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60 Trade as a Percent of GDP 50 World 40 30 United States 20 10 0 1965 1970 1975 1980 1985 Year 1990 1995 2000 2005 Buyers of U.S. Exports Canada Mexico Japan China United Kingdom Germany South Korea Netherlands 0 50 100 150 200 250 Sellers of Imports to the U.S. Canada China Mexico Japan Germany United Kingdom South Korea Taiwan 0 50 100 150 200 Billions of Dollars 250 300 350 Quantity of Wine 200 C 100 0 A (Desired Consumption) 50 100 Quantity of Cloth Quantity of Wine 200 B (Desired Consumption) 100 D 0 100 200 Quantity of Cloth 300 400 Production, Exchange, and Consumption of Wine and Cloth Production Wine Cloth Portugal 200 0 England 0 400 200 400 Total Exchange Portugal sell 100 buy 100 England buy 100 sell 100 Consumption Portugal 100 100 England 100 300 200 400 Total Opportunity Cost and Comparative Advantage Country Portugal England Opportunity Cost of Opportunity Cost of 1 Unit of Cloth 1 Unit of Wine 2 units of wine ½ unit of cloth 2 units of cloth ½ unit of wine Euros per Dollar S E D Quantity of Dollars Euros per Dollar Depreciation of the Dollar S1 S2 E1 E2 D Quantity of Dollars United States Balance of Payments Account (2006, Billions of Dollars) Current Account Inflows: Payments for Exports of Goods 1,023 Payments for Exports of Services 423 Income Receipts 650 Total 2,096 Outflows: Payments for Imports of Goods –1,861 Payments for Imports of Services –343 Income Payments –614 Net transfers –90 Total –2,908 Balance on Current Account (= Inflows Outflows) Financial Account Outflows (e.g., U.S. lending abroad, or FDI abroad) –1,055 Inflows (e.g., U.S. borrowing from abroad, or FDI in the United States) 1,889 Balance on Financial Account (= Inflows Outflows) Statistical discrepancy (and “capital account”) Balance of Payments Source: U.S. BEA, U.S. International Transactions Accounts Data –811 833 –22 0 18 Imports 16 Percent of GDP 14 12 10 Exports 8 6 4 2 0 1950 1960 1970 1980 Year 1990 2000 2010 Expansionary monetary policy Lowers interest rates Reduces capital inflows Investment is encouraged Reduces demand for dollars, leading to depreciation Aggregate demand rises Reduces imports and increases exports Equilibrium GDP rises Per Unit of Domestic Currency Units of Foreign Exchange surplus Smarket e* Dwith intervention Dmarket Quantity of the Domestic Currency
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