warm-up
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Warm-up
1. What is the opportunity cost for Egypt to produce 1 bushel of corn? Cotton?
2. Same for Venezuela?3. Who should specialize in corn? Why?4. Who should specialize in cotton? Why?
International Economics
EQ: Why should we trade with other nations?
What is meant by a FAVORABLE balance of trade?
Balance of Trade is--
Value of the Exports = Value of the imports
What do we call it when --
Value of the exports > Value of the imports
Trade Surplus
Value of the exports<Value of the imports
THE U.S.A!!Trade Deficit
What do we call it when --
Squanderville versus Thriftville
• What is the fundamental problem for Squanderville?
• Why does Thriftville have an advantage?
• How does squnderville fund its trade deficit?
• Why might Thriftville eventually not accept this form of payment?
• What is the end result for Squanderville?
What is the U.S. trade deficit?Why do you think it decreased during the recession?
Analyze….
• What can we say about the green nations?
• How about the red?
What is the relationship to the trade and GDP in a open
economy?
Y = C + I + G + NX
Warm-up1. What do exchange rates represent?2. Where are currencies exchanged?3. If the Euro appreciates relative to the dollar, how
will it effect the cost of German goods for someone in the U.S.?
4. What will be the effect of a depreciation of the dollar against the Euro?
5. Why is the U.S. not happy about China holding the value of its currency down against the dollar?
Where is your shirt from?
• Are we a global economy? • What is economic interdependence?
So, where do most U.S. imports come from?
Japanese Shipping Company
Korean Shipping Company
It is fairly obvious, which country is our
trading partner?
#1
CANADA
Top 15 International Trading Partners
1. Canada 2. China 3. Mexico 4. Japan 5. Germany 6. United Kingdom 7. South Korea 8. France 9. Taiwan10. Netherlands
Top 5 Countries Receiving U.S. Exports1. Canada2. Mexico3. Japan4. China5. United Kingdom
Top 5 Countries Supplying U.S. Imports 1. Canada 2. China 3. Mexico 4. Japan 5. Germany
What is the U.S. # 1 import?
What does the U.S. export?
– fuel– aircrafts– automobiles– Telecom equipment
EQ
• What are the effects of trade on the Balance of payments (i.e. will China own us)?
BOP Video
• From VE4
Review
• What happens when a Japanese firm sells a car to a U.S. citizen?1. What does this do to the balance of trade?2. What currency does Japan receive?3. What can Japan do with those dollars?4. How are the current and capital account
affected?
International Flows of Goods and Capital: Summary
Review
• If interest rates in the United States are increasing faster than interest rates in other countries, what happens to the following?– Demand for dollars– Supply of dollars– The value of the dollar
Exchange Rates
Why do they fluctuate?
Assume that the United States and France are theonly two countries in the world and that exchange rates between the two countries are flexible.
Assume that there is an increase in the U.S. demand for French goods. Explain how this increase in demand will affect each of thefollowing.
(i) The supply of dollars(ii) The international value of the dollar
S
D
Currency doesn’t flow this way
S
D
Dollar Euro
dollar
Euro
S1
P
Q
P
Q
P1P
Q Q1
D1P
Q
P1
Q1
Supply
buy
Pay
French goods
Assume that there is an increase in real interestrates in the U.S., but not in France. Explain howthis increase in interest rates will affect each ofthe following:
(i) The international value of the dollar in the foreign exchange market
(ii) The quantity of dollars supplied in the foreign exchange market
Increase in interest rates in U.S.relative to France.
If you lived in France, where would you like to invest yourhard-earned money?
S
D
P
Q Euro
S1
Supply
In the U.S.
How do youdo it?
Go throughthe--
P1
Q1
S
D
P
Q Dollar
D1
Q1
P1Buy Dollars
INVEST
Receive higher interest rate
Summary
• What happens to the balance of trade when the U.S. dollar appreciates? Depreciates?
• What effect does contractionary monetary policy have on the value of the U.S. dollar on the international currency market? Why?
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© 2007 Thomson South-Western
How might exchange rates affect your everyday lives?
• http://www.npr.org/blogs/money/2011/11/21/142500594/why-a-new-york-cheese-buyer-hangs-on-the-euros-fate
1. Where does Murray’s get most of its cheese?
2. How is Aaron Foster’s financial well-being tied into Europe?
3. In what currency does Aaron purchase his cheese?
4. How does the cheese get to the port for shipment in Europe?
5. Does he pay more or less from his cheese when the Euro drops in value?
6. Why does he not want the situation in Europe to worsen?
© 2007 Thomson South-Western
Real Exchange Rates
• The real exchange rate compares the prices of domestic goods and foreign goods in the domestic economy.• If a case of German beer is twice as expensive as
American beer, the real exchange rate is 1/2 case of German beer per case of American beer.
© 2007 Thomson South-Western
Real Exchange Rates
• The real exchange rate is a key determinant of how much a country exports and imports.
Real exchange rate =Nominal exchange rate Domestic price
Foreign price
×
© 2007 Thomson South-Western
Real Exchange Rates
• http://www.econedlink.org/interactives/index.php?iid=151
1.Why would China want to intentionally keep the value of their currency low?
2.What drawbacks could there be to China?
3.How does this affect the U.S. currency?
4.What about the current and capital accounts?
© 2007 Thomson South-Western
Boeing 787
Boeing 787, a Global ProjectList three possible benefits Boeing receives as a result of partnering with companies in other countries.1.2.3.
List three common characteristics all of the countries making parts for the 787 share.1.2.3.
List three possible costs of Boeing’s decision to purchase 787 parts from companies in other countries.1.2.3.
How is the production of the Boeing 787 a good example of explaining specialization and comparative advantage?
With a partner, why do nations trade?
Why should they not trade?
Movie Questions1. What are two
arguments for free-trade (think about NAFTA)?
2. What is an argument against?
3. What are four barriers to trade?
4. Of these barriers, which one is predominantly used for political reasons?
© 2007 Thomson South-Western
Protectionism
• What are the ways that governments protect domestic industry from free trade?
• What are the arguments for?
• What are the arguments against?
White boards1. What is the equation for a balance of trade deficit?
2. Draw a graph showing what happens to the U.S. $ when interest rates increase relative to the rest of the world.
3. What happens to the U.S. balance of trade when the dollar appreciates?
4. If a nation’s currency appreciates what happens to NX?
5. Aggregate Demand?
6. If U.S. demand for Japanese goods increases, will the U.S. pay more or less for Japanese goods?
7. What happens to exports when the U.S. $ appreciates?
8. Name 3 factors that will cause an increase in U.S. imports.
9. Create a scenario that would affect the U.S. current account.
10. Capital account.
11. A nation can fund a deficit on its current account with a surplus on its ____________ acct
12. What is the effect on contractionary monetary policy on interest rates and exchange rates?
• Draw a loanable funds graph
• Where do savings come from?
• Where does demand come from?
• What does price level have to do with interest rates?
• Monetary policy affects RGDP in the _______ run only.
• What does Keynes blame for recessions?
Globalization Search
Develop 4 scenarios that would either appreciate or depreciate the
dollar relative to a foreign currency
Balance of Payments
• Accounts are an accounting record of all monetary transactions between a country and the rest of the world– Capital account - records the net change in
ownership of foreign assets• Commercial loans, official flows, foreign direct
investment, and foreign portfolio investment
– Current account - sum of the balance of trade
Warm-up
Coffee CocoaBrazil 10 hours 6 hoursColombia 6 hours 3 hours
1. What country has the absolute advantage in each good?2. What country has the comparative advantage in each good?
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