6 International Trade & Business

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Chapter 6: International Trade & Business

Overview of Economics
Economy: a system for producing and distributing goods and services in an economy
o Between ppl, corporations, and govts

Analogy of a bucket
Inside the bucket is a transaction
Economy is the sum of all the transactions occurring
At any given time, there are certain # of transactions going on
o # could be going up (expanding)
o # could be going down (contracting)

*Gross Domestic Product = C + I + G + (X-M)
All the component of national economy
o C: Consumer expenditure
o I: Business Investments (e.g. equipment, land, rent, wages)
o G: Govt expenditure (e.g. military, infrastructure, education)
o X: Exports
o M: Imports
Everything is positively correlated with GDP EXCEPT
o Imports: importing foreign goods
o Have to pay other countries for goodslose money

Consumers: 50-
66%
Gov'ts
MUSH--> blend of
for Profit & N4P
Business: For Profit
Foreign
Trade: X-M
Top View of Bucket
Consumers: 50-66%
Gov'ts
MUSH--> blend of for Profit &
N4P
Business: For Profit
Foreign Trade: X-M
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Foundations of Economic Growth
See diagram on pg. 156
Natural Resources
o Not necessarily: e.g. Japan (not a lot of resources but very successful)
Productivity
o Output/man power
Human Resources
Technology & Inventions
Social Institutions
Research & Knowledge
o Important for future economic growth

Interest Rates
Set by semi-autonomous central bank in every country
o Mainly concerned with inflation
o Inflation: of prices of goods and services in an economy
Almost always measured on a yearly basis
o Deflation: in prices
Ideal target band of inflation: between 1-3%
Dont want deflation
o Business owner: want prices to go , not
o Govt: economy will
o Even as a consumer: dont want houses, stocks to
Dont want hyperinflation either (inflating spiral)
o The higher inflation, fewer goods people can afford people angry and feel poor
Inflationary Expectations
Global South: have 12, 16 100% or more inflation
Interest rates , GDP
o Interest rates , GDP (Inverse relationship)

Price of Currency
Currency determined by demand and supply
In general, currency can either be fixed or float
o Fixed: pegged to another currency (like USD) or based on hard assets like gold
(e.g. gold standard)proved to be inefficient and undesirable
o Float: based world demand for national assets, currency, resources
Canadian currency: appreciation past 25 years
o 25 years ago: $0.70$1.1 USD
o Increase of 30% appreciation
Appreciation of currency: economy goes down
o Less countries want to buy from it b/c of the price of exports (higher)
Currency , GDP
o Inverse relationship

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Overview of Trade
Most traded currencies: USD, RMB, yen, Euro, Pound
If X>M: trade surplusGDP
o If X<M: trade deficit GDP
o US has largest trade deficit
Most trades occur b/w the nations of the Global North
Look through Canadian Insights (pg. 164)

Gravity Theory of International Trade
Calls happen every 2-3 years to become less dependent on US
o Never happens
Earth forever trapped in orbit of Sun
o Tiny economies like Canada trapped in huge economies of US
Shows its a total waste of time to spread Canadas exports around
o Better to make more money of Americans
o Which is why we have NAFTA

Why Trade at All?
When you trade: gain access to more things
Can choose from global assortment
Compete for best price
Decision to robustly engage in Intl trade increases economy by 20%

3 Trade Policies
1. Autarchy/Mercantilism
Self-rule: not engage in intl trade
To be as self-reliant as possible as a country
Historical norm
Not favoured anymore
o 20% pay-cut
o Govt control, poverty, shoddy local products
o Recipe for war
Lead it into competition with others
E.g. North Korea
2. Free Trade/Internationalism
20% pay raise
More freedom, wealth, best intl products
Interconnection reduces invenctives to go to war
Anti-free-trade (protection)
o Tariffs
o Quotas (e.g. Japan has quota on US cars)
o Govt subsidies
*Nowhere is pure free-trade a reality*
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Still, we give it a go e.g. TA & NAFTA, EU, MEROCUR; CARICOM, APEC
3. A Blended Strategy
Export-Led Development
o Two stage policy
Attempt to blend autarchy and free trade
Govt Protection/Strategic Mercantilism at first, THEN:
International Trade
o E.g. Asian Tigers/Dragons
o South Korea, China, Taiwan
o Japan is the model

International Trade Institutions
World Bank
Aid
GATT/WTO
WTOTrade
Huge progress until recently; now stalemate
o Dispute b/w Global North vs. Global South
Southwant free trade in agriculture
o Have a lot of people and fertile land
o Chance to have a strength in agriculture
o Angry b/c North only cares about free trade when it benefits them
o Want to be able to sell all of its agricultural goods to the Global North
o Trade, not aid
Northwant free trade in finance banking + I.P. protection
o Argue that its important for each country to have its own food industry
o Not strategically wise
o They want protection for International Property (software, Hollywood)

Globalization: History pro & con
Increasing, widening, & deepening of interconnections between national economies,
especially since end of WWII (1945) but especially since end of Cold War (1991)
Interconnection economically (trade especially) but also culturally & socially

MNC: Pro & Con

Fair Trade

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Chapter 6: International Trade & Business

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