AGEC 340 International Economic Development Week 14April 1416 Macroeconomic Policy

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AGEC 340 International Economic
DevelopmentWeek 14April 14-16Macroeconomic
Policy

• Exchange rates and inflation
• Monetary and fiscal policy

• Reading Chapter 18
• Ex. 5 (last one!) on trade policy -- due Thursday

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The U.S. economy
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Dividing the pie How is it used? How is it
made? How is it earned?
Click here for the latest figures
US data on supply
US data on income
US data on demand
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How does macroeconomics matter for trade?

• What is macroeconomics, anyway?
• How would it enter our diagrams?

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From week 3, the three-panel diagramWhat if our
currency falls in value? (e.g. more US per
foreign currency)
Our country (US)
Rest of the world (ROW)
Intl. Trade
Sexports
Dimports
Q (tons)
Q (thou. tons)
Q (tons)
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More simply, from week 4s small country
diagrams, When our currency falls in value
An importable good
An exportable good
S
D
S
D
Price (/unit)
Pt
Pt
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How does agriculture fit in?

• Devaluation or depreciation of the currency
  helps producers of any tradable, whether exported
  or imported
• Agriculture is a major producer of tradables,
  using non-tradable land and labor a low value of
  the currency helps farmers!
• But note that currency depreciation hurts most
  consumers, who are net buyers of tradable goods,
  and net sellers of non-tradables

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How has the U.S. exchange rate moved?
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The exchange rate and farm income
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We can think of this using a PPF and indifference
curves
Qty of other goods
Foreigners are trading with us along the dashed
line, at price Pag/Pother
Gains from trade
Qty. of ag goods
Qs
Qd
exports
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Adding up all tradable goods on the X axis
Qty of other goods (all non-tradables, e.g. most
services)
If total exports imports (exactly balanced
trade), then the slope of the price line here
would be Pt/Pother
Qty. of all tradable goods (e.g. farm products)
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Now we can see effects of macro policyWhat if
our country (e.g. the U.S.) borrows money from
the rest of the world?
Qty of other goods (all non-tradables, e.g. most
services)
Then we have capital inflows and a matching
trade deficit we consume more tradables than
we produce Pt/Pother is lower than if we did
not borrow.
Gains from borrowing (but note losses if/when we
have to pay back!)
Qd
Qty. of all tradable goods (e.g. farm products)
Qs
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but now back to the textbook!