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Chapter 10International 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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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