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					    Frank & Bernanke




Ch. 16: International Trade and
         Capital Flows
              Trade Flows
 Buying foreign goods at cheaper prices than
  domestically produced.
 Selling domestic goods to foreign countries
  at higher prices than sold domestically.
 Trade makes participant countries better off.
 The choices are determined by comparative
  advantage.
               Capital Flows
 Buying and selling of assets across borders.
 Financial assets are bank deposits, bonds,
  stocks, foreign currency, etc.
 Real assets are real estate, factories, art, etc.
 Trade flows and capital flows together
  cancel each other.
    – Trade deficits are financed by capital inflows
      and trade surpluses are matched by capital
      outflows.
Production Possibilities Curve
   Suppose there are two individuals (say a
    married couple) who have the following
    productivities.
    – He can clean house or cook one meal per day.
    – She can clean house or cook two meals per day.
   Draw PPC for this household per week.
           Opportunity Costs
   What is her opportunity cost of giving up
    cleaning?
    – A gain of 2 meals.
   What is his opportunity cost of giving up
    cleaning?
    – A gain of 1 meal.
   Who should give up cleaning first?
Cleaning Cooking
   14       0
   13       2
   12       4                             PPC
                             24
   11       6
   10       8                18
    9      10

                   Cooking
    8      12                12
    7      14
                              6
    6      15
    5      16
                              0
    4      17                     0   5              10   15
    3      18                             Cleaning

    2      19
    1      20
    0      21
        PPC for 3-persons
 Suppose her mother comes to live with
  them.
 She can clean or cook three meals.
 Who should stop cleaning first?
 What would the PPC look like?
                        PPC
          45
          40
          35
          30
Cooking




          25
          20
          15
          10
          5
          0
               0   5   10              15   20   25
                            Cleaning
    PPC for Many Workers
A




                    B
    Consumption Possibilities
 In a closed economy where there is no trade
  (autarky) a country’s consumption
  possibilities are limited by its production
  possibilities.
 In an open economy where a country can
  sell products at higher prices than at home
  and buy products at lower prices than at
  home, the consumption possibilities are
  larger than the production possibilities.
        Him and Her Again
 Suppose cleaning and cooking can be
  exchanged in the marketplace for 1.5 meals
  per cleaning.
 Put this information on PPC.
 Determine who is going to do what.
 Show why the couple is better-off.
14




     She can get 10.5 cleanings
7
     for her 14 meals


                          He can get 10.5
                          meals for his 7
                          cleanings


                                   14       21
                                        1
                                        4
Many Workers
     Cheap Labor and Jobs
 If two countries are producing the same
  products, computers and food, and one
  country has lower wages, would free trade
  make the higher wage country lose all the
  jobs?
 Productivity and wages
 Comparative advantage
    Productivity and Wages
 Wages are high in the country that has
  higher productivity.
 Productivity is measured as Marginal
  Product of Labor.
 MPL = Increase in Output/Increase in Labor
 MPL shifts to the right as capital,
  technology, and human capital increases.
    Comparative Advantage
 If rich country (R) can produce 10
  computers or 100 food with one unit of
  labor and poor country (P) can produce 2
  computers and 50 food with one unit of
  labor who has the absolute and comparative
  advantage in computers and in food?
 What if P can produce 2 computers and 20
  food?
            Supply Curve
 If the “price” of one computer is 10 food in
  R, would the people in R make more or less
  computers if they could exchange a
  computer for 11 food? 12 food? 9 food?
 How does this look in a typical supply
  curve?
 How does it relate to PPC?
Increasing Computer Price
  Food




               Computers
       PPC
Food




             Computers
             Supply Curve
Price of
computers

        11
        10
        9




                        Computers
            Demand Curve
 Typically, demand depends on the income
  of the people, their tastes and the price of
  the product.
 As the computer price goes up, ceteris
  paribus, the number of computers
  demanded will fall.
       Autarky
P




    Computers    Computers
        Exports
P



Pw




     Computers    Computers
         Imports
P




Pw




     Computers     Computers
       Markets With Trade
 On a supply-demand diagram, show the
  world price, amount produced, amount
  exported and amount consumed.
 On a supply-demand diagram, show the
  world price, amount produced, amount
  imported and amount consumed.
       Winners and Losers
 Because of the difference between world
  and domestic prices some gain and others
  lose from free trade.
 Winners are consumers of imported goods
  and producers of exported goods.
 Losers are consumers of exported goods
  and producers of import-competing goods.
Winners and Losers
Winners and Losers
       Import Tariffs



Pw+t

 Pw
         Import Quota



P

    Pw



           Quota
         Net Capital Inflows
 Capital inflows are purchases of our assets
  by foreigners (funds flowing in).
 Capital outflows are our purchases of
  foreign assets (funds flowing out).
 Net capital inflows (KI) is capital inflows
  minus capital outflows.
 KI>0 net capital inflows.
 KI<0 net capital outflows.
                NX and KI
 Net exports and net capital inflows are
  connected.
 NX + KI = 0
 If there is a trade surplus, we have claims
  abroad: we can keep the local currency
  earned in a bank abroad, buy local stocks,
  bonds, real estate.
 If there is a trade deficit, the foreigners can
  purchase our assets. If they demand their
  money, we borrow (sell bonds = KI).
    Real Interest Rates and KI
 Net capital inflows respond to changes in
  our (domestic) real interest rates.
 Higher real interest rates mean people can
  earn higher returns here.
 Lower real interest rates mean people can
  earn higher returns abroad.
        Real Interest Rates and KI
Real interest rate                                           KI




                     Net capital outflows   0   Net capital inflows
               Shifts in KI
 Riskiness of domestic assets increases =>
  KI shifts left.
 Riskiness of foreign assets increases => KI
  shifts right.
 Real interest rate abroad increases => KI
  shifts left.
      Savings and Investment
1.   Y = C + I + G + NX (output = AD)
2.   Y=C+S+T              (output = income)
3.   C + S + T = C + I + G + NX (one and
     two)
4.   S + (T – G) – NX = I (from three)
5.   KI = - NX (from NX + KI = 0)
6.   Private savings + Government savings +
     Capital inflows = Investments (from four)
    Saving and Investment
r                         r
        S+(T-G)
             S+(T-G)+KI       S+(T-G) S+(T-G)+KI




0


               I


      Japan                   USA

				
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