Transcript Identify the factors of production and why they are necessary for the

Standard 3
Understand the fundamental concepts
and interrelationships of the United
States economy in the international
marketplace
SS.912.E.3.3
Discuss the effect of barriers to trade and
why nations sometimes erect barriers to
trade or establish free trade zones
Before we can fully understand the
impact of trade barriers, we have to
understand the foreign exchange
market and the international flow of
goods, services, currency, and capital
Has the US “lost” or “given away”
our manufacturing?
Absolutely not, we are still world-class
manufacturers
If we choose not to manufacturer, we still
do a lot of designing and engineering and
let others actually manufacture
Examples: Nike and McDonald’s
The trade sector is a growing portion of GDP
Imports
Exports
Think carefully about the
ramifications
GDP = Consumption + Investment +
Government Purchases + Exports –
Imports
If Imports = (-18%), then the rest, 82%
must come from the US!
If GDP is about $14 trillion, 82% is a LOT
of domestic production!!!!!!!
Graph of surplus:
Graph of shortage:
The foreign exchange market
coordinates all international
exchanges
Video: Dodgeball
Foreign Exchange Market
Dollar price
(of foreign currency)
S (exports
+ capital inflow)
Depreciation
of dollar
P1
D(imports + capital outflow)
Appreciation
of dollar
Q
Quantity of
foreign currency
Dollar price (of foreign currency) = how much
foreign currency you get for $1
Another way to think about foreign
exchange
“Regular” price is an exchange rate:
goods/$
– Example: exchange $3.00 for Chick-fil-A
sandwich
Dollar price = foreign currency/$1
Example: £1/$1 then £2/$1
– $1 now buys twice as much in England
Foreign exchange terms:
The dollar appreciates when you can buy
more foreign goods with the same $1
– The dollar is referred to as strong
– Americans import more, export less
The dollar depreciates when you can buy
less foreign goods with the same $1
– The dollar is referred to as weak
– Americans import less, export more
If the dollar appreciates against another
currency, then that currency depreciates
against the dollar
Canadian Dollar
Mexican Peso
Japanese Yen
South Korean Won
Key relationship:
A trade deficit (imports > exports) = inflow
of capital (foreigners purchasing US
financial and real assets > Americans
purchasing foreign assets)
A trade surplus (exports > imports) =
outflow of capital (Americans purchasing
foreign assets > foreigners purchasing US
assets)
Trade Balance
Capital Inflow
Capital Outflow
Video: Stossel 2011 Economics of trade
deficits
Trade Barriers
Main point: Generally, any trade restriction will
reduce quantity, increase consumer prices, and
create a deadweight loss (elimination of gains
from trade).
A tariff is a tax on imports (it raises the price so
quantity demanded will fall); it reduces imports
and generates revenue for the government
A quota is a limit on the physical units that can
be imported; it generates no revenue
Video: Stossel are boycotts of sweatshop
products helpful?
So, why does the US impose trade
restrictions?
To “protect” certain groups, which gave
rise to the term “protectionism”
The protected group is helped while others
in the US economy are hurt
A country cannot simultaneously reduce
imports and increase exports for an
extended period of time
Imports
Exports
Huge point (that most people
don’t understand):
Our imports give purchasing power to
foreigners. They, in turn, purchase our
exports.
If we limited imports, we would limit the
income of foreigners and they wouldn’t be
able to buy as many of our exports.
That’s why imports and exports are
positively related
Here are more accurate statements
about free trade:
Free trade is harmful to some Americans
but is helpful to America
More people are helped by free trade than
are hurt by free trade (i.e. America
experiences a net gain)
Video: Stossel does outsourcing cost
Americans jobs?
A study done in 2004 by Professor Matthew J.
Slaughter at Dartmouth University found that
outsourcing is actually a way of increasing the
number of American jobs. He found that
employment increased both for American firms
involved in outsourcing but also for their affiliates
in other countries. While employment in foreign
affiliates rose by 2.8 million jobs, employment in
the U.S. parent firms rose even more --by 5.5
million jobs. In other words, for every one job
outsourced, U.S. firms created nearly two jobs in
the United States.
Graph 1: Total employment has increased
while exports and imports have increased
Employment
Imports
Exports
Graph 2: The unemployment rate is inversely
related to exports and imports
Imports
Unemployment
Rate
Exports
Graph 3: An increase in the trade sector has
not caused inflation
Imports
Exports
Inflation Rate
Graph 4: Per Capita Income has increased while
both exports and imports have increased
Per Capita Income
Imports
Exports
Arguments for tariffs that may, in
principle, have some merit:
1) National security
2) Infant industry
Focus: Understanding Economics in Civics and
Government
Lesson 17 Making Trade-Offs in Policy Decisions: The
Patriot Act
The Great Economics Mysteries Book
Chapter 3 Lesson 8 Why Would Mexico Want to Trade with
the United States and Canada?
Focus: Understanding Economics in Civics and
Government
Lesson 20 Economic Freedom and Rights
Video: Stossel 2011 International tradecriticisms and responses