trade help the economy?

Comparative Advantage

  • Situation where an individual, business, or country can produce at a lower opportunity cost than a competitor can

  • Trade leads to lower costs of production and maximises the combines output of all nations involved


Production Possibilities Frontier for Mexico and the US without specialization and trade


Production Possibilities Frontier for Mexico and US with specialisation and trade



Other advantages of trade

Economies of Scale

  • Important for smaller nations that do not have a population big enough to support the domestic production of large-scale items such as automobiles, television sets, steel, 

  • Once a smaller nation has free access to larger markets, it can effectively specialise in what it does best and generate low per-unit costs through exports


Increased Competition

  • Increased competition from foreign suppliers forces domestic firms to become more innovative and compete in terms of price and quality

  • Gives consumers more options to choose from, enables consumers to purchase a broader array of products that better match their needs


Trade Agreements

  • Gains from trade spur nations to sign trade agreements to reduce tariffs and clear and the way for mutually beneficial exchange

  • Ex: NAFTA, signed 1992 between Mexico, US, Canada to eliminate barriers to trade

  • USMCA Agreement: Altered provisions of NAFTA but also ensured a continuation of trade among three nations

  • World Trade Organisation:

  - International organisation that facilitates trade agreements between nations. 

  - Created in 1995 by 123 countries

  - Regulates trade of various goods and services, resolves trade disputes




Effects of Tariffs and Quotas

  • Two most common trade barriers: Tariffs & Quotas

  • Protectionism: Governmental actions and policies that restrict or restrain international trade, often with the intent of protecting local businesses and jobs from foreign competition


Tariffs

  • Taxes levied on imported goods and services

  • Tariff is paid by the producer of the good when the good arrives in a foreign country

  • Can be percentage of the value of the good(ad valorem tax), a per-unit tax (specific tax) or both

  • To analyse how Tariff affects market price, observe the relationship between supply and demand

  • Tariff Imposed: Price riss and domestic production expands from Qd1 to Qd2

  • At same time, import falls to QT - Qd2

  • Creates Deadweight Loss (Shaded areas A + B), revenue for the government (Area T), and increased producer surplus for domestic firms (area PS(

  • Domestic Supply and Domestic Demand Equilibrium: $140

  • Tariff Levied of $20


Quotas

  • Import Quotas: Limits on the quantity of products that can be imported into the country

  • Function like tariffs but the government does not receive any tax revenue

  • Quotas: Tuna, Milk, Olives, Cotton, Sugar


Impact of a quotas

  • Without quota, domestic market is dominated by imports

  • When quota is imposed, price rises and domestic production expands from QD1 to QD2

  • Import falls from Qq to Qd2

  • Created deadweight loss (A + B), a gain for foreign suppliers (Area F), an increased producer surplus for domestic firms (area PS)

  • Voluntary Quota: By voluntarily limiting supply, foreign producers avoid having a tariff applied to their goods + The quantity supplied is somewhat smaller than it would be otherwise be, foreign suppliers can charge higher prices + makes financial sense if it is helping a nation avoid a tariff

  • Green Rectangle Triangle: Tariff-Equivalent Quota






Reasons given for trade barriers

National Security

  • People argue that


Infant Industries

  • State that domestic industries need trade protection until they are established and able to compete internationally

  • Once the fledgling industry gains traction and can support, trade restrictions can be removed


Retaliation for Dumping

  • Occurs when foreign supplier sells a good below the price it charges in its home country

  • A deliberate effort to gain a foothold in a foreign market, result of subsidies within foreign countries


Favors to special interests

  • Imposition of trade barriers is often referred to as protectionism

  • Barriers may be in place as a favour to special interest groups that have much to gain at the expense of domestic consumers