Download International Economics - Mr. Zittle`s Classroom

Warm-up
1. What is the opportunity cost for Egypt to
produce 1 bushel of corn? Cotton?
2. Same for Venezuela?
3. Who should specialize in corn? Why?
4. Who should specialize in cotton? Why?
International Economics
EQ: Why should we trade with other
nations?
What is meant by a FAVORABLE balance of trade?
Balance of Trade is-Value of the Exports = Value of the imports
What do we call it when --
Value of the exports
>
Value of the imports
Trade Surplus
What do we call it when --
<
THE U.S.A!!
Value of the exports
Value of the imports
Trade Deficit
Squanderville versus Thriftville
• What is the fundamental problem for
Squanderville?
• Why does Thriftville have an advantage?
• How does squnderville fund its trade
deficit?
• Why might Thriftville eventually not accept
this form of payment?
• What is the end result for Squanderville?
What is the U.S. trade deficit?
Why do you think it decreased during the
recession?
Analyze….
• What can we say about the green nations?
• How about the red?
What is the relationship to the
trade and GDP in a open
economy?
Y = C + I + G + NX
Warm-up
1. What do exchange rates represent?
2. Where are currencies exchanged?
3. If the Euro appreciates relative to the dollar,
how will it effect the cost of German goods
for someone in the U.S.?
4. What will be the effect of a depreciation of
the dollar against the Euro?
5. Why is the U.S. not happy about China
holding the value of its currency down
against the dollar?
Where is your shirt from?
• Are we a global economy?
• What is economic interdependence?
So, where do most U.S. imports
come from?
Japanese Shipping Company
Korean Shipping Company
It is fairly obvious, which country is our
#1
trading partner?
CANADA
Top 15 International Trading Partners
1. Canada
2. China
3. Mexico
4. Japan
5. Germany
6. United Kingdom
7. South Korea
8. France
9. Taiwan
10. Netherlands
Top 5 Countries Receiving U.S. Exports
1. Canada
2. Mexico
3. Japan
4. China
5. United Kingdom
Top 5 Countries Supplying U.S. Imports
1. Canada
2. China
3. Mexico
4. Japan
5. Germany
What is the U.S. # 1 import?
What does the U.S. export?
– fuel
– aircrafts
– automobiles
– Telecom equipment
EQ
• What are the effects of trade on the Balance
of payments (i.e. will China own us)?
BOP Video
• From VE4
Review
• What happens when a Japanese firm sells a
car to a U.S. citizen?
1.
2.
3.
4.
What does this do to the balance of trade?
What currency does Japan receive?
What can Japan do with those dollars?
How are the current and capital account
affected?
International Flows of Goods and
Capital: Summary
Review
• If interest rates in the United States are
increasing faster than interest rates in other
countries, what happens to the following?
– Demand for dollars
– Supply of dollars
– The value of the dollar
Exchange Rates
Why do they fluctuate?
Assume that the United States and France are the
only two countries in the world and that exchange
rates between the two countries are flexible.
Assume that there is an increase in the U.S.
demand for French goods. Explain how this
increase in demand will affect each of the
following.
(i) The supply of dollars
(ii) The international value of the dollar
Currency doesn’t
flow this way
Euro
P
S
u
p
p
l
y
French goods
dollar
P
S
Q Q1
Dollar
D
Q
S
P1
P
S1
P
P1
P
a
y
buy
Q
Euro
Q1
D1
D
Q
Assume that there is an increase in real interest
rates in the U.S., but not in France. Explain how
this increase in interest rates will affect each of
the following:
(i) The international value of the dollar
in the foreign exchange market
(ii) The quantity of dollars supplied in the
foreign exchange market
In the U.S.
Receive higher interest
rate
How do you
do it?
Go through
the-I
N
V
E
S
T
If you lived in France,
where would you like
to invest your
hard-earned money?
S
S1
Increase in interest
rates in U.S.
relative to France.
S
P1
Buy Dollars
P
D
Q
Q1 Dollar
D1
P
P1
D
Q Q1
Euro
S
u
p
p
l
y
Summary
• What happens to the balance of trade when
the U.S. dollar appreciates? Depreciates?
• What effect does contractionary monetary
policy have on the value of the U.S. dollar
on the international currency market?
Why?
?
?
?
?
?
?
How might exchange rates affect your
everyday lives?
• http://www.npr.org/blogs/money/2011/11/21/14
2500594/why-a-new-york-cheese-buyer-hangson-the-euros-fate
Where does Murray’s get most of its cheese?
How is Aaron Foster’s financial well-being tied into Europe?
In what currency does Aaron purchase his cheese?
How does the cheese get to the port for shipment in Europe?
Does he pay more or less from his cheese when the Euro drops
in value?
6. Why does he not want the situation in Europe to worsen?
1.
2.
3.
4.
5.
© 2007 Thomson South-Western
Real Exchange Rates
• The real exchange rate compares the prices of
domestic goods and foreign goods in the
domestic economy.
• If a case of German beer is twice as expensive as
American beer, the real exchange rate is 1/2 case of
German beer per case of American beer.
© 2007 Thomson South-Western
Real Exchange Rates
• The real exchange rate is a key determinant of
how much a country exports and imports.
Nominal exchange rate × Domestic price
Real exchange rate =
Foreign price
© 2007 Thomson South-Western
Real Exchange Rates
© 2007 Thomson South-Western
• http://www.econedlink.org/interactives/inde
x.php?iid=151
1. Why would China want to intentionally
keep the value of their currency low?
2. What drawbacks could there be to China?
3. How does this affect the U.S. currency?
4. What about the current and capital
accounts?
© 2007 Thomson South-Western
Boeing 787
List three possible benefits Boeing receives as a result of partnering with
companies in other countries.
1.
2.
3.
List three common characteristics all of the countries making parts
for the 787 share.
1.
2.
3.
List three possible costs of Boeing’s decision to purchase 787 parts from
companies in other countries.
1.
2.
3.
How is the production of the Boeing 787 a good example of explaining
specialization and comparative advantage?
With a partner, why do nations
trade?
Why should they not trade?
Movie Questions
1. What are two
arguments for freetrade (think about
NAFTA)?
2. What is an argument
against?
3. What are four barriers
to trade?
4. Of these barriers,
which one is
predominantly used
for political reasons?
Protectionism
• What are the ways that governments protect
domestic industry from free trade?
• What are the arguments for?
• What are the arguments against?
© 2007 Thomson South-Western
White boards
1.
2.
What is the equation for a balance of trade deficit?
Draw a graph showing what happens to the U.S. $ when interest rates
increase relative to the rest of the world.
3. What happens to the U.S. balance of trade when the dollar
appreciates?
4. If a nation’s currency appreciates what happens to NX?
5. Aggregate Demand?
6. If U.S. demand for Japanese goods increases, will the U.S. pay more
or less for Japanese goods?
7. What happens to exports when the U.S. $ appreciates?
8. Name 3 factors that will cause an increase in U.S. imports.
9. Create a scenario that would affect the U.S. current account.
10. Capital account.
11. A nation can fund a deficit on its current account with a surplus on its
____________ acct
12. What is the effect on contractionary monetary policy on interest rates
and exchange rates?
•
•
•
•
Draw a loanable funds graph
Where do savings come from?
Where does demand come from?
What does price level have to do with
interest rates?
• Monetary policy affects RGDP in the
_______ run only.
• What does Keynes blame for recessions?
Globalization
Search
Develop 4 scenarios that would
either appreciate or depreciate the
dollar relative to a foreign
currency
Balance of Payments
• Accounts are an accounting record of all
monetary transactions between a country and
the rest of the world
– Capital account - records the net change in
ownership of foreign assets
• Commercial loans, official flows, foreign direct
investment, and foreign portfolio investment
– Current account - sum of the balance of trade
Warm-up
Brazil
Colombia
Coffee
10 hours
6 hours
Cocoa
6 hours
3 hours
1. What country has the absolute advantage in each good?
2. What country has the comparative advantage in each good?