Running head: International Trade and Finance

International Trade and Finance Name Principles of Macroeconomics/ECO3 ! Date Instructor Date

International Trade and Finance International Trade and Finance International trade is a competition" #ot in the sense of a normal competition to see $ho

can $in% &ut in the sense of competing to disco'er $hat goods a countr( can produce and trade to another countr( that $ill &enefit e'er(one" It is a competition to gro$ the glo&al econom(" ) nation must identif( $hat comparati'e ad'antage it has $ith another to maintain a proper trading relationship" E*porting goods to other nations is a large part of the nations +ross ,omestic Product -+,P." To ensure that trade does not negati'el( affect the domestic trade of goods the go'ernment maintains a &alance of imports $ith tariffs and /uotas" Tariffs and Quotas Tariffs pro'ide the go'ernment e*tra re'enue &( ta*ing imports to &ring the prices consistent $ith domestic goods" )&use of tariffs can cause serious glo&al and domestic economic issues" For instance% if the tariff is e*cessi'e it can create a trade $ar &et$een nations" E*ports ha'e the potential for e*cessi'e ta*ation &( other nations causing serious economic pro&lems -Colander% !010." This is e'ident in the 1moot23a$le( Tariff of 1430 that caused so man( pro&lems $ith international trade -Colander% !010." Comparati'el( /uotas restrict the amount of goods there&( increasing the price to domestic le'els" 5ecause /uotas do not generate re'enue 'ia ta*es as a tariff the e*tra re'enue generated goes to the importer of the goods -Colander% !010." E*porters normall( cur& the goods e*ported 'oluntaril( to help in maintaining the glo&al econom( rather than re/uiring the need for /uotas" Gross Domestic Product and Domestic Markets International trade affects the +,P and domestic mar6ets in different $a(s" Consider that in 7une !01! total e*ports e/ual 819:"0 &illion and imports e/ual 8!! "4 &illion -5ureau of Economic )nal(sis% !01!." Consider that the trade deficit of 8;!"4 &illion dollars is reduced a

International Trade and Finance great deal since !011<s deficit of 8:0"3 &illion -5ureau of Economic )nal(sis% !01!." This indicates a considera&le gro$th in the +,P" ,omestic mar6ets and prices are ad=usted &( trading policies" ,omestic prices decline $ith cheaper imports" Essentiall( glo&ali>ing the prices of a good rather than maintaining a

simple domestic relationship of pricing" 3o$e'er% $hen the import prices of goods are simpl( so lo$ it $ill dri'e the econom( do$n tariffs or /uotas maintain a domestic &alance -Colander% !010." The competition of a glo&al mar6et and international trade creates more sta&le prices and economies" Traders also ha'e the opportunit( to import goods and sell these goods at an increased cost" This ensures the ma=or portion of the profit goes to the domestic mar6et rather than the e*porting mar6et" Foreign Exchange Rates Foreign e*change rates are set &( a countr(<s import and e*port contri&ution to the econom( as $ell as the countr(<s +,P" Therefore% a countr(<s currenc( is 'alued &( ho$ much of a foreign countr(<s currenc( it trades for -Colander% !010." Monetar( policies can create fluctuations in the foreign e*change rate of the dollar" For instance% e*pansionar( monetar( polic( creates lo$er interest rates% larger mone( suppl(% and e*pands income? the dollar e*change rate $ill decrease -Colander% !010." Surp us of Imports @hen there is a surplus of imports it causes the countr( to lose the comparati'e ad'antage for the import and means the countr( is consuming more than it is producing -Colander% !010." ) surplus of imports means the countr( is consuming more than it is producing" This is &ad as it creates a lo$er economic standing for the countr( in a glo&al mar6et" Recentl(% the Anited 1tates solar panel industr( has gone from trade surplus to trade deficit" In !010 the solar product trade $ith China $as 8!:02:;0 million surplus% one short (ear later this surplus reduced to a deficit of

International Trade and Finance 81"B3: million -1impson% !01!." The large amount of la(offs% plant closures% and &an6ruptcies $ithin the industr( is some of the effects of the drastic decline in the glo&al econom( -1impson% !01!." If the surplus of imports continues the industr( can e*pect to see e'en more =o& loss and economic issues" @hen a surplus of imports occurs in this fashion% entire industries and economies suffer" China is leading the path in solar panel manufacturing and /uic6l( &ecoming the $orld leader in other clean energ( industries -1impson% !01!." Restriction of Goods Trade restrictions are generall( considered &ad for economic gro$th -Colander% !010." Implementing trade restrictions interrupts the speciali>ation of la&or and competition" This is e'ident &( the pre'iousl( mentioned 1moot23a$le( Tariff of 1430 that caused such a large reduction in glo&al economic trade -Colander% !010." @hen a countr( can pro'ide a ser'ice or goods at a reduced rate it fosters competition if trade is not restricted" 3o$e'er% $hen these lo$er rates and prices are restricted it raises prices and can cause further restrictions as retri&ution% creating a glo&al economic decline" Restricting trade $ith China or an( countr( that can suppl( goods and ser'ices at a competiti'e price is not a proper alternati'e to allo$ing the mar6et to ad=ust prices in a natural manner" !onc usion In conclusion% competition is the largest factor in proper international trade" Proper competition helps to maintain prices for a glo&al econom( that $ill increase the $ell&eing for the $orld" Ase of tariffs and /uotas should reduce or discontinue% $hich $ill help the glo&al

econom( gro$" There is still a place for these to ensure the domestic mar6et has the opportunit( to catch up $ith the rest of the $orld% &ut used sparingl("

International Trade and Finance

International Trade and Finance References

5ureau of Economic )nal(sis" -!01!." A"1" International Trade in +oods and 1er'ices 7une !01!" Retrie'ed )ugust !;% !01! from
http://$$$"&ea"go'/ne$sreleases/international/trade/tradne$srelease"htm"

1impson% C" -!01!." Report: A"1" 1olar Trade 1urplus $ith China and @orld Danished in !011" Retrie'ed )ugust !;% !01! from http://$$$"americansolarmanufacturing"org/ne$s2
releases/0320121!2casm2e*port2report"htm"

Colander% ," C" -!010." Macroeconomics -9th ed"." 5oston% M): Mc+ra$23ill/Ir$in"