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Chapter 37 - International Trade

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Chapter 37 - International Trade Powered By Docstoc
					                   It is comparative advantage that
                   matters, not absolute advantage.

                         Increase in “taste” for U.S. cars.




            Ricardo
                            United States                 Europe
                          “S&D” determine currency strengths.



“Loonie”
Exports equal 28% of global economic output, but
only 12% of U.S. output. [U.S. supplies 1/8 of world’s exports]
In 2006, American imports & exports totaled around $3.6 tril.
[$1.4 trillion in exports & $2.2 trillion in imports] [Deficit $764 B]
Principal U.S. Exports & Imports – 2006
in Billions of Dollars



    Exports                      Imports
   Chemicals             $68.6   Petroleum           $225.2
   Consumer Durables      53.5   Automobiles          211.9
   Agricultural Products  52.9   Household Appliances 97.1
   Semiconductors         47.2   Computers             93.3
   Computers              45.5   Metals                83.8
   Generating Equipment 33.2     Clothing              79.1
   Automobiles            83.5   Consumer Electronics 47.3
   Aircraft               64.4   Generating Equipment 43.1
   Medical                27.6   Semiconductors        37.1
   Telecommunications     25.6   Telecommunications 25.8
   Electrical machinery   83.2   TVs, VCRs, etc       115.3
   Power gen. machines    44.0   Electrical machinery 109.7
                                      Source: Department of Commerce Data
   The U.S. and World Trade
      U.S. Exports & Imports of Goods, 2005
         Exports to:       Value (Billions of Dollars)

          Industrial Countries                      $483
          Developing Countries                       410
          Total              .
                                                    $893

          Imports from:          Value (Billions of Dollars)
            Industrial Countries                     $770
            Developing Countries                      904
            Total                                  $1,674
Most of our imports come from developing countries.
Total: $1.4 Exports               Total: $2.2 Imports
Over $1 trillion going both ways
*Exports support 14 million American jobs. [Wages 16.5% higher]
6.5 million Americans work for foreign companies in the U.S.
Toyota alone has created more than 100,000 U.S. jobs.


        2005                               2006
 Deficit in goods    $782        Deficit in goods    $836
 Surplus in services $56         Surplus in services  $72
                    $726                             $764
                        [Selected Nations]
                    Percentage Share of World Exports, 2004
                    0     2     4       6           8     10            12
       Germany                                                 10.0
  United States                                         8.9
          China                               6.5
          Japan                              6.2
         France                        4.9
    Netherlands                  3.9
            Italy               3.8
United Kingdom                  3.8




                                                              Source: World Trade Organization
            I Can do 8              I Can do 42 push-ups,
                             I have an absolute advantage but    in
            push-ups.                102 if you play the Aggie
                             the production of push-ups.
                                            Fight Song.




Texas Longhorn
                                         Texas Aggie




                             I’m more efficient. I can do the
      I can clean that       same work in 3 hours so I have
      house in 4 hours.      an absolute advantage.


      Future Longhorn Maid              Future Aggie Maid
                                  [Their jobs]

With trade, a few people lose a lot,



        [Lower prices & more choices]
but, a lot of people gain a little.
Free trade is like improved technology
[There are some job losses, but many more job gains]
              Comparative and Absolute Advantage
[Comparative Advantage can produce at a lower productive opportunity cost]
Haiti’s DCC     Haiti                    Cuba             Cuba’s DCC
1B = __ C 100
   costs 4                      90 X 1/5                       = 6
                                                          1B costs__ C
1/4 =
__ B costs1C 80 But CPC is out here
                                                          __     =
                                                          1/6 B costs 1C
                                PPC is still here                                          Terms of Trade




                                                    Coffee
               Coffee
                                   “A prisoner of                    “I can consume

                    50
                                   my own PPC.”          45          only on my PPC.”               5
                                                                                          1 bread = __coffees
                    40
                                                                                              World CC
                                                                                                 5
                                                                                        1 Bread=__ Coffees
                        o Bread 20
                             10
                                          X   5              0 Bread 15 18
                                                                 7.5 9                  1/5 Bread=1
                                                                                         __           Coffee

                “Trade is the free lunch of economics.”
1. (Haiti/Cuba) has an absolute advantage in coffee and (Haiti/Cuba) has an
  absolute advantage in bread.
2. Haiti will export (bread/coffee) [comparative advantage] & import (bread/coffee).
  [comparative disadvantage] & Cuba will export (bread/coffee) & import (bread/coffee).
3. Advantageous trade can occur between Haiti & Cuba when 1 bread is exchanged for
  (3/5/7) tons of coffee. Production in both reflects (increasing/constant) opportunity costs.

“Export” what it can produce at a lower relative price and “import” goods it can buy at a lower relative price.

 Absolute Advantage - more efficient, can produce more with  “Do what you do best
 the same number of inputs [who can produce absolutely more] & trade for the rest.”
                                          30
Brazil’s DCC                Brazil                      Chile         Chile’s DCC
1 W = __ S
    costs 4                                                                costs 2
                                                                      1 W = __ S
                                          20
 ¼
___W = 1S         12                                                  ___W = 1S
                                                                      ½
                                           15
                                                             Terms of Trade




                                       Steel
                                           10
                                                                       3
                                                             1 Wheat= ___ Steels
                Steel
                        6



                        0 Wheat 3 4
                          1.5 2                0    5   10        World CC
                                                   Wheat
                                                             1 Wheat = __ Steels
                                                                        3
                                                              __
                                                              1/3 Wheat = 1 Steel


4. Chile has a comparative advantage in (wheat/steel) & an absolute advantage
   in (wheat/steel/both). Brazil has a comparative advantage in (wheat/steel).

5. The opportunity cost of one unit of wheat for Chile is (2/4/6) units of steel.
  The opportunity cost of one unit of steel for Brazil is (1/2 or ¼ ) wheat.

6. If trade occurred, Chile would export (wheat/steel) & import (wheat/steel).
   Brazil would export (wheat/steel) & import (wheat/steel).
                70                        Brazil
DCC for U.S.                      40               DCC for Brazil
     costs 14
1 H = __ B                                              costs 10
                                                   1 H = __ B

                Bread
___H = 1B                                          ___ H = 1B




                                  Bread
1/14                                               1/10

                                               Terms of Trade
                   0    Ham   5      0 Ham 4   1 Ham = __ Bread
                                                       12


8. Brazil has a comparative advantage in (bread/ham) and a
   comparative disadvantage in (bread/ham).
9. The opportunity cost of producing 1 unit of ham for the U.S.
   is (10/12/14) breads.
10. Acceptable terms of trade might be 1 ham for (8/12/16) breads.
                     2.5 pork [10x1/4]
Froggy          A B C D E DCC: Froggy      Woggy       A B C D E DCC: Woggy
Pork(tons)      4 3 2 1 0 1P = __ B    5   Pork(tons) 8 6 4 2 0 1P = __ B 3
Beans(tons)                      __
                0 5 10 15 20 1/5 P = 1B                                __
                                           Beans(tons) 0 6 12 18 24 1/3 P = 1B
                                                         8 beans [2x4]
      Before:     2 porks                                        Before:   10 beans
                  6 porks        Terms of Trade                             6 beans

        After:
                  8 porks
                  8 porks
                                           4
                                 1 Pork = __ Beans
                                                                           16 beans
                                                                  After:    20 beans
          8 – 8 = 0 porks                                           10 – 16 = 4 beans
15. Production in both countries is subject to (increasing/constant)
    opportunity cost.
16. If these 2 nations specialize in accordance with comparative advantage,
    Froggy will produce (pork/beans) & Woggy will produce (pork/beans).

17. In Froggy, the opportunity cost of 1 pork is (1/5 or 5 or 3) beans’

18. Assume that prior to specialization & trade, Froggy produced combo “C” and
  Woggy produced “B”. If these 2 nations now specialize according to comparative
  advantage, the total gains will be (4/2/0) tons of beans & (4/2/0) ton(s) of pork.

19. Feasible terms of trade would be (1/6/4) ton of pork for (1/6/4) tons of beans.
                       50 Fish [10x5]
Piggy      A B C D E DCC: Piggy                Wiggy   A B C D E DCC: Wiggy
Fish                          4
           80 60 40 20 0 1C = __ F             Fish  240 180 120 60 0 1C = __F   6
Chips       0 5 10 15 20 __ C = 1F
                         1/4                   Chips   0 10 20 30 40 __ C = 1F
                                                                             1/6
                                                           12 chips [60x1/5]
                                    Terms of Trade
Before:      40 fish                                                Before:     10 chips
            180 fish                                                            10 chips
            220 fish                                                            20 chips

                                                 5
 After:     240 fish                                                  After:    20 chips
 240 – 220 = 20 fish                    1 Chip = __ Fish                20 – 20 = 0 chips

20. (Piggy/Wiggy) has an absolute advantage in both fish & chips.
.
21. For Wiggy, the opportunity cost of producing 1 ton of chips
    is (1/4/6) tons of fish.

22. Wiggy should specialize (export) in            (fish/chips) and import (fish/chips).

23. Before specialization and trade Piggy chose combo “C” and
    Wiggy chose “B”.
    After specialization, the gains from trade were (20/40/60)
    tons of fish and (0/10/20) tons of chips.
                                                        15 soups [30x1/2]
Doggy       A B C D E DCC: Doggy Woggy             A B C D E DCC: Woggy
Soup       60 45 30 15 0 1S = __ P 1 Soup                              3
                                                  20 15 10 5 0 1S = __ P
Peanuts     0 15 30 45 60            Peanuts                     __
                                                   0 15 30 45 60 1/3 S = 1P
                  60 Peanuts [30x2]
 Before:      30 soups                                       Before:    30 peanuts
             10 soups       Terms of Trade                               30 peanuts

  After:
             40 soups
             60 soups
                                    2
                           1 Soup = __ Peanuts
                                                              After:
                                                                         60 peanuts
                                                                        60 peanuts
   60 – 40 = 20 soups                                           60 – 60 = 0 peanuts

24. If trade occurs, Doggy will export (soup/peanuts) and import (soup/peanuts).
    Woggy will export (soup/peanuts) and import (soup/peanuts).

25. For Doggy, the opportunity cost of 1 soup is (1/2/3) peanuts.
    For Woggy, the opportunity cost of 1 soup is (1/2/3) peanuts.

26. Prior to specialization, Doggy & Woggy chose combination “C”.
    Now each specializes according to comparative advantage. The gains
    from trade will be (0/20/40) units of soup & (0/20/40) units of peanuts.
                            The countries of:
                        “Fuzzy” and “Wuzzy”
Fuzzy      A    C D E F DCC: Fuzzy Wuzzy A B
                 B
                 C                                   B C       D E F DCC: Wuzzy
                                    3                                         5
Plums 1500 1200 900 600 300 0 1G = __ P Plums 3500 2500 1500 1000 500 0 1G = __ P
                900             1G            3500 2500
Grapes 0 100 200 300 400 500 __ G= 1P Grapes 0 150 300 450 575 700__ G = 1P
                200         500 1/3                 150                 1/5     1P
 Before:        900 plums                                      Before:    200 grapes
               2500 plums     Terms of Trade                              150 grapes
               3400 plums                                                 350 grapes
  After:    3500 plums       1   Grape = 4 Plums
                                         __                     After:     500 grapes
3500 – 3400 = 100 plums                                        500 – 350 = 150 grapes

11. In Wuzzy, the opportunity cost of 1 grape is (1/2/3/4/5) plums.

12. Fuzzy has a comparative advantage in & should produce (plums/grapes).

13. The terms of trade will be 1 grape for somewhere between (3&5/2&6) plums.

14. Assume that if Fuzzy did not specialize it would produce combo “C” and if Wuzzy
   did not specialize it would produce combo “B”. The gains from specialization
   and trade are: (0/100/150) plums and (0/100/150) grapes.
         Djibouti    DCC: Djibouti       Canada       DCC: Canada
Fish                   = 2
         10 hours 1W costs__F Fish 20 hours          1 W costs 3 F
                                                           = __
Wheat              1/2
         20 hours ___ W=1F Wheat 60 hours             ___W = 1F
                                                       1/3

                       Terms of Trade:
                        1 Wheat = 2.5 Fish
                                  __
27. (Djibouti/Canada) has an absolute advantage in both commodities.
   (Djibouti/Canada) has a comparative advantage in producing wheat.
28. (Djibouti/Canada) has an absolute disadvantage in both, but a
    comparative advantage in fish.
29. Advantageous trade can occur between the two when
   1 wheat is exchanged for (1/2.5/3) fish.
        We are going to turn inputs into outputs.
In 20 hours, Djibouti can produce an output of 1 wheat or 2 fish.
In 60 hours, Canada can produce an output of 1 wheat or 3 fish.
    [lower # of hours gives absolute advantage]

                    DCC: U.S.             Russia   DCC: Russia
Caviar 6 hours             2
                    1C = __W                              4
                                   Caviar 16 hours 1C = __ W
Wheat 3 hours       __
                    1/2 C = 1W     Wheat           __
                                           4 hours 1/4 C = 1W

                        Terms of Trade
                                  3
                       1 Caviar = __ Wheats

30. (Russia/U.S.) has an absolute disadvantage in both commodities.
    (Russia/U.S.) has a comparative advantage in wheat.
31. (Russia/U.S) has an absolute advantage in both commodities.
    (Russia/U.S.) has a comparative advantage in caviar.
31. Advantageous trade can occur between the two nations when
   1 caviar is exchanged for (1/3/5) tons of wheat.

  We are once again turning inputs into outputs.
In 6 hours, the U.S.A. can produce an output of 1 caviar or 2 wheats.
In 16 hours, Russia can produce an output of 1 caviar or 4 wheats.
     Absolute Advantage [Outputs v. Inputs]
Remember that with outputs or quantity, the larger
number indicates absolute advantage; that country
can produce absolutely more with the same inputs,
and is more efficient.


                                               Product
                                               Market
And with inputs (hours), the smaller number indicates absolute
advantage; that country is more efficient because it can produce
a good absolutely faster than the other with the same inputs.




                                               Resource
                                                Market
      2nd Most Missed Question On 95 AP Exam [26% correct]
        Country         Food        Clothing
         Ducky          20 hours    50 hours
Ducky    Wucky          10 hours    20 hours          Wucky
    a. Ducky has a comparative advantage in the production
       of both food and clothing.
    b. Wucky has a comparative advantage in the production
       of both food and clothing.
    c. Ducky has a comparative advantage in food production, &
       Wucky has a comparative advantage in clothing production.
    d. Ducky has a comparative advantage in clothing production,
        & Wucky has a comparative advantage in food production.
    e. Neither country has a comparative advantage in the
        production of either good.
  Country Food      Clothing
  Ducky 20 hrs 50 hrs            1C = 2.5F; .4C = 1F
  Wucky 10 hrs 20 hrs            1C = 2F;        .5C = 1F

      Terms of Trade might be 1C = 2.2F
(59%) 8. Econ can produce either 2 tons of cocoa or 4 cars with 10 units of labor.
    Nomics can produce either 5 tons of cocoa or 25 cars with 10 units of labor.
    Based on this information, which of the following is true.
 a. Econ has an absolute advantage in the production of cocoa, while Nomics has a
    comparative advantage in the production of cocoa.
 b. Econ has a comparative advantage in the production of cocoa, while Nomics has a
    comparative advantage in the production of cars.
 c. Econ has an absolute advantage in the production of cocoa, while Nomics has a
    comparative advantage in the production of cars.
 d. Econ has a comparative disadvantage in the production of both goods.
 e. Neither country has a comparative advantage in the production of either good.

Answer: For Econ, 1 cocoa costs 2 cars
                             =                     Econ has a lower op cost for cocoa,
                                                   2 cars v. 5 cars.
                               =
              so, 1/2 cocoa costs 1 car
                                                   So Econ will produce cocoa.

       For Nomics, 1 cocoa         =
                                 costs   5 cars     Nomics has a lower op cost for cars,
             so, 1/5 cocoa         =
                                 costs   1 car      1/5 cocoa v. 1/2 cocoa.
                                                    So Nomics will produce cars.
     Output v. Input Comparative and Absolute Advantage
Rabbit                          Wabbit Rabbit                            Wabbit
1G=3B                  1G=2B 1B=3G                     1B=2G
1/3 G=1B Rabbit Wabbit 1/2 G=1B 1/3 B=1G Rabbit Wabbit 1/2 B=1G
 Terms of Trade: 1G = 2.5 B                  Terms of Trade: 1B = 2.5 G
Product Market [outputs]                    Resource Market [inputs]
Country Guns Butter                         Country Guns Butter
Rabbit     40 units 120 units               Rabbit      40 hours 120 hours
Wabbit     20 units  40 units               Wabbit      20 hours  40 hours
What country has an absolute                What country has an absolute
advantage in guns? Rabbit                   advantage in guns?Wabbit
Why does Rabbit have an                     Why does Wabbit have an
absolute advantage in guns?                 absolute advantage in guns?
Rabbit can produce absolutely               Wabbit can produce guns
more guns than Wabbit                       absolutely faster than Rabbit
[40 units v. 20 units]                      [20 hours v. 40 hours]
                                            What country has a     comparative
What country has a     comparative
                                            advantage in guns? Rabbit
advantage in guns? Wabbit
                                            “Let’s change inputs into outputs.”
Wabbit can produce guns at a lower          Rabbit can produce guns at a lower
opportunity cost [2 butters v. 3 butters]   opportunity cost [1/3 butter v. 1/2 butter]
   The world is becoming a smaller place. What happens in Tokyo affects what
happens in New York and Dallas, Texas.
There is over $12 trillion in world trade.
Volume of Trade
Exports as % of GDP           The importance of trade has grown.
Panama               80%
Belgium              87%
Netherlands          71%                                        2008   11%
Kuwait               55%
Norway               45%
Canada               38%
[If we sneeze, Canada catches a cold]
South Korea          44%
Germany              40%
China                35%[1/3 bought by U.S.]
United Kingdom 26%
Spain                25%
Italy                27%
France               26%
Mexico               25%                       In 2006, we had a trade deficit
[80% of Mexico’s exports are sold to U.S.]
Japan                13%
                                               in goods of $836 billion.
United States        11%                       We had a trade surplus in
[$1.4 trillion in 2006]                        services of $72 billion. ($764)
World                25%
1. Revenue Tariffs – applied to products not produced domestically
   [bananas, coffee]. These are normally low & their purpose is to provide
   income for the government.
2. Protective Tariffs – tax on imports designed to protect domestic
   producers from foreign competition [autos, shoes, textiles].
   *We have tariffs on 8,753 products (70% of our imports). They add about
   3% to prices. They cost consumers an extra $70 billion. [$1,000 per family]
     Singapore     Ireland   Switzerland
                                                          2.6%
                                                     The 2.6% is 4rth lowest
                             3rd                     behind Singapore,
                      2nd
       1st                                           Ireland, & Switzerland.
                                           4rth




                                                                   2.6%
Global Competition
Top 12 [Free Traders] - 2005

         1-Singapore
           2-Ireland
        3-Switzerland
       4-United States
        5-Netherlands
           6-Canada
          7-Denmark
          8-Sweden
           9-Austria
          10-Finland
       11-New Zealand
     12-United Kingdom
1. Reciprocal Trade Act – 1934-Roosevelt said to other countries,
    “If you’ll lower your tariffs, we’ll reciprocate and lower
   ours by the same percent.” [up to 50% of existing rates]

2. GATT[General Agreement on Tariffs & Trade] 1947–1995
   - started with 23 nations and ended with 128 nations –
   set the rules for world trade. GATT had no mechanism to
  enforce their rules. Tariffs fell from 40% to 4%.
3. GATT was based on these three principles.
 A. Equal, nondiscriminatory treatment for all member nations
 B. The reduction of tariffs [Uruguay round will end in 2005]
 C. The elimination of import quotas [Based on cooperation and
    negotiation, or “I’ll lower mine if you will lower yours.”]
WTO                                                                                     WTO
         GATT protected intellectual property (patents,
         trademarks, and copyrights). GATT in 1995 was
         replaced by the World Trade Organization [WTO].
         These agreements have already boosted the world’s
         GDP by $6 trillion [8%]. [149 nations]
         U.S. consumers will gain $30 billion annually.

   We have trade restrictions on oranges from S. America, machine tools from Switzerland, TVs
from S. Korea, computer screens from Japan, and steel from nearly everywhere on earth. There
are also restrictions on watches, tobacco, ships, ice cream, cheese, clothing, sugar, & hundreds
of other products. Sugar quotas for 12,000 sugar growers cost consumers $3 billion per year
[cost twice the world price -22 cents per pound v. 10 cents per pound for the world price].

  The annual cost of retaining just 1 job through trade restraints is $1 million in specialty
steel, $550,000 in nuts and screws, $240,000 in orange juice, and $200,000 in glassware.

  In 1980, U.S. auto companies sold 1 million fewer cars than in 1979. The “Big 3” lost over
$4 billion. The “Big 3” demanded protection so they could retool for smaller cars. Japan agreed to
voluntarily freeze auto exports to 1.65 million from 1981-1983 & 1.85 million in 1984. With fewer
choices, domestic car prices rose $2,000 and Japanese car prices rose $2,500. We had a
smaller selection, had to wait longer and paid $15.7 billion extra.
     148




                                     WTO
WTO Objectives: [They have settled 200 disputes]
  1. Accord national treatment to imported goods
     [regulate “M” the same as domestic goods]
  2. Accord “most favored nation status” to member
     nations [charge all same tariffs & quotas]
  3. Eliminate tariffs & non tariff barriers.
  4. A government must find the best goods internationally.
Reductions in Tariffs Worldwide
                                              WTO
New Rules to Promote Trade in Services

Reduction in Agricultural Subsidies

Intellectual Property Protections

Phasing Out Textile Quotas & Tariffs

Tariffs will be totally eliminated by 2008

WTO settled more disputes in 10 years than
 GATT did in 50 years.
• This would include South, Central and North
  America, from Anchorage to Patagonia,
  a population of 800 million. This would be
  the largest free-trade zone on the planet.
  President Bush favors this. It includes 34
  nations with a combined output of $15 trillion.



       FTAA

 Import Quotas – sets a maximum amount for
 an import. They may be a more effective protective
 device than tariffs which do not limit the amount
 of goods entering a country.
            The vote for CAFTA
              was 217-215.




• CAFTA is a comprehensive trade agreement between the U.S.,
  Costa Rica, the Dominican Republic, El Salvador,
  Guatemala, Honduras, and Nicaragua.
• It will eliminate the tariffs on $33 billion worth of currently traded
  goods to 44 million customers. CAFTA is considered to be a
  stepping stone to the FTAA which would include 34 countries.
Non-tariff Barriers –licensing requirements, re-inspections,
unreasonable standards pertaining      to quality and safety, or
unnecessary bureaucratic red tape      in customs procedures.
The Japanese conduct stringent         re-inspections of our autos
that cost the Japanese consumer         an extra $500.00.




                    33%       22%      31%


                 86%
                                        25%
                             23%
The European Union
Started with
  these 15
15 initial mbrs
                  Joined by
                  these 12
                  by 2007
    Eurozone                                     Eurozone
    1. Austria                                   8. Italy
    2. Belgium                                   9. Luxembourg
    3. Finland                                   10. The Netherlands
    4. France                                    11. Portugal
    5. Germany                                   12. Slovenia
    6. Greece                                    13. Spain
    7. Ireland                         Eurozone population of 320 M.
[27 nations – 475 million people] [“Eurozone” makes up
the 13 Euro nations] [GDPs of 27 total around $14.5 tril.]
*It's like a "U.S. of Europe” [imagine each state in the U.S.
having its own currency. If you wanted to buy a product in
Louisiana, you would have to buy Louisiana currency and pay
a 1-2% fee for doing so.) [After independence, states
printed their own money. Formerly, there were tariffs and
quotas against other European countries.
The single currency will create efficiencies leading to
faster growth & facilitate the establishment of a kind of U.S.
of Europe. There will be huge benefits from free trade.
The elimination of trade barriers alone will boost European
GDPs an average of 6% & lower prices by about 6%.
About 4-5 million more jobs will be created all over
Europe.
European free trade will increase production in two ways.

 1. Lower costs, which will increase output.

  2. It will increase productivity of capital and labor as those
factors are allocated on the basis of comparative advantage.
Incomes will rise, increasing AD. Europe will be more
prosperous.

So, there will be a central bank [European Central Bank] and a
single defense force, or a kind of national sovereignty. This is
the goal. Each nation still has its own central bank but they will
have no authority to conduct monetary policy. They will operate like
regional banks of the Fed.
[U.S.,         Canada,               & Mexico                             ]
           U.S.    Canada            Mexico
GDP        $13 tril.   $1 Trillion   $1 Trillion
                                     [30% live on less than $2 day]
Population 300 mil.    30 million    106 million [50% in poverty]
                                     [Only 28% grad. high school]
Per Capita $40,000     $30,000       $9,000 [ave. ed. Level is 6   th   grade]



Ave. Hourly $16.00     $17.00        $2.00     [.60 min. wage]

 NAFTA is a $15 trillion market [1,000 page document]
 gamble for 421 million consumers.
 NAFTA will roll back 20,000 separate tariffs over 15 yrs.
 Before NAFTA, those barriers averaged 11% in Mexico,
 5% in Canada, & 4% in the U.S.
 American consumers will save $20 billion per year
 when all trade barriers are removed.
Texas’ exports to Mexico have increased from $19 B to $55 B
      Top Texas Export Countries - 2006
   $55
  billion                     Signing of NAFTA - 1994
                                          George Bush
                              Carlos Salinas
                                                   Brian Mulroney
                               De Gortari




               =$4 billion
                 $6.65
                 China
Mexico buys 70% of its imports from Texas.
Texas’ exports to Mexico have increased from
$19 billion in 1994 to over $52 billion in 2005.

Mexico’s imports of U.S. goods have gone from
$51 billion to $134 billion, supporting over
1 million jobs in the U.S. Imports from Mexico
have more than tripled to $198 billion..

NAFTA       encourages more world-wide investment
in Mexico. This is enhancing their productivity and
income. Some of this increased income is being used
used to buy U.S. exports. A higher standard of
living in Mexico will help stem the flow of illegal
immigrants to the U.S.
North American Free Trade Agreement [NAFTA]
                                                  NAFTA, 2006
                                              Population: 440 million
                                             Combined GDP: 15.5 Tril.
                                             2-Way Trade: $875 billion




                                U.S. – Canada Trade
                         U.S. exports to Canada    $230 B
                         U.S. imports from Canada $303 B

     Canadian-Mexican Trade
Canadian exports to Mexico $1.3 B
Canadian imports from Mexico $8.5 B

                              U.S. - Mexico Trade
                       U.S. exports to Mexico     $134 B
                       U.S. imports from Mexico $198 B
1. Most of our imports come from with (developed/developing) nations.
2. Quantitatively, our most important trade partner is
   (Japan/Mexico/Canada/Germany/Djibouti).
3. American exports of goods/services average about (30%/25%/11%/4%) of GDP.
4. According to the theory of comparative advantage, a good should
   be produced in that nation where its cost is (most/least) in terms
   of alternative goods which might otherwise be produced.
5. The ratio at which nations will exchange two goods is the
   (domestic comparative [opportunity] cost/terms of trade).
6. A (quota/tariff) is an excise tax on imported goods.
7. If the U.S. eliminates tariffs on Cuban rollerblades, we would expect the price
   of Cuban rollerblades to (increase/decrease) in the U.S. Also employment
   would (increase/decrease) in the Cuban rollerblade industry.
8. The Smoot-Hawley Tariff of 1930 established very (low/high)
   tariffs on goods imported to the U.S.
9. GATT included over 100 nations and emphasized tariff (reductions/increases)
   for members, and (increasing/decreasing) import quotas.
10. The Reciprocal Trade Agreements Act of 1934 brought about
   considerable (increases/reductions) in American trade barriers.
11. The European Union (abolished/increased) tariffs among one another
   and established a system of common tariffs with non-member nations.
12. NAFTA included the U.S., Mexico, and (Japan/Canada/Djibouti).
13. Proponents of NAFTA contend it will (incr/decr) the flow of illegal immigrants
   (incr/decr) U.S. exports by raising productivity & income in Mexico, and enable
   the U.S. to obtain (more/less) total output from its scarce resources.
     [“S&D” determine currency strengths]
[What if the U.S. wants more Mazdas from Japan?]




      United States
                                 Japan
     [“S&D” determine currency strengths]
[What if the Europeans want more American cars?]




      United States             Europe
         Appreciation/Depreciation History
Japanese TV cost Y207,000
1. A.    $1 = Y140 [TV would cost $1,479]
    B.    $1 =  80 [TV would cost $2,588]
    C.    $1 =  115 [TV would cost $1,770]
2. A. 1 Euro = $1.17
   B. 1 Euro = 86 cents        [in 2002]
   C. 1 Euro = $1.40             [in 2007]
3. $1=1.00 Loonies        And – $1 = 16.0 Vietnamese dongs
4. A.      $1 = 2,400 rupiahs [in 1996]
   B.      $1 = 9,391 rupiahs [in 2007]
5. A.      $1 = P3.5 [in 1995]
   B.      $1 = P11.1 [in 2007]
6. A. 1970       $1 = W335
   B. 2006       $1 = W929
APPRECIATION                                                           D1                                        s
                                                                      [Euros looking for $’s]   D2   [Dollars looking for Euros]




                                              Euro Price of $
                           Or                                   150                                     E2           M will increase
DEPRECIATION                                                    100
                                                                        D                       E1
                                                                         D3
                                                                50      A          E3
                                                                           X will increase

                                                                       D # of Dollars A
Europeans decide to buy                                                      Europeans decide to buy
more American cars.                                                          fewer American cars.
                                    D1                                          S
    Dollar Price of Euro




                           $1.50                           [Euros looking for Dollars]
                                   [Dollars looking for Euros]

                           $1.00
                           $ .50


                                   D # of Euros A
         Increase in U.S. Growth Rate (Y)
       [We buy more from Japan appreciating
        the yen and depreciating the dollar]
                           “We want more Japanese cars,
                           computers, DVD players, digital
                           cameras, and camcorders.”


    Price of
                    D1         D2 S
          $1.50
                    D
          $1.00
“Booming” Economy
              AS
       AD2
 AD1

                        # of        A
     YR      Y*
         Decrease in U.S. Growth Rate (Y)
Recessionary Economy [We buy less from Japan
                 AS
    AD2
          AD1        depreciating the yen and
PL                    appreciating the dollar]
    YR Y*                           “Five million of us
                                    have lost our jobs.
   Price of     D1                  We can’t buy as many
                               S    American or
                                    Japanese products.”


      $1.00
                    D2
          .50   A


                    D Quantity of
                                                          Appreciation of the Dollar
                                                          Increase in taste for U.S. goods
                                                          Increase in U.S. Interest Rates
        The Market for Dollars                            Decrease in U.S. Price Level
        Exchange Rate: $1 = ¥100                          Decrease in U.S. Growth Rate
                                                           Decrease in U.S. Currency Price
                                          D1$
             Yen Price of Dollar     P                          D2         S$
                                            Y looking for $’s
                                                                         $’s looking for Y
                                   Y150
                                                                    E2

                                   Y100
                                          D     Yen
                                            depreciates
                                                              E1
                                                Yen
                                          A appreciates




                                    Y50
                                              E3

Depreciation of Dollar
                                                           D3
 Decrease in Taste 0                                       Q
 Decrease in In. Rates
 Increase Price Level
 Increase Growth Rate
                                           D     Quantity of Dollars
                                                       E                 A
 Increase in Currency Price
                      Appreciation/Depreciation
                            D1$  D2    S
                                         [Exchange Rate:                          $1 = Y100]



Yen Price of Dollar
                      Price
                             Y looking for $’s                 $
                      Y150                                $’s looking for Y
                                                     E2
                              D    Yen
                                 depreciates
                      Y100          Yen
                                                E1

                              A   appreciates



                       Y50
                                 E3
                                               D3
                                    Quantity of Dollars
         X M D                                                  A M X
          +             -            Taste [products/assets]           +      -
          +             -              Interest Rates                  +      -
          +             -              Price Level                     +      -
          +             -              Growth Rate                     +      -
          +             -              Currency Price                  +      -
  Currency Appreciation and Depreciation
                                              International
                     Dollar price             value of dollar
                                               falls (dollar
                     of another
        D D2     S     currency
                                     Equals    depreciates)
                                                  Exports
                        [yen]                    increase
$1.50
        D             increases               Imports decrease
$1.00
        A            [$1 to $1.50]
 .50
            D3
        # of Yen       Dollar
                        price
                     of another               International
                                              value of dollar
                      Currency
                        [yen]        Equals    rises (dollar
                                               appreciates)
                      decreases               Imports increase
                     [$1 to .50]              Exports decrease
Strong and Weak Dollar
                “Strong
                Dollar”


               Exports




               Imports
     Appreciation/Depreciation                              NS [14-19]
14. If the dollar depreciates relative to the peso, the
    peso will (appreciate/depreciate) relative to the dollar.
15. Appreciation of the dollar will tend to (increase/decrease)
    American imports & (increase/decrease) American exports.
16. The yen price of the dollar has decreased from
      150=$1 to        100=$1, which means the dollar
   (apprec/deprec), which (incr/decr) our imports from Japan.

17. Depreciation of the euro will (increase/decrease)
    European exports & (increase/decrease) their imports.

18. If Mexico decides to increase their investments
    in the U.S., the peso will (appreciate/depreciate) which
    would (increase/decrease) [Mexico’s imports]
    U.S. exports to Mexico.


19. If the exchange rate changes so that more Japanese
    yen are required to buy a dollar then the yen will
   (appreciate/depreciate) and Americans will
    purchase (more/less) Japanese goods.
20. If Americans increase their investments in Europe, then the supply of
  dollars in European banks will (incr/decr) & the dollar will (apprec/deprec).
21. If Europeans quadrupled their investments in the U.S. stock market, the
  supply of euros in U.S. banks would (incr/decr) & the dollar would (appr/depr).
22. Under a system of freely floating exchange rates, an increase in the inter-
  national value of a nation’s currency will cause its (exports/imports) to increase.
23. If the exchange rate changes so that fewer dollars are required to buy a yen,
  the dollar will (appr/depr) & (fewer/more) U.S. goods will be exported to Japan.
24. If the dollar price of yen increases, then the dollar (appreciates/depreciates)
  relative to the yen and our exports to Japan (increase/decrease).
25. If Mexico’s price level is increasing faster than that of the U.S., the peso
  will (appr/depr) and their exports to the U.S.[our imports] will (incr/decr).
26. If German’s growth rate[income] is increasing faster than that of Mexico,
  the euro will (apprec/deprec) & Germany’s exports to Mexico will (incr/decr).
27. If interest rates are decreasing faster in Italy relative to Mexico, the euro
  will (appreciate/depreciate) and Italy’s exports to Mexico will (incr/decr).
28. If the dollar price of the yen decreases, the dollar (appreciates/depreciates)
  relative to the yen and American exports to Japan (increase/decrease).
29. If the dollar price of the euro decreases, our imports from Europe (incr/decr).
30. If the exchange rate changes from $1=Y200 to $1=Y100, we can say the
  dollar has (apprec/deprec) in value & Japan’s exports to the U.S. (incr/decr).
31. Depreciation of the euro relative to the U.S. dollar would make a trip by
  an American to Europe (more/less) expensive.
32. Suppose that yesterday $1 would buy 800 South Korean won, but today
  will buy 810 won. We can conclude that the won has (depr/apprec) in value.
1. Increase in taste
   [more demand for a country’s products or assets]
2. Increase in interest rates
   [Overseas investors increase their investments there.]
3. Decrease in price level
   [overseas buyers want to buy our cheaper goods.]
4. Decrease in growth rate
   [A country’s declining economy results
   in them buying less from other countries;
   decreasing demand for their currency
   and thus appreciating the declining
   economy’s currency]

5. Decrease in the price of a currency
  relative to the other
(50%) 1. If Mexico increases their investments in the U.S., the supply of Mexican
     pesos to the foreign exchange market and the dollar price of the peso will
     most likely change in which of the following ways?
          Supply of Pesos              Dollar Price of Peso
          a. increase                  increase     As pesos are exchanged for dollars, peso
          b. increase                  decrease supply increase in depository institutions.
          c. decrease                  increase     There is an increase in demand for the
          d. decrease                  decrease dollar and it appreciates, decreasing the
          e. decrease                  not change dollar price of the peso.
(41%) 2. If the real interest rate in Canada increases relative to the real interest rate
       in Japan and there are no trade barriers between the two countries, then for
       Canada, which of the following will be true of its financial capital, the value
       of its currency, and its exports?
          Capital Flow       Currency           Exports The higher real IR in Canada
          a. Inflow          Appreciation       Increase would attract more financial
          b. Inflow          Appreciation       Decrease capital “inflows” from overseas,
          c. Inflow          Depreciation       Increase appreciating the Canadian
          d. Outflow         Depreciation       Increase dollar, and decreasing its
          e. Outflow         Appreciation       Decrease exports because they are
                                                         now more expensive.
(51%) 3. With an increase in investment demand in the U.S. the real interest rate
        rises. In this situation, the most likely change in the capital stock in the U.S.
        and in the international value of the dollar would be which of the following?
      Capital Stock in         International Value
      United States            of the Dollar
                                                 More real investment would result in an
   a. Increase                 Decrease
                                                 increase in real capital stock in the U.S.
   b. Increase                 No change
                                                 The increase in the real interest rate would
   c. Increase                 Increase
                                                 increase financial investment demand
   d. Decrease                 Increase
                                                 for the dollar as it appreciates.
   e. No change                Decrease
(64%) 4. Which of the following would cause the U.S. dollar to
         increase in value compared to the Japanese yen?
  a. An increase in the money supply in the U.S.
  b. An increase in interest rates in the U.S.
  c. An increase in the U.S. trade deficit with Japan
  d. The U.S. purchase of gold on the open market
  e. The sale of $2 billion dollars worth of Japanese television sets to the U.S.
(71%) 5. Which of the following best explains why many U.S. economists support
        free trade?
  a. Workers who lose their jobs can collect unemployment compensation.
  b. It is more important to reduce world inflation than to reduce U.S. unemployment.
  c. Workers are not affected; only business suffer.
  d. The long-run gains to consumers & some producers exceed the losses to other producers.
  e. Government can protect U.S. industries while encouraging free trade.
       Appreciation/Depreciation Practice

1. If Japan buys 10 million iPhones
   the dollar would (appr/depr) and our
   imports from Japan would (incr/decr).

2. If U.S. in. rates are increasing faster
   than Japan’s, the dollar would (appr/depr)
   and our exports would (increase/decrease).

3. If prices are dropping more in Japan
   than in the U.S., the yen will (appr/depr)
   and Japan’s imports will (increase/decrease).

4. If the U.S. growth rate is faster than that of Japan,
   the dollar will (appreciate/depreciate) and U.S.
   imports from Japan will (increase/decrease).

5. If the dollar price of the yen decreases, the
   dollar has (appreciated/depreciated) and our
   imports from Japan will (increase/decrease).
Appreciation/Depreciation Practice                       [continued]
6. If Russia sells 10 bil. worth of oil to the
   U.S. the ruble would (appr/depr) and their
   imports from the U.S. would (incr/decr).

7. If U.S. in. rates are decreasing faster here
   than in Canada, the dollar would (appreciate/
   depreciate) & U.S. exports would (incr/decr).

8. If prices are increasing more in Japan
   than in the U.S., the dollar will (appr/depr)
   and our exports will (increase/decrease).

9. If the U.S. growth rate is slower than that of Canada,
   the Canadian dollar will (appreciate/depreciate) & Canada’s
   exports to the U.S. will (increase/decrease).

10. If the dollar price of the euro increases, the
  dollar has (appreciated/depreciated) and our our
  imports from France will (increase/decrease).
1. If more Thai bahts are required to buy a dollar,
  then the baht has (appreciated/depreciated), &
  Thai exports to the U.S. should (increase/decrease).
2. If Latvia’s demand for U.S. Fuzzy Wuzzies decrease,
  then Latvia’s Lat will (apprec/deprec) & Latvia’s
  imports from the U.S. will (increase/decrease).
3. If interest rates are decreasing faster in S.Korea[4%]
  than in Cuba[8%], then the Korean won will (appr/depr)
  & Korea’s exports to Cuba will (increase/decrease).
4. If Malaysia’s price level is decreasing faster than that of Brazil,
   the Malaysian ringgit will (apprec/deprec) & Malaysia’s exports
   to Brazil will (increase/decrease).
5. If growth rate is less rapid in Djibouti than in Swaiziland,
   then the Djibouti bouti will (appreciate/depreciate) and
   Djibouti’s exports will (increase/decrease).
6. If the Euro price of the S. Korean won decreases, the Euro has
  (apprec/deprec) & European exports to Korea will (incr/decr).
7. If interest rates are increasing faster in Zambia than in Spain,
  the Zambian Kwachi will (appreciate /depreciate) and Zambia’s
  imports from Spain will (increase/decrease).
1. If Korea buys 2 million fewer American autos
    the dollar would (appreciate/depreciate) & our
    exports to Korea would (increase/decrease).
2. If U.S. interest rates decrease faster than
   Haiti’s, the dollar would (appreciate/depreciate) &
   our imports would (increase/decrease).
3. If prices are dropping more in Mexico than
   in the U.S., the peso will (appreciate/depreciate)
   and Mexico’s exports will (increase/decrease).
4. If the U.S. growth rate is faster than that of China,
   the dollar will (appreciate/depreciate) and U.S.
   exports to China will (increase/decrease).
5. If the dollar price of the renminbi increases, the
   dollar has (appreciated/depreciated) and our imports
   from China will (increase/decrease).
6. If Zimbabwe wants to buy 3 million American Fuzzy Wuzzys,
   the dollar (appreciates/depreciates) and our imports from
   Zimbabwe should (increase/decrease).
7. If the bouti price of the dollar increases the bouti will
  (appreciate/depreciate) and their exports will (increase/decrease).
1.   If Djibouti buys 4 mil. more U.S. Fuzzy Wuzzies
    the dollar would (appreciate/depreciate) & our
    exports to Djibouti would (increase/decrease).
2. If U.S. interest rates are increasing faster
   than Cuba’s, the dollar would (appr/depr) &
   our imports from Cuba would (incr/decr).
3. If prices are increasing more in Canada than
   in the U.S., the Canadian loonie will (appr/depr)
   and Canada’s exports will (increase/decrease).
4. If the U.S. growth rate is slower than that of China,
   the dollar will (appreciate/depreciate) and U.S.
   exports to China will (increase/decrease).
5. If the dollar price of the renminbi decreases, the
   dollar has (appreciated/depreciated) and our
   imports from China will (increase/decrease).
6. If the Congo wants to buy 2 million American Piggy Wiggies,
   the dollar (appreciates/depreciates) and our imports from
   the Congo should (increase/decrease).
7. If the euro price of the dollar decreases the euro will
  (appreciate/depreciate) and their exports will (increase/decrease).
• Balance of Payments – sum of all the transactions that take place
  between its residents and the residents of all foreign nations. There are
  two components: the Current Account and the Capital and Financial
  Account.
• The Current Account includes four things:
• 1. Goods [balance on goods (merchandise)]
• 2. Services [balance on goods and services]
• 3. Net investment income [interest & dividend payments on capital]
• 4. Net transfers [foreign aid, pensions, money sent back home, etc.]

•   The Capital and Financial Account includes three items:
•   1. Balance on capital account [net “debt forgiveness”]
•   2. Foreign purchases of U.S. assets [real or financial] in the U.S.
•   3. U.S. purchases of foreign assets [real or financial] abroad
•   The difference between these two accounts is the “balance of payments.”
•   They should balance.
•   If not, official reserves will be used to balance them.
•   [a + here means we will export a stock of foreign money ($’s will enter the U.S.)]
•   [a – here means we will import a stock of foreign money ($’s will exit the U.S.)]
   [If you bought a parachute from a factory in Germany–Current Account]
  [If you bought a parachute factory in Germany – capital investment, so Capital Account]
Current Account [trade in currently produced goods, svcs, net investment & transfers]
 (1) U.S. goods exports……………………………………………$+ 893
 (2) U.S. goods imports………………………………………..…...-1,675
 (3) Balance on goods [visibles]………..…………………………………………..$-782
 (4) U.S. exports of services [shipping, insur., tourists, bank.] +380
 (5) U.S. imports of services…………………………………..…….- 322
 (6) Balance on services [invisibles]………………………..................................+ 58
 (7) Balance on goods and services…………………………………….…………..-724
 (8) Net investment income (income earned for svc of exported capital [money]
     [Profits received from overseas investment (interest, dividends, and rents)]
     ……………………………………………………………………… - 2
 (9) Net transfers (gifts given to the indivs, foreign aid, pensions, etc.)…… - 83
 (10) Balance on current account…………………………………………………..-805
Capital Account [a “net” account that mainly measures “debt forgiveness”]
 (11) Balance on capital account ………………………..…………………………....-6
Financial Account [buying/selling of physical & financial assets (stock/bonds)]
                                                                                      $0
 (12) Foreign purchases of assets in the U.S. ……………… +1,298
 (12) U.S. purchases of assets abroad……………….…………… -147
 (13) Balance on financial account…………………………………………….…..+811
 (14) Balance on capital and financial account………………………………….+805
                                                                                   $0
                                      Current Acct+Capital & Financial Acct = 0



                       Capital & Financial Acct



(16%) 7. If a country has a current account deficit, which of the following must be true?
 a. It must also show a deficit in its capital account.
 b. It must show a surplus in its capital account.
 c. It must increase the purchases of foreign goods and services.
 d. It must increase the domestic interest rates on its bonds.
 e. It must limit the flow of foreign capital investment.
   17th Ed.
                   U.S. Goods export………………….…….…..+$100
                   U.S. Goods imports……………………………...-80
                   U.S. Service exports…………………………... +40
                   U.S. Service imports………………………….…-90
                   Net Investment income………………..……….+20
                   Net transfers………………………………….…..-15
                   Balance on capital account …………………….-5
                   Foreign purchase of assets in the U.S………+45
                   U.S. purchases of assets abroad……………..-10
                   Official Reserves…………………………………. -5

1. The U.S. is experiencing a balance on goods (deficit/surplus) of ($10/$20/$30)
   billion.
2. The U.S.’s balance on goods & services is a (deficit/surplus) of ($30/$40)
   billion.
3. The U.S.’s balance on the current account is a (deficit/surplus) of ($25/$35).

4. The balance on the capital and financial account is a (surplus/deficit) of
   ($25/$30/$40).

5. The U.S. is experiencing a balance of payments (surplus/deficit) of $5.
 [don’t include official reserves here]
6. The “official reserves account indicates the U.S. (imported/exported)
   $5 billion of its stock of foreign reserves.
[A + here means we will export a stock of foreign money ($’s will enter U.S.)]
[A – here means we will import a stock of foreign money ($’s will exit U.S.)]
    17th Ed.          U.S. Goods export………………….…….…..+$100
Balance on Goods      U.S. Goods imports……………………………...-80            $20 G/S
                                                                                   Curr.
                      U.S. Service exports…………………………... +40                 -$30
                                                                     -$50          Acct
Bal. on Curr. Acct.   U.S. Service imports………………………….…-90
                                                                                   -$25
                      Net Investment income………………..……….+20
                      Net transfers………………………………….…..-15              $5
                      Balance on capital account …………………….-5
                                                                                     $5
Balance on Cap.
& Financial Acct.     Foreign purchases of assets in the U.S…… +45   $30
                      U.S. purchases of assets abroad…………… -10
                      Official Reserves…………………………………. -5
1. The U.S. is experiencing a balance on goods(deficit/surplus)of ($10/$20/$30).

2. The U.S.’s balance on goods & services is a (deficit/surplus) of ($30/$40) bil.

3. The U.S.’s balance on the current account is a (deficit/surplus) of ($25/$35).

4. The balance on the capital and financial account is a (surplus/deficit) of
   ($25/$30/$40).

5. The U.S. is experiencing a balance of payments (surplus/deficit) of $5.
 [don’t include official reserves here]
6. The “official reserves account indicates the U.S. (imported/exported)
   $5 billion of its stock of foreign reserves.
[A + here means we will export a stock of foreign money ($’s will enter U.S.)]
[A – here means we will import a stock of foreign money ($’s will exit U.S.)]
  Answer the next 8 questions[33-40]
  33. The balance on goods is a
                                           17      Ed.
                                                   th           Goods exports……….………………………+$45
                                                                Goods imports….…………………………….-$75
       (deficit/surplus) of ($25/$30/$40) billion.              Service exports……………………………..+$15
  34. The balance on goods and services is a                    Service imports………………………………-$10
       (deficit/surplus) of ($25/$45/$55) billion               Net investment income………………….. -$10
  35. The balance on the current account is a                   Net Transfers…………………………………+$15
       (deficit/surplus) of ($20/$25/$30) billion.              Balance on capital account………………. -$5
     36. The balance on the capital account is a                Foreign purchases of U.S. Assets……..+$30
       (deficit/surplus) of ($10/$20/$30) billion.              U.S. purchases of assets abroad………. -$15
  37. This country is experiencing a balance of payment Official Reserves…………………………… +$10
  (surplus/deficit) of ($10/$20).[Do not include official reserves]
  38. The “official reserves” account indicates this country (imported/exported) $10 billion of its
      stock of foreign reserves.
  39. If the foreign purchases of U.S. assets had been +$45 instead of +$30, then this country would
  have to (import/export) a $5 billion stock of foreign currency & official reserves would read (-$5/+$5).
  40. The current account, capital account, & official reserves must always net to (0/50/100).

41. We give (inpayments/outpayments) for imports & get (inpayments/outpayments) for exports.
42. U.S. export transactions create foreign (demand for/supply) dollars[appreciation] & this
   satisfaction (increases/decreases) the supplies of foreign monies held by U.S. banks [depreciation].
43. If we brought home our 40,000 troops in South Korea, this would contribute to a
   U.S. balance of payments (surplus/deficit).
44. U.S. tourists traveling in large numbers to Europe would contribute to a U.S. balance of
   payments (surplus/deficit).
45. The U.S. balance of payments show the balance between (all/some of) the payments the
   U.S. receives from foreign countries and (all/some of) the payments which we make to them.
46. If a nation’s merchandise exports are $60 billion, while its merchandise imports are
   $70 billion, this nation is experiencing a balance of trade (surplus/deficit) of $10 billion.
47. The (current/capital) account includes trade in currently produced goods/services[X-M].
48. The (current/capital) account reflects flows of real [land, factories, etc.] and
    financial assets [securities].
49. There (must/must not) always be a balance of a nation’s total international payments.
   [includes “official reserves”]
50. A deficit on the current account tends to cause a (deficit/surplus) on the capital account.
“I have a comparative advantage.”




                Review for
               Global Trade
              Comparative and Absolute Advantage
[Comparative Advantage can produce at a lower productive opportunity cost]
Haiti’s DCC     Haiti                    Cuba             Cuba’s DCC
1B = __ C 100
   costs 4                      90 X 1/5                       = 6
                                                          1B costs__ C
1/4 =
__ B costs1C 80 But CPC is out here
                                                          __     =
                                                          1/6 B costs 1C
                                PPC is still here                                          Terms of Trade




                                                    Coffee
               Coffee
                                   “A prisoner of                    “I can consume

                    50
                                   my own PPC.”          45          only on my PPC.”               5
                                                                                          1 bread = __coffees
                    40
                                                                                              World CC
                                                                                                 5
                                                                                        1 Bread=__ Coffees
                        o Bread 20
                             10
                                          X   5              0 Bread 15 18
                                                                 7.5 9                  1/5 Bread=1
                                                                                         __           Coffee

                “Trade is the free lunch of economics.”
1. (Haiti/Cuba) has an absolute advantage in coffee and (Haiti/Cuba) has an
  absolute advantage in bread.
2. Haiti will export (bread/coffee) [comparative advantage] & import (bread/coffee).
  [comparative disadvantage] & Cuba will export (bread/coffee) & import (bread/coffee).
3. Advantageous trade can occur between Haiti & Cuba when 1 bread is exchanged for
  (3/5/7) tons of coffee. Production in both reflects (increasing/constant) opportunity costs.

“Export” what it can produce at a lower relative price and “import” goods it can buy at a lower relative price.

 Absolute Advantage - more efficient, can produce more with  “Do what you do best
 the same number of inputs [who can produce absolutely more] & trade for the rest.”
                            The countries of:
                        “Fuzzy” and “Wuzzy”
Fuzzy      A    C D E F DCC: Fuzzy Wuzzy A B
                 B
                 C                                   B C       D E F DCC: Wuzzy
                                    3                                         5
Plums 1500 1200 900 600 300 0 1G = __ P Plums 3500 2500 1500 1000 500 0 1G = __ P
                900             1G            3500 2500
Grapes 0 100 200 300 400 500 __ G= 1P Grapes 0 150 300 450 575 700__ G = 1P
                200         500 1/3                 150                 1/5     1P
 Before:        900 plums                                      Before:    200 grapes
               2500 plums     Terms of Trade                              150 grapes
               3400 plums                                                 350 grapes
  After:    3500 plums       1   Grape = 4 Plums
                                         __                     After:     500 grapes
3500 – 3400 = 100 plums                                        500 – 350 = 150 grapes

11. In Wuzzy, the opportunity cost of 1 grape is (1/2/3/4/5) plums.

12. Fuzzy has a comparative advantage in & should produce (plums/grapes).

13. The terms of trade will be 1 grape for somewhere between (3&5/2&6) plums.

14. Assume that if Fuzzy did not specialize it would produce combo “C” and if Wuzzy
   did not specialize it would produce combo “B”. The gains from specialization
   and trade are: (0/100/150) plums and (0/100/150) grapes.
     Absolute Advantage [Outputs v. Inputs]
Remember that with outputs or quantity, the larger
number indicates absolute advantage; that country
can produce absolutely more with the same inputs,
and is more efficient.


                                               Product
                                               Market
And with inputs (hours), the smaller number indicates absolute
advantage; that country is more efficient because it can produce
a good absolutely faster than the other with the same inputs.




                                               Resource
                                                Market
         Djibouti    DCC: Djibouti       Canada       DCC: Canada
Fish                   = 2
         10 hours 1W costs__F Fish 20 hours          1 W costs 3 F
                                                           = __
Wheat              1/2
         20 hours ___ W=1F Wheat 60 hours             ___W = 1F
                                                       1/3

                       Terms of Trade:
                        1 Wheat = 2.5 Fish
                                  __
27. (Djibouti/Canada) has an absolute advantage in both commodities.
   (Djibouti/Canada) has a comparative advantage in producing wheat.
28. (Djibouti/Canada) has an absolute disadvantage in both, but a
    comparative advantage in fish.
29. Advantageous trade can occur between the two when
   1 wheat is exchanged for (1/2.5/3) fish.
        We are going to turn inputs into outputs.
In 20 hours, Djibouti can produce an output of 1 wheat or 2 fish.
In 60 hours, Canada can produce an output of 1 wheat or 3 fish.
   Output v. Input Comparative                and Absolute Advantage
Rabbit                          Wabbit Rabbit                            Wabbit
1G=3B                  1G=2B 1B=3G                     1B=2G
1/3 G=1B Rabbit Wabbit 1/2 G=1B 1/3 B=1G Rabbit Wabbit 1/2 B=1G
 Terms of Trade: 1G = 2.5 B                  Terms of Trade: 1B = 2.5 G
Product Market [outputs]                    Resource Market [inputs]
Country Guns Butter                         Country Guns Butter
Rabbit     40 units 120 units               Rabbit      40 hours 120 hours
Wabbit     20 units  40 units               Wabbit      20 hours  40 hours
What country has an absolute                What country has an absolute
advantage in guns? Rabbit                   advantage in guns?Wabbit
Why does Rabbit have an                     Why does Wabbit have an
absolute advantage in guns?                 absolute advantage in guns?
Rabbit can produce absolutely               Wabbit can produce guns
more guns than Wabbit                       absolutely faster than Rabbit
[40 units v. 20 units]                      [20 hours v. 40 hours]
                                            What country has a     comparative
What country has a     comparative
                                            advantage in guns? Rabbit
advantage in guns? Wabbit
                                            “Let’s change inputs into outputs.”
Wabbit can produce guns at a lower          Rabbit can produce guns at a lower
opportunity cost [2 butters v. 3 butters]   opportunity cost [1/3 butter v. 1/2 butter]
                                                          Appreciation of the Dollar
                                                          Increase in taste for U.S. goods
                                                          Increase in U.S. Interest Rates
        The Market for Dollars                            Decrease in U.S. Price Level
        Exchange Rate: $1 = ¥100                          Decrease in U.S. Growth Rate
                                                           Decrease in U.S. Currency Price
                                          D1$
             Yen Price of Dollar     P                          D2         S$
                                            Y looking for $’s
                                                                         $’s looking for Y
                                   Y150
                                                                    E2

                                   Y100
                                          D     Yen
                                            depreciates
                                                              E1
                                                Yen
                                          A appreciates




                                    Y50
                                              E3

Depreciation of Dollar
                                                           D3
 Decrease in Taste 0                                       Q
 Decrease in In. Rates
 Increase Price Level
 Increase Growth Rate
                                           D     Quantity of Dollars
                                                       E                 A
 Increase in Currency Price
                      Appreciation/Depreciation
                            D1$  D2    S
                                         [Exchange Rate:                          $1 = Y100]



Yen Price of Dollar
                      Price
                             Y looking for $’s                 $
                      Y150                                $’s looking for Y
                                                     E2
                              D    Yen
                                 depreciates
                      Y100          Yen
                                                E1

                              A   appreciates



                       Y50
                                 E3
                                               D3
                                    Quantity of Dollars
         X M D                                                  A M X
          +             -            Taste [products/assets]           +      -
          +             -              Interest Rates                  +      -
          +             -              Price Level                     +      -
          +             -              Growth Rate                     +      -
          +             -              Currency Price                  +      -
1. Increase in taste
   [more demand for a country’s products or assets]
2. Increase in interest rates
   [Overseas investors increase their investments there.]
3. Decrease in price level
   [overseas buyers want to buy our cheaper goods.]
4. Decrease in growth rate
   [A country’s declining economy results
   in them buying less from other countries;
   decreasing demand for their currency
   and thus appreciating the declining
   economy’s currency]

5. Decrease in the price of a currency
  relative to the other
    17th Ed.          U.S. Goods export………………….…….…..+$100
Balance on Goods                                                     $20 G/S
                      U.S. Goods imports……………………………...-80                          Curr.
                      U.S. Service exports…………………………... +40                 -$30
                                                                     -$50          Acct
Bal. on Curr. Acct.   U.S. Service imports………………………….…-90                          -$25
                      Net Investment income………………..……….+20           $5
                      Net transfers………………………………….…..-15
                      Balance on capital account …………………….-5                         $5
Balance on Cap.
& Financial Acct.
                      Foreign purchases of assets in the U.S…… +45   $30
                      U.S. purchases of assets abroad…………… -10
                      Official Reserves…………………………………. -5

1. The U.S. is experiencing a balance on goods(deficit/surplus)of ($10/$20/$30).

2. The U.S.’s balance on goods & services is a (deficit/surplus) of ($30/$40) bil.

3. The U.S.’s balance on the current account is a (deficit/surplus) of ($25/$35).

4. The balance on the capital and financial account is a (surplus/deficit) of
   ($25/$30/$40).

5. The U.S. is experiencing a balance of payments (surplus/deficit) of $5.
 [don’t include official reserves here]
6. The “official reserves account indicates the U.S. (imported/exported)
   $5 billion of its stock of foreign reserves.
[A + here means we will export a stock of foreign money ($’s will enter U.S.)]
[A – here means we will import a stock of foreign money ($’s will exit U.S.)]

				
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