Download International Trade - Madison County Schools

International Trade
Why do nations trade?
• Distribution of resources are uneven among
nations (natural, human, and capital
resources)
• Efficient production of various goods required
different technologies or combinations of
resources
• Products are differentiated as to quality and
other nonprice attributes (imported goods vs.
domestic goods)
Examples…
• Land-intensive goods
– Examples: Australia (vast amounts of land for wheat,
wool, meat) and Brazil (soil and climate for coffee
production)
• Capital-intensive goods
– Industrially advanced countries with large amounts
capital
• Labor-intensive goods
– Countries heavy in skilled labor
– Example: Japan
• Can produce some goods at lower cost such as digital
cameras, video games, etc.
Comparative Advantage (review)
• Principle says that total output will be greatest
when each good is produced by the nation
that has the lowest domestic opportunity cost
for that good
• Review workbook activities outside of class for
test!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Terms of Trade
• Exchange ratio that a country will trade with
another country
• REVIEW WORKBOOK ACTIVITY 50 OUTSIDE OF
CLASS!!!!!!!!!!
Case for Free Trade
• Argument: through free trade based on the
principle of comparative advantage, the world
economy can achieve a more efficient allocation
of resources and a higher level of material wellbeing than it can without free trade
– Promotes competition and deters monopoly
– Competition lowers prices (forces domestic firms to
produce more efficiently/lower cost)
– Links national interests and breaks down national
animosities (tend to negotiate rather than make war)
Supply and Demand Analysis of
Exports and Imports
• Determines how equilibrium prices/quantities of
exports and imports are determined
• Amount of a good or service a nation will export or
import depends on differences between the
equilibrium world price and the equilibrium domestic
price
• In absence of trade, the domestic prices in a closed
economy may or may not equal the world equilibrium
prices
• When economies are opened for international trade,
differences between world and domestic prices
encourage exports/imports
Trade Barriers
• WORKBOOK ACTIVITY 51!!!!!!!
Balance of Payments System
Financing International Trade
Balance of Payments
• A country’s balance of payments is commonly defined
as the record of transactions between its residents and
foreign residents over a specified period.
• Each transaction is recorded in accordance with the
principles of double-entry bookkeeping, meaning that
the amount involved is entered on each of the two
sides of the balance-of-payments accounts
• Compiled by Bureau of Economic Analysis
– Shows all payments a nation receives from foreign
countries and all the payments it makes to them
– Shows “flows” of inpayments and outpayments
• Any transaction that causes money to flow into a country is
a credit to it BOP account, and any transaction that causes
money to flow out is a debit
– If someone in England buys a South Koreans stereo, the
purchase is a debit to the British account and a credit to the
South Korean account
– If a Brazilian company sends an interest payment on a loan to a
bank in the U.S., the transaction represents a debit to the
Brazilian BOP account and a credit to the U.S. BOP account
• BOP includes:
– CURRENT ACCOUNT – deals with international trade in
goods/services and with earning on investments; measures the
flows of goods/services
– CAPITAL ACCOUNT – consists of capital transfers and the
acquisition and disposal of non-produced, non-financial assets
– FINANCIAL ACCOUNT – records investment flows; records
transfers of financial capital and non-financial capital
– Capital/Financial account may be combined by some
resources….
Current Account
• Shows current import and export payments of
both goods and services
• The difference between a nation's total exports
of goods, services and transfers, and its total
imports of them. Current account balance
calculations exclude transactions in financial
assets and liabilities.
• The account is divided into four sections: goods,
services, income (such as salaries and investment
income) and unilateral transfers (for example,
worker's remittances).
• Trade Deficit –sub category of current account
Current Account
• Sum of balances in the merchandise, services, income, and
unilateral transfers accounts
– Merchandise: exports of goods (credits) and imports of goods
(debits)
• Consists of all raw materials and manufactured goods bought/sold
• When exports exceeds imports (credits exceeds debits), account shows a
surplus
• When imports exceeds exports, account shows a deficit
• Balance of merchandise is referred to a balance of trade!!!!
– Services
• Includes travel and tourism, royalties, transportation costs, and
insurance premiums, fees (patents, copyrights, etc.)
– Income
• Derived from ownership of assets, such as dividends on holdings of stock
and interest on securities
– Unilateral Transfers
• When one party gives something but gets nothing in return (examples:
gifts and retirement pensions)
• If a farm worker in California sends money to family member in Mexico,
this is an unilateral transfer
Capital Account/Financial Account
• Record of a country’s international transactions involving
purchases or sales of financial and real assets…MONEY
(money to acquire financial assets, such as stocks, bonds,
and bank balances, and money to buy foreign land,
housing, factories, and other physical assets)
• When a nation buys a foreign firm or real estate of another
nation, it appears in the capital account
• Examples:
– Swedish firm buys a manufacturing facility in Idaho
– If Mexican citizen buy U.S. Treasury bond, recorded as an inflow
of foreign capital assets into the U.S.
– If an American firm buys a ship-building company in Turkey, it
would be an outflow of assets to foreign nations
– U.S. residents purchase foreign securities to earn a higher rate
of return and to diversify their portfolios; U.S. capital flows out
when Americans buy foreign assets; foreign capital flows in
when foreigners buy U.S. assets
• The current and capital accounts should equal
zero.
• When they do not equal zero, the central bank
must buy or sell currency to resolve the imbalance
• BOP transactions impact the foreign current
markets for the participants
– When you buy foreign goods, you must have foreign
current to complete exchange (vice versa)
• Financial account transfers may impact the
loanable funds markets of participants.
– These capital flows include direct investment, purchases
of stocks/bonds, and central bank purchases of assets
– Capital inflows will increase the supply loanable funds;
capital outflows will decrease the supply of loanable
funds
PRACTICE
• http://www.reffonomics.com/TRB/INPROGRE
SS/Macroeconomics
Foreign Exchange Rates and
Markets
Exchange Rate Systems
• Flexible (floating) exchange rate system –
supply and demand determine exchange rates
and in which no government intervention
occurs
• Fixed exchange rate system – governments
determine exchange rates and make necessary
adjustments in their economies to maintain
those rates (China today)
Flexible Exchange Rate System
• Depreciation: value of currency falls in comparison
with other currencies
– More needed to buy goods
• Appreciation: value of currency increases in
comparison with other currencies
– less needed to buy goods
• Three generalizations of exchange rates:
– If demand for nation’s currency increases (all else equal),
that currency will appreciate; if the demand declines, that
currency will depreciate
– If the supply of a nation’s currency increases, that currency
will depreciate (vice versa)
– If a nation’s currency appreciates, some foreign currency
depreciates relative to it
KNOW!!!!!!!!!
• If currency appreciates, your goods are now
MORE EXPENSIVE, so IMPORTS INCREASE
(foreign goods cheaper) and EXPORTS
DECREASE.
• If currency depreciates, your goods are now
cheaper, so IMPORTS DECREASE (foreign
goods more expensive) and EXPORTS
INCREASE (thus shifting AD to the right)
Determinates of Exchange Rates
• Changes in Tastes
– Change in consumer tastes/preferences for product of foreign country
may alter demand for country’s currency
• Relative Income Changes
– Nation’s currency likely to depreciate if its growth of national income
is more rapid than that of other countries (country’s imports vary
directly with its income level; as income rises in U.S., people buy more
domestic and foreign goods, thus causing a demand in foreign
currency, depreciating U.S. dollar)
• Relative Price-Level Changes
– If price level rises more rapidly in U.S. than in Britain, British goods will
be cheaper than domestic goods thus demanding more British pounds
• Relative Interest Rates
– Suppose real interest rates rise in US but stay constant in Britain;
British citizens will then find the U.S. attractive place to make financial
investments thus supply pounds for U.S. dollars
• Speculation
– People who buy and sell currencies with an eye toward reselling or
repurchasing them at a profit
KNOW!!!!
• When interest rates rise, there is a decrease in
capital investments (machinery, equipment,
etc.) because it becomes more costly to
borrow for those projects; HOWEVER…when
interest rates rise, we see an increase in
financial investments (bonds) because income
earned on those bonds is rising (vice versa)
If the Fed
increases
MS…
Interest
rates
decrease
which…
Decreases
demand for
$ which…
Depreciates
the dollar
which…
Increases
U.S. Net
Exports
which…
Increases AD
(shift to
right...)
If the Fed
decreases
MS…
Interest
rates
increase
which…
Increases
demand for
$ which…
Appreciates
the dollar
which…
Decreases
U.S. Net
Exports
which…
Decreases
AD (shift to
left…)
GRAPHING TIME….
• Woo hoo…………….