1 chapter 11 international trade these slides supplement the textbook, but should not replace...
TRANSCRIPT
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Chapter 11International Trade
These slides supplement the textbook, but should not replace reading the textbook
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All nations can increase productivity, lower prices, increase jobs and standard of living
Why trade with other nations?
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Because the world’s resources are not evenly distributed around the globe
Why is trade advantageous for all countries?
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An increase in exports increases GDP
A decrease in exports decreases GDP
How does foreign trade effect GDP?
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Shifts in the Economy’s PPFAn increase in available resources
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international trade
With international trade
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It has something that other countries want
What gives a county’s currency value?
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The price of one country’s currency measured in terms of another country’s currency
What is a country’s exchange rate?
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An increase in the number of units of a currency needed to purchase one unit of foreign exchange
What does it mean when a currency is depreciated?
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A decrease in the number of units of a currency needed to purchase one unit of foreign exchange
What does it mean when a currency is appreciated?
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The supply and demand for that currency on the international market
What determines the exchange rates of
different currencies?
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Rates are determined by the forces of demand and supply without government intervention
What are flexible exchange rates?
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This is called floating
What is it called when currencies are allowed to fluctuate?
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Foreigners demand a another country’s currency for what that currency can buy in that country
What determines the demand for a currency on the international market?
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When citizens of a country buy goods and services from another country
What determines the supply for a currency on the international market?
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price levelsrates of interestrates of growthpolitical & economic stability
What determines different exchange rates? Relative …
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Equilibrium in the World Market
Quantity on world market
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A dirty float occurs when a country influences the demand and/or supply of its currency on the international market
What is a dirty float?
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An exchange rate system that combines features of freely flexible rates with intervention by central banks
What is amanaged float system?
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A managed float system
What kind of system do we have today?
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The measure of money that enters and leaves a country via trade with other nations
What is the balance of trade?
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The value of a country’s imports of goods is less than the value of its exports of goods
What is a favorable balance of trade?
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The value of a country’s imports of goods is greater than the value of its exports of goods
What is an unfavorable balance of trade?
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investmentstravelsending gifts
How can money leave or enter a country other than trade?
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Money can leave a country because of trade - but more money can enter the country in other areas
Can the balance of payments offset the
balance of trade?
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Summarizes all economic transactions that occur during a given time period between residents of that country and residents of other countries
What is a country’s balance-of-payments?
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When there is more money entering a country than there is leaving a country
What is a payments surplus?
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If it is too favorable over time it can cause inflation
When can a payments surplus be a problem?
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When there is more money leaving a country than there is entering a country
What is a payments deficit?
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If it is too unfavorable it can cause unemployment
When can a payments deficit be a problem?
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When the amount of money entering equals the amount of money leaving
At what point is equilibrium reached?
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With a lot more money entering over a time, a currency will appreciate in value
With a lot more money leaving over time, a currency will depreciate in value
How are Balance of Payments Problems Resolved?
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The value of a country’s currency fluctuates as the supply fluctuates on the world market
Why is there a balance in the balance of payments?
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An arrangement whereby the currencies of most countries are convertible into gold at a fixed rate
What is the gold standard?
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From 1879 to 1914, the international financial system operated under a gold standard
When was the gold standard?
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Any increase in the money supply would be limited to a country’s gold holdings
What is one advantage of the gold standard?
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Yes!If countries demanded payment for goods and services in gold we would pay in gold
Did America honor gold payments after
WWI?
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During the Depression of the 1930’s foreigners demanded payment in gold, thus depleting our gold supply
What happened to this practice of paying in gold?
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During World War I, the gold standard collapsed, limiting trade during the 1920s and 1930s
When did thegold standard end?
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The value of each currency was pegged to an ounce of gold
What is the fixed exchange rate system?
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From about 1945 to 1972
When was the fixed exchange rate system?
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All foreign exchange rates were fixed in terms of the dollar and the dollar could be converted to gold at a fixed exchange rate
What was the Bretton Woods Agreement?
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$35 an ounce
Under the Bretton Woods Agreement how much did we agree to
exchange foreign holdings of dollars?
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1944
When was the Bretton Woods Agreement?
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An increase in the official pegged price of foreign exchange in terms of the domestic currency
What is currency devaluation?
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An reduction in the official pegged price of foreign exchange in terms of the domestic currency
What is currency revaluation?
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Helps facilitate exchange rates by allowing countries to trade currencies
What is the International Monetary Fund?
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1944
When was the IMF established?
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How does the IMF help countries?
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If the U.S. wants to devalue the dollar it will borrow dollars from the IMF and buy other currencies around the world
If the U. S. wants to revalue the dollar it will borrow other currencies from the IMF and buy dollars around the world
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Each country knew what its currency was worth in relation to foreign currencies
What was the advantage of the fixed
rate system?
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The inflation in the 1970’s led to a change in the value of all currencies
What happened to the fixed exchange
rate system?
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In 1972 we uncoupled the dollar from the pegged international monetary system
In what year did the Bretton Woods
System collapse?
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Yes!By each country specializing in certain exports non-productive activity is lessened
Does specialization increase productivity?
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In those goods and services that it has a comparative advantage
What should a country specialize?
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Producing something with lower opportunity costs than others
What is comparative advantage?
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Producing something better than others
What is absolute advantage?
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It should produce those things in which it has a comparative advantage
What should a country produce?
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Even if Americans were best at making wicker baskets our opportunity costs would be very high in this activity
What is an example of comparative advantage?
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If a country has a comparative advantage in a product that product should be produced if the job can be done good enough
What is the good enough rule?
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differences in resourceseconomies of scaledifferences in tastes
What are the reasons for international specialization?
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When the world price is ...> our price, export
< our price, import
= our price, will not trade
When will we trade?
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When the high wage worker is a lot more productive than the low wage worker
When would a high wage worker be cheaper than a
low wage worker?
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• Infrastructure• Capital• Education• Skills • Attitude
What makes one worker more productive than
another? Better
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There are good and bad reasons for trade restrictions
Why havetrade restrictions?
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tariffsimport quotasexport subsidieslicensing agreementunreasonable standards
How do werestrict trade?
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Specific - applied to a specific good, like a barrel of oil
Ad Valorem- a percentage of the price of imports at the port of entry
What are two types of tariffs?
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An increase in pricesA decrease quantity in supplied
A lower standard of living
What are the effects of a tariff or quota?
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The practice of selling a commodity abroad at a price that is below its cost or below the price charged in the home market
What is dumping?
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What are the three types of dumping?
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Predatory is when the purpose of dumping is to drive competitors out of the market, this is rareLong-term is when there are economic reasons that a product can be sold at a low price, for example, less competitionSporadic occurs when there are excess inventories
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What are arguments for tariffs and quotas?
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National defense Protect infant industries Protect against predatory dumping Reduce unemployment Protect temporary declining industries Promote variety
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What are arguments against trade restrictions?
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Leads to retaliation
Subsidizes weakness
Works against comparative advantage
Problems with policing & enforcing
Encourages rent seeking
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Treat all nations equallyReduce tariff rates Reduce import quotas
What is theWorld Trade
Organization (WTO)?
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A market in Europe begun in 1958 as a way of creating barrier-free trade in Europe
What is the Common Market?
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Passed during the Clinton Administration to remove barriers of trade with Mexico
What is North American Free Trade Agreement
(NAFTA)?
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END