0015 International Trade and the American Economy (SMR 5.6) Flashcards
Give an example of how a PPF chart can show comparative advantages and the need for trade?
Quantity of Planes vs. Quantity of Shoes. There are only so many resources in the US, so there are only so many planes that can be made in a day and so many shoes that can be made in a day. For every plane made, it means that two tons of shoes can’t be made. If China is more efficient at producing shoes it means it has the comparative advantage over the US when it comes to shoes. If the US is more efficient in producing planes, the US has comparative advantage over China when it comes to planes. This is where international trade makes sense.
How does trade become mutually benefiicial for both parties?
If countries focus on producing products which they have comparative advantage of and trading for those which they don’t, then trade becomes mutually beneficial for both parties.
Most economists agree that _____ and _______ are key to economic development
Most economists agree that specialization and trade are key to economic development (evidenced in the case of Japan, India and China which improved b/c of trade vs. Venezuela, Zimbabwe, and Cuba who have either voluntarily or involuntarily been cut off from trade and have not improved)
What is Comparative Advantage?
The ability of one country to product goods and services at a lower opportunity cost than another country
Trade is born out of ___________.
Specialization
How does division of labor lead to trade?
Division of labor causes interdependence and specialization which leads to trade
How do we define trade?
Any act of buying and selling goods, can be regional, national or international
What are the two limitations to Comparative Advantage?
- Trade deficit: lower value of goods produced relative to what is purchased can cause a reduction in value of country’s currency (you want to export more than you import)
- Cost of transportation: “advantage” off set by distance, it might be a cheaper product but shipping costs make it not so
The goal of trade is to maintain _______.
balance
for example, fix deficit by limiting imports or increasing exports
If we’re importing more than we are exporting, we have a trade _________.
deficit
If we are exporting more than we are importing, we have a trade _______.
surplus
How has globalization impacted trade?
Globalization accelerated trade beginning in the 1980’s because there was more competition for domestic products, more access to international labor and access to new markets
How does government intervene in trade?
Through protective laws like import barriers (tariffs, quotas, and regulations) and by limiting movement through citizenship and immigration laws
What is Protectionism?
The government’s use of trade barriers to limit foreign imports
What are the pros of Protectionism (5)?
- Newer infant industries need gov protection from more established foreign competitors
- Trade barriers protect domestic jobs and wages of domestic workers
- Purchase of foreign goods support worker exploitation abroad
- Necessary to prevent “dumping”
- We shouldn’t become overly dependent on other countries for essential goods
What are the cons of Protectionism?
- Protecting infant industries encourages them to remain inefficient
- If the US enacts trade barriers, other nations will retaliate in turn, resulting in higher unemployment and lower wages for US workers
- Nations should produce and trade products for which they enjoy a comparative advantage, resulting in more efficient use of the nation’s resources
What are the effects of a trade deficit?
- Can change demand for low priced imported products
- Results in outflow of capital
- Can lead to loss of jobs, greater insecurity and failing wages
The US has been in a trade ______ since 1975.
Deficit
What was the Hawley Smoot Tariff?
A tariff on European imports set by Herbert Hoover in the 1930’s as a way to bring production back to America but resulted in Europe retaliating with high tariffs that ended up hurting the economy and causing more unemployment
What did the Federal Reserve try to do after the initial 1929 Stock Market Crash?
The Federal Reserve dropped interest rates to zero, output and prices fell and regular people started to expect further price declines.
Unemployment rose to 25% and the average family income dropped by around 40%
In recessions, central banks may try to use _______ monetary policy to speed up the economy. Does this work?
Expansionary (i.e. lowering interest rates to encourage spending)
Doesn’t usually work because people expect prices to keep falling and therefore won’t spend so the velocity of money declines which leads to a liquidity trap
What book was written during the Great Depression that offered a different approach to getting countries out of a depression?
John Maynard Keynes - 1936 book, A General Theory of Money, Interest, and Employment
What was the result of Keynes’ book?
It essentially launched the field of macroeconomics and argued that market economies don’t self correct quickly because prices and wages take time to adjust. Therefore it was necessary for the federal govt to get involved by using monetary and fiscal policy to increase output and decrease unemployment.
Keynesian economics was adverse to ________ but today it’s _______.
classical capitalist ideas about free market but today it’s a common and accepted economic theory
Whose ideas were contrary to Keynes?
Milton Friedman was on the other side of Keynes and believed that it was actually failed monetary policy that started the depression
What are trade agreements supposed to do (2)?
- Set exclusive trade rights with another country or countries
- Cancel tariffs between parties
What are three examples of times when the US has used tariffs?
- 1828-1842: Tariffs protected US manufacturers from lower wage European countries
- 1930: Hawley Smoot Tariff raised tariffs on over 20,000 imported goods to record levels
- Presently, tariffs exist to protect US tire manufactures and in the early 2000’s on Stell manufacturing to protect American steel production
What are individual treaties?
Drawn between two parties (often countries) to remove restrictions and allow access to producer and consumer markets
What are treaty organizations?
Collective trade treaties providing (almost) exclusive trade rights to all members
Often have strict limits for membership
Treaty organizations were even seen as far back as Imperialist China
When was the EU founded?
1993
What is the EU and what does it do?
An economic, military and political union that allows for freedom of movement of labor and capital among members. This is geographically defined, though not all European countries are a part of it (i.e. Switzerland). This superseded all previous individual trade agreements between countries
What did the EU do in 2002 to make trading within the EU easier?
Established the Euro as the uniform currency and the European Central Bank
Note that England continues to use the pound
What does NAFTA stand for and when was it started?
North American Free Trade Agreement, founded in 1994
Who are the member nations of NAFTA?
US, Canada and Mexico
What has NAFTA done?
Established a free trade zone across much of North America and gradually eliminated all trade barriers
What were some of the effects and controversies surrounding NAFTA?
While trade increased between member nations, some jobs have been sent to Mexico where it is cheaper
What is the current status of NAFTA (2020)?
NAFTA has been replaced with the USMCA (US-Mexico-Canada Agreement) that will go into effect in July 2020
What treaty organization would eventually become the WTO?
General Agreement on Tariffs and Trade (GATT)
When did GATT exist?
1947-1995
What was GATT meant to do?
- Was not meant to be a club, anyone could join it
- Global agreement seeking to bring nations together to pursue free trade, without trade barriers or restrictions
- Meant as a means of cooperation after WWII, signed by 23 nations
- Held eight rounds to agree on lowering tariffs
What did GATT attempt to do to help developing nations and agricultural trade?
Tried to reduce tariffs by 38% to developing nations so they can develop and build their economies up, tried to eliminate trade barriers and subsidies and tried to apply more effective discipline to agricultural trade
What is the WTO and when was it started?
World Trade Organization, started in 1995 and continues today
How is the WTO different than GATT?
It is an exclusive club unlike GATT who let everyone in
What does the WTO seek to do? (4)
- Liberalize trade
- Regulate trade laws
- Negotiate trade agreements
- Promote freer trade in services and intellectual property
What controversy has WTO faced and by what group(s)?
WTO’s insistence on Globalization is seen as a threat by socialist movements who regularly protest at meetings. They oppose it because of concerns about the inability to enact safety and health laws due to challenges about restraint on trade. Also fears that it could lead to colonization and that the economies of developing nations could be manipulated by the WTO
What is an example of the controversy surrounding the WTO?
Protestors in Seattle at WTO in 1999 were pepper sprayed by police, “Battle of Seattle”
The WTO seeks to eliminate _____, _____, and other restrictions on the international exchange of goods.
tariffs and quotas
What is an exchange rate?
One on one relationship between two currencies, measures the value of one currency in terms of another
Why are exchange rates important for trade between two countries?
Low exchange rate will lead to more exports, this is why the govt will take care to keep a favorable rate of exchange in relation with their GDP
What are the two types of exchange rates?
- Pegged (or fixed)
2. Flexible
What are pegged or fixed exchange rates?
Exchange rates that are set at a relative rate to another currency; stable for trade, but prevents effective competition. Rate does not change, and most nations now use this
What is a flexible exchange rate?
One currency is allowed to float against another currency, based on principles of supply and demand, also called free exchange rate. These are the exchange rates that facilitate world trade
What exchange rate facilitates world trade?
Flexible exchange rates
What happens as exchange rates fluctuate?
It leaves a country stronger or weaker relative to another
If US and Japan are trading and the US dollar is stronger (i.e. the rate between dollar and yen increases from 110 to 130 yen/dollar), what will the result be?
Result is that US exports are more expensive and Japan buys less. Japan’s exports are now less expensive and the US buys more
If US and Japan are trading the US dollar is weaker (i.e. the rate between the dollar and the yen decreases from 100 yen to 80 yen/dollar) what will the result be?
Result is that the US exports are less expensive so Japan buys more. Japan’s exports are more expensive so Japan buys less
