Chapter 10 International Trade

1
Chapter 10International Trade
These slides supplement the textbook, but should
not replace reading the textbook
2
Why trade with other nations?

• All nations can increase productivity, lower
  prices, increase jobs and standard of living

3
Why is trade advantageous for all countries?

• Because the worlds resources are not evenly
  distributed around the globe

4
How does foreign trade effect GDP?

• An increase in exports increases GDP
• A decrease in exports decreases GDP

5
Shifts in the Economys PPF
An increase in available resources
Without international trade
A'
A
Food
With international trade
F
F'
Clothing
6
What gives a countys currency value?

• It has something that other countries want

7
What is a countrys exchange rate?

• The price of one countrys currency measured in
  terms of another countrys currency

8
What does it mean when a currency is depreciated?

• An increase in the number of units of a currency
  needed to purchase one unit of foreign exchange

9
What does it mean when a currency is appreciated?

• A decrease in the number of units of a currency
  needed to purchase one unit of foreign exchange

10
What determines the exchange rates of different
currencies?

• The supply and demand for that currency on the
  international market

11
What are flexible exchange rates?

• Rates are determined by the forces of demand and
  supply without government intervention

12
What is it called when currencies are allowed to
fluctuate?

• This is called floating

13
What determines the demand for a currency on the
international market?

• Foreigners demand a another countrys currency
  for what that currency can buy in that country

14
What determines the supply for a currency on the
international market?

• When citizens of a country buy goods and services
  from another country

15
What determines different exchange rates?
Relative

• price levels
• rates of interest
• rates of growth
• political economic stability

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Equilibrium in the World Market
S
Surplus
Value of the dollar
D
Shortage
Quantity on world market
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Effects of an Increase in Demand
0
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Effects of an Decrease in Demand
0
Quantity on world market
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Effects of a Decrease in Supply
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Effects of a Increase in Supply
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What is a dirty float?

• A dirty float occurs when a country influences
  the demand and/or supply of its currency on the
  international market

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What is amanaged float system?

• An exchange rate system that combines features of
  freely flexible rates with intervention by
  central banks

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What kind of system do we have today?

• A managed float system

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What is the balance of trade?

• The measure of money that enters and leaves a
  country via trade with other nations

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What is a favorable balance of trade?

• The value of a countrys imports of goods is less
  than the value of its exports of goods

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What is an unfavorable balance of trade?

• The value of a countrys imports of goods is
  greater than the value of its exports of goods

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How can money leave or enter a country other than
trade?

• investments
• travel
• sending gifts

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Can the balance of payments offset the balance of
trade?

• Money can leave a country because of trade - but
  more money can enter the country in other areas

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What is a countrys balance-of-payments?

• Summarizes all economic transactions that occur
  during a given time period between residents of
  that country and residents of other countries

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What is a payments surplus?

• When there is more money entering a country than
  there is leaving a country

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When can a payments surplus be a problem?

• If it is too favorable over time it can cause
  inflation

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What is a payments deficit?

• When there is more money leaving a country than
  there is entering a country

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When can a payments deficit be a problem?

• If it is too unfavorable it can cause unemployment

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At what point is equilibrium reached?

• When the amount of money entering equals the
  amount of money leaving

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How are Balance of Payments Problems Resolved?

• 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

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Why is there a balance in the balance of payments?

• The value of a countrys currency fluctuates as
  the supply fluctuates on the world market

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What is the gold standard?

• An arrangement whereby the currencies of most
  countries are convertible into gold at a fixed
  rate

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When was the gold standard?

• From 1879 to 1914, the international financial
  system operated under a gold standard

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What is one advantage of the gold standard?

• Any increase in the money supply would be limited
  to a countrys gold holdings

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Did America honor gold payments after WWI?
Yes!
If countries demanded payment for goods and
services in gold we would pay in gold
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What happened to this practice of paying in gold?

• During the Depression of the 1930s foreigners
  demanded payment in gold, thus depleting our gold
  supply

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When did thegold standard end?

• During World War I, the gold standard collapsed,
  limiting trade during the 1920s and 1930s

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What is the fixed exchange rate system?

• The value of each currency was pegged to an
  ounce of gold

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When was the fixed exchange rate system?

• From about 1945 to 1972

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What was the Bretton Woods Agreement?

• All foreign exchange rates were fixed in terms of
  the dollar and the dollar could be converted to
  gold at a fixed exchange rate

46
Under the Bretton Woods Agreement how much did we
agree to exchange foreign holdings of dollars?

• 35 an ounce

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When was the Bretton Woods Agreement?

• 1944

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What is currency devaluation?

• An increase in the official pegged price of
  foreign exchange in terms of the domestic currency

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What is currency revaluation?

• An reduction in the official pegged price of
  foreign exchange in terms of the domestic currency

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What is the International Monetary Fund?

• Helps facilitate exchange rates by allowing
  countries to trade currencies

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When was the IMF established?

• 1944

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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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What was the advantage of the fixed rate system?

• Each country knew what its currency was worth in
  relation to foreign currencies

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What happened to the fixed exchange rate system?

• The inflation in the 1970s led to a change in
  the value of all currencies

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In what year did the Bretton Woods System
collapse?

• In 1972 we uncoupled the dollar from the pegged
  international monetary system

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Does specialization increase productivity?
By each country specializing in certain exports
non-productive activity is lessened
Yes!
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What should a country specialize?

• In those goods and services that it has a
  comparative advantage

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What is comparative advantage?

• Producing something with lower opportunity costs
  than others

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What is absolute advantage?

• Producing something better than others

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What should a country produce?
It should produce those things in which it has a
comparative advantage
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What is an example of comparative advantage?

• Even if Americans were best at making wicker
  baskets our opportunity costs would be very high
  in this activity

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What is the good enough rule?

• If a country has a comparative advantage in a
  product that product should be produced if the
  job can be done good enough

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What are the reasons for international
specialization?

• differences in resources
• economies of scale
• differences in tastes

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When will we trade?

• When the world price is ...
• gt our price, export
• lt our price, import
• our price, will not trade

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When would a high wage worker be cheaper than a
low wage worker?

• When the high wage worker is a lot more
  productive than the low wage worker

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What makes one worker more productive than
another? Better

• Infrastructure
• Capital
• Education
• Skills
• Attitude

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Why havetrade restrictions?

• There are good and bad reasons for trade
  restrictions

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How do werestrict trade?

• tariffs
• import quotas
• export subsidies
• licensing agreement
• unreasonable standards

70
What are two types of tariffs?

• 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

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What are the effects of a tariff or quota?

• An increase in prices
• A decrease quantity in supplied
• A lower standard of living

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What is dumping?

• The practice of selling a commodity abroad at a
  price that is below its cost or below the price
  charged in the home market

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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 rare
• Long-term is when there are economic reasons that
  a product can be sold at a low price, for
  example, less competition
• Sporadic 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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What is theWorld Trade Organization (WTO)?

• Treat all nations equally
• Reduce tariff rates
• Reduce import quotas

80
What is the Common Market?

• A market in Europe begun in 1958 as a way of
  creating barrier-free trade in Europe

81
What is North American Free Trade Agreement
(NAFTA)?

• Passed during the Clinton Administration to
  remove barriers of trade with Mexico

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END