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Transcript
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