Download File - MCNEIL ECONOMICS

Chapter 16
International Trade
and Exchange Rates
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved
1-1
Trade Facts
•
•
•
•
•
LO1
U.S. trade deficit in goods
• $646 billion in 2010
U.S. trade surplus in services
• $146 billion in 2010
Canada largest U.S. trade partner
Trade deficit with China
• $273 billion in 2010
Dependence on oil
16-2
Trade Facts
•
•
Principal U.S. exports include
• Chemicals
• Agricultural products
• Consumer durables
• Semiconductors
• Aircraft
United States provides about 8.5 percent
of world’s exports
16-3
Some Key Trade Facts
• Principal U.S. imports include
• Petroleum
• Automobiles
• Metals
• Household appliances
• Computers
16-4
Global Snapshot
Percentage Share of World Exports
0
2
4
6
8
10
12
China
Germany
United States
Japan
Netherlands
France
Italy
Belgium
16-5
Global Snapshot
Exports as a Percentage of GDP
0
20
40
60
80
Belgium
Netherlands
South Korea
Germany
Canada
New Zealand
United Kingdom
Italy
France
Spain
Japan
United States
16-6
Comparative Advantage
•
Assumptions
•
Opportunity cost ratio
• Two nations
• Same size labor force
• Constant costs in each country
• Different costs between countries
• United States absolute advantage in both
• Slope of the curve
• Soybeans sacrificed per ton of avocados
16-7
Comparative Advantage
•
•
•
•
Self-sufficiency output mix
Specialization and trade
Produce the good with the lowest
domestic opportunity cost
Opportunity cost of one ton of soybeans:
• Three tons of avocados in United
States
• Four tons of avocados in Mexico
16-8
Comparative Advantage
Mexico’s Production Possibilities
Production Alternatives
Product
A
B
C
D
E
Avocados
0
20
24
40
60
Soybeans
15
10
9
5
0
U.S. Production Possibilities
Production Alternatives
Product
A
B
C
D
E
Avocados
0
30
33
60
90
Soybeans
30
20
19
10
0
16-9
Comparative Advantage
•
Terms of trade
• United States: 1S = 3A
• United States will sell 1S for more than
3A
• Mexico: 4A = 1S
• Mexico will pay less than 4A for 1S
• Settle between the two
• Depends on supply/demand factors
• Assume 1S = 3.5A
16-10
Comparative Advantage
Specialization According to Comparative Advantage
and the Gains from Trade (in Tons)
(1)
Country
Mexico
United
States
Outputs before
Specialization
(2)
Outputs after
Specialization
(3)
Amounts Traded
(4)
Outputs
Available after
Trade
(5)
Gains from
Specialization
and Trade
(4) – (1)
24 avocados
60 avocados
-35 avocados
25 avocados
1 avocados
9 soybeans
0 soybeans
+10 soybeans
10 soybeans
1 soybeans
33 avocados
0 avocados
+35 avocados
35 avocados
2 avocados
19 soybeans
30 soybeans
-10 soybeans
20 soybeans
1 soybeans
16-11
The Foreign Exchange Market
$1 Will Buy…
44.49 Indian rupees
0.62 British pounds
0.96 Canadian dollars
11.72 Mexican pesos
0.82 Swiss francs
0.71 European euros
79.2 Japanese yen
1058 South Korean won
6.5 Swedish kronor
4.3 Venezuelan bolivares fuertes
16-12
Exchange Rates
•
•
•
•
•
Demand for pounds
Supply of pounds
Market equilibrium
Increase in dollar price of pounds
• Dollar depreciates
• Pound appreciates
Decrease in dollar price of pounds
• Dollar appreciates
• Pound depreciates
16-13
Flexible Exchange Rates
The Market for Foreign Currency
(Pounds)
P
Dollar price of 1 pound
S1
$3
$2
Dollar
depreciates
(pound
appreciates)
Exchange
rate: $2 = £1
Dollar
appreciates
(pound
depreciates)
$1
D1
0
Q1
Q
Quantity of pounds
16-14
Flexible Exchange Rates
•
•
Determinants of exchange rates
Factors that shift demand/supply
• Changes in tastes
• Relative income changes
• Relative inflation rate changes
• Relative interest rates
• Relative expected returns on assets
• Speculation
16-15
Trade Barriers and Export
Subsidies
• Tariffs
• Import quota
• Nontariff barrier (NTB)
• Voluntary export restriction (VER)
• Export subsidy
16-16
Economic Impact of Tariffs
• Direct effects
• Decline in consumption
• Increase in domestic production
• Decline in imports
• Tariff revenue
• Indirect effects
16-17
Net Costs of Tariffs
• Price of imported product goes up
• Consumers shift purchases to higher•
priced domestic goods
Domestically produced goods
become more expensive as import
competition declines
16-18
Three Arguments for
Protection
• Increased domestic employment
• Cheap foreign labor
• Protection against dumping
16-19
Trade Adjustment Assistance
• Trade Adjustment Assistance Act
• Designed to help individuals hurt by
•
international trade
Offshoring of jobs
• Shifting of work previously done by
American workers to workers
abroad
16-20
Multilateral Trade Agreements
• General Agreement on Tariffs and
•
•
•
Trade (GATT)
World Trade Organization (WTO)
European Union (EU)
North American Free Trade
Agreement (NAFTA)
16-21
GATT
• Three principles:
• Equal, nondiscriminatory trade
between member nations
• Reduction in tariffs
• Elimination of import quotas
16-22
WTO
• Established by Uruguay Round of
•
•
•
GATT
153 member nations in 2011
Oversees trade agreements and rules
on disputes
Critics argue that it may allow nations
to circumvent environmental and
worker-protection laws
16-23
European Union
• Initiated in 1958 as Common Market
• Abolished tariffs and import quotas
•
•
between member nations
Established common tariff with
nations outside the EU
Created euro zone with one currency
16-24
NAFTA
• Agreement between United States,
•
•
•
Canada, and Mexico
Established a free trade zone
between the countries
Trade has increased in all countries
Enhanced standard of living
16-25
U.S. Trade Deficits
•
•
•
Large and persistent
Causes of trade deficits
• High U.S. growth (relatively)
• China
• Price of oil
• Low U.S. saving rate
Implications of trade deficits
• Increased current consumption
• Increased indebtedness
16-26
Billions of Dollars
U.S. Trade Deficits
16-27