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?

?

?

?

?

?

?

© 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?