The Dynamic Environment of International Trade PDF

Chapter 2 The Dynamic Environment of International Trade ©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written Economic Systems  Market Capit...

Chapter 2 The Dynamic Environment of International Trade ©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written Economic Systems  Market Capitalism Individuals and firms allocate resources Production resources are privately owned Driven by consumers Government’s role is to promote competition among firms and ensure consumer protection 2-3  Centrally Planned Socialism Opposite of market capitalism State holds broad powers to serve the public interest; decides what goods and services are produced and in what quantities Consumers can spend only what is available Government owns entire industries and controls distribution Demand typically exceeds supply Little reliance on product differentiation, advertising, pricing strategy China, India, and the former USSR now moving towards some market allocation and private ownership 2-4  Economic Freedom Rankings of economic freedom among countries – “free” “mostly free” “mostly unfree” “repressed” Variables considered include such things as: – Trade policy – Taxation policy – Capital flows and foreign investment – Banking policy – Wage and price controls – Property rights – Black market 2-5  Economic Freedom— Rankings Free Repressed 1. Hong Kong 169. Turkmenistan 2. Singapore 170. Equatorial Guinea 3. Australia 171. Dem. Rep. Congo 4. New Zealand 172. Burma 173. Eritrea 5. Switzerland 174. Venezuela 6. Canada 175. Zimbabwe 7. Chile 176. Cuba 8. Mauritius 177. North Korea 9. Denmark 10. United States Not ranked: Afghanistan, Iraq, Kosovo, Libya, Liechtenstein, Somalia, Sudan, Syria 2-6  Stages of Market Development www.forbes.com 2-7 Low-Income Countries per capita of $1,025 or less Characteristics – Limited industrialization – High percentage of population in farming – High birth rates – Low literacy rates – Heavy reliance on foreign aid – Political instability and unrest 2-8  Lower-Middle-Income Countries per capita: $1,026 to $4,035 Characteristics – Rapidly expanding consumer markets – Cheap labor – Mature, standardized, labor-intensive industries like footwear, textiles and toys India is the only BRIC nation 2-9  Upper-Middle-Income Countries per capita: $4,036 to $12,475 Characteristics: Rapidly industrializing, less agricultural employment Increasing urbanization Rising wages High literacy rates and Chilean copper advanced education mine Lower wage costs than advanced Also called industrializing countries or developing economies BRICS: Brazil, China, Russia, South Africa Other countries: Malaysia, Chile, Venezuela, Mexico 2-10  High-Income Countries per capita: $12,476 or more Also known as advanced, developed, industrialized, or postindustrial countries Characteristics: – Sustained economic growth through disciplined innovation – Households have high ownership levels of basic products Tokyo 2-11 The Trade Deficit What Is a Trade Deficit? A trade deficit occurs when a country's imports exceed its exports during a given time period. It is also referred to as a negative balance of trade (BOT) Protectionism The Reality of World Trade Countries protect their own markets Ward off unwanted foreign investments and imports Use barriers for protection Tariffs Exchange barriers https://www.youtube.com/watch?v=LKCMnCZyxiQ Trade Barriers A Variety of Non-Tariff Barriers Quotas and import licenses Boycotts and embargoes Monetary barriers Anti-dumping penalties Easing Trade Restrictions: WTO, IMF, UN……….. 2-16 Preferential Trade Agreements Many countries seek to lower barriers to trade within their regions PTAs give partners special treatment and may discriminate against others Over 300 PTAs have been notified to the WTO 2-17 Hierarchy of PTAs CET = Common External Tariffs 2-18  Free Trade Area Two or more countries agree to abolish tariffs and other barriers to trade amongst themselves Countries continue independent trade policies with countries outside agreement Rules of origin requirements restrict transshipment of goods from the country with the lowest tariff to another 2-19 Customs Union Evolution of Free Trade Area Includes the elimination of internal barriers to trade (as in FTA) AND establishes common external tariff (CETs) to trade Examples: The EU and Turkey 2-20 Common Market Includes the elimination of internal barriers to trade (as in free trade area) AND establishes common external barriers to trade (as in customs union) AND allows for the free movement of factors of production, such as labor, capital, and information 2-21 Economic Union Includes the elimination of internal barriers to trade (as in free trade area) AND establishes common external barriers to trade (as in customs union) AND allows for the free movement of factors of production, such as labor, capital, and information (as in common market) AND coordinates and harmonizes economic and social policy within the union 2-22 The European Union (EU) Initially began with the 1958 Treaty of Rome Objective is to harmonize national laws and regulations so that goods, services, people, and money could flow freely across national boundaries 1991 Maastricht Treaty set stage for transition to an economic union with a central bank and single currency (the Euro) 2-23 Gulf Cooperation Council Established in 1981 by 6 countries with 45% of world’s oil, only 18% of output Attempting to diversify industries