01 international trade and finance
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01 international trade and finance Presentation Transcript

  • 1. Chapter 28International Trade and Finance • Key Concepts • Summary • Practice Quiz • Internet Exercises ©2000 South-Western College Publishing 1
  • 2. In this chapter, you will learn to solve these economic puzzles: How does Babe Ruth’s Should the United decision not to become a Is there a valid argument pitcherreturn to the States illustrate an for trade protectionism? important principle in gold standard? international trade? 2
  • 3. Why do countries trade? International trade allows a country to consume a combination of goods and services that exceeds its production possibilities curve 3
  • 4. U.S. Trading Partners, 1998 7% 11% 2% Mexico Canada Western Europe24% 21% Australia Eastern Europe Japan Asia Africa Latin America 11% 1% 1% 22% 4
  • 5. U.S. Production and Consumption100 A 80 Grain (tons per year) B´ (with trade) 70 B (without trade) 60 40 PPC 20 U.S. Steel (tons per day) C 0 10 20 30 40 50 5
  • 6. Japanese Production Grain (tons per year)100 and Consumption 80 6040 D E (without trade)30 E´ (with trade)20 PPC Japan Steel (tons per day) F 0 10 20 30 40 50 6
  • 7. Why should countriesSpecialize and Trade?Total world output increases, and therefore, the potential for greater total world consumption also increases 7
  • 8. If countries shouldSpecialize, in what should they Specialize? They should produce those goods and services in which they have a comparative advantage 8
  • 9. What isComparative Advantage? The ability of a country to produce a good at a lower opportunity cost than another country 9
  • 10. What isAbsolute Advantage?The ability of a country to produce a good using fewer resources than another country 10
  • 11. What is Free Trade?The flow of goods between countries without restrictions or special taxes 11
  • 12. What is Protectionism?The government’s use of embargoes, tariffs, quotas, and other restrictions to protect domestic producers from foreign competition 12
  • 13. What is an Embargo?A law that bars trade with another country 13
  • 14. What is a Tariff?A tax on an import 14
  • 15. What is a Quota?A limit on the quantity of a good that may be imported in a given time period 15
  • 16. What are the Arguments for Protectionism?• Infant industry argument• National security argument• Employment argument• Cheap foreign labor argument• Free trade agreements 16
  • 17. What is a Recent Free Trade Agreement?North America Free Trade Agreement (NAFTA) 17
  • 18. What is NAFTA?A 1993 free trade agreement between the U.S., Canada, and Mexico 18
  • 19. What is the Balance of Payments?A bookkeeping record of all the international transactions between a country and other countries during a given period of time 19
  • 20. What is the Current Account?The first section of the balance of payments, which includes trade in currently produced goods and services 20
  • 21. What is the Balance of Trade?The most widely reported and largest part of the current account defined as the value of a nation’s merchandise imports subtracted from its merchandise exports 21
  • 22. How is a Current Account Deficit Financed?By a capital account surplus 22
  • 23. What is the Capital Account?The second section of the balance of payments, which records payment flows for financial capital 23
  • 24. 50 U. S. Balance of Trade, 1977-1998 0 -50 (billions of dollars) Balance of Trade-100-150-200-250 Year 77 79 81 83 85 87 89 91 93 95 97 99 24
  • 25. What does the Balance ofPayments always equal?Zero; the current account deficit should equal the capital account surplus 25
  • 26. How could the US have a Balance ofPayments Problem?The problem is with the composition of the balance of payments 26
  • 27. What is an Exchange Rate?The number of one nation’s currency that equals one unit of another nation’s currency 27
  • 28. If 1.81 Dollars is exchangeable for 1British Pound, what is the Exchange Rate? 1 / 1.81 = .552 pounds per dollar 28
  • 29. How is the Exchange Rate determined?Supply and demand for foreign exchange 29
  • 30. Supply and Demand for Dollars 200 S of $ (U.S. citizens)Price (yen per dollar) 150 E 100 50 D for $ (Japanese citizens) 0 100 200 300 400 500 Quantity of dollars (millions per day) 30
  • 31. 240 Changes in the Yen-per- Dollar Rate, 1980-1998220200180 Price (yen per160140120 dollar100 80 82 84 86 88 90 92 94 96 98 31
  • 32. What happens when aCurrency Depreciates?The price of the currency falls in relation to another currency 32
  • 33. What happens when aCurrency Appreciates?The price of the currency rises in relation to another currency 33
  • 34. What can cause a Currency to change Value?The demand and/or supply of the currency can change 34
  • 35. What can cause a changein Demand of a Currency? There can be a change in - • tastes and preferences • relative price levels • relative interest rates 35
  • 36. 250 Decrease in Demand S200 Price (yen per dollar E1150 E2100 D1 50 D2 Quantity of Dollars (millions per day 100 200 300 400 500 36
  • 37. Decrease U.S. Value of the in theexports dollar falls demand less (dollar forpopular depreciates) dollars 37
  • 38. What can cause a changein Supply of a Currency?There can be a change in -• relative incomes• relative price levels• relative interest rates 38
  • 39. 250 Decrease in Supply S2200 Price (yen per dollar S1 E2150 E2100 D50 Quantity of Dollars (millions per day) 100 200 300 400 500 39
  • 40. Japanese Decrease Value of the imports in the dollar rises less supply of (dollar popular dollars appreciates ) 40
  • 41. What happens whenDemand and/or Supply changes? The currency seeks a new equilibrium; the value changes 41
  • 42. Japanese Increase the buy more demand for U.S. dollars exportsJapanese Impact on relative Value of the price price changes on dollar rises level Exchange Rates (dollar rises appreciates U.S. Decrease citizens in the buy fewer supply of Japanese dollars imports 42
  • 43. The Effects of Shift in Supply on Market Equilibrium300 S2 S1 Yen / Dollars250 E2200150 E1 D2100 50 Quantity of dollars D1 100 200 300 400 500 600 700 43
  • 44. Key Concepts 44
  • 45. Key Concepts• Why do countries trade?• Why should countries Specialize and Trade?• If countries should Specialize, in what should the• What is Comparative Advantage?• What is Absolute Advantage?• What is Free Trade?• What is Protectionism? 45
  • 46. Key Concepts cont.• What is an Embargo?• What is a Tariff?• What is a Quota?• What is NAFTA?• What is the Balance of Payments?• What is the Balance of Trade?• What is an Exchange Rate?• What can cause a Currency to change Value?• What if Demand - Supply changes? 46
  • 47. Summary 47
  • 48. Comparative advantage is aprinciple that allows nations to gainfrom trade. Comparative advantagemeans that each nation specializesin a product for which itsopportunity cost is lower in terms ofthe production of another productand then nations trade. 48
  • 49. When nations follow theprinciple of comparative advantage,they gain. The reason is that worldoutput increases and each nationends up with a higher standard ofliving by consuming more goods andservices than possible withoutspecialization and trade. 49
  • 50. U.S. Production and Consumption100 A 80 Grain (tons per year) B´ (with trade) 70 B (without trade) 60 40 PPC 20 U.S. Steel (tons per day) C 0 10 20 30 40 50 50
  • 51. Japanese Production Grain (tons per year)100 and Consumption 80 6040 D E (without trade)30 E´ (with trade)20 PPC Japan Steel (tons per day) F 0 10 20 30 40 50 51
  • 52. Free trade benefits a nation as awhole, but individuals may lose jobsand incomes from the competitionfrom foreign goods and services. 52
  • 53. Protectionism is a government’suse of embargoes, tariffs, quotas,and other methods t impose barriersintended to both reduce imports andprotect particular domesticindustries. 53
  • 54. Embargoes prohibit the import ofexport of particular goods. Tariffsdiscourage imports by making themmore expensive. Quotas limit thequantity of imports or exports ofcertain goods. These trade barriersoften result primarily from domesticgroups that exert political pressure togain from these barriers. 54
  • 55. The balance of payments is asummary bookkeeping record of allthe international transactions a countrymakes during a year. It is divided intodifferent accounts, including thecurrent account, the capital accountand the statistical discrepancy. 55
  • 56. The current account summarizesall transactions in currently producedgoods and services. The overallbalance of payments is always zeroafter an adjustment for the statisticaldiscrepancy. 56
  • 57. The balance of trade measuresonly goods (not services) that a nationexports and imports. A balance oftrade can be in deficit or in surplus.The balance of trade is the mostwidely reported and largest part of thecurrent account. Since 1975, the U.S.has experienced balance of tradedeficits. 57
  • 58. 50 U. S. Balance of Trade, 1977-1998 0 -50 (billions of dollars) Balance of Trade-100-150-200-250 Year 77 79 81 83 85 87 89 91 93 95 97 99 58
  • 59. An exchange rate is the price ofone nation’s currency in terms ofanother nation’s currency. Foreignerswho wish to purchase U.S. goods,services, and financial assets demanddollars. The supply of dollars reflectsthe desire of U.S. citizens to purchaseforeign goods, services and financialassets. The intersection of the supplyand demand curves for dollarsdetermines the number of units of aforeign currency per dollar. 59
  • 60. Supply and Demand for Dollars 200 S of $ (U.S. citizens)Price (yen per dollar) 150 E 100 50 D for $ (Japanese citizens) 0 100 200 300 400 500 Quantity of dollars (millions per day) 60
  • 61. Shifts in supply and demand forforeign exchange result from changesin such factors as tastes, relative pricelevels, relative real interest rates, andrelative income levels. 61
  • 62. Depreciation of currency occurswhen one currency becomes worthfewer units of another currency. If acurrency depreciates, it becomesweaker. Depreciation of a nation’scurrency increases its exports anddecreases its imports. 62
  • 63. Appreciation of currency occurswhen one currency becomes worthmore units of another currency. If acurrency appreciates, it becomesstronger. Appreciation of a nation’scurrency decreases its exports andincreases its imports. 63
  • 64. Chapter 28 Quiz ©2000 South-Western College Publishing 64
  • 65. 1. With trade, the production possibilities for two nations lie a. outside their consumption possibilities. b. inside their consumption possibilities. c. at a point equal to the world production possibilities curve. d. none of the above.B. When countries specialize and trade, total world output increases and potential total total world consumption also increases. 65
  • 66. 2. Free trade theory suggests that when trade takes place a. both nations will be worse off. b. one nation must gain at the other nation’s expense. c. both nations are better off. d. one nation will gain and the other nation will be neither better nor worse off. C. Free trade allows a country to consume a combination of goods that exceeds its production possibilities curve. 66
  • 67. 3. Which of the following is true when two countries specialize according to their comparative advantage? a. It is possible to increase their total output of all goods. b. It is possible to increase their total output of some goods only if both countries are industrialized. c. One country is likely to gain from trade while the other loses. d. None of the above. A. Comparative advantage is the ability of a country to produce a good at a lower opportunity cost than another country. 67
  • 68. 4. According to the theory of comparative advantage, a country should produce and a. import goods in which it has an absolute advantage. b. export goods in which it has an absolute advantage. c. import goods in which it has a comparative advantage. d. export goods in which it has a comparative advantage. D. Don’t confuse comparative advantage and absolute advantage. Absolute advantage is the ability of a country to produce a good using fewer resources than another country. 68
  • 69. Exhibit 11 Potatoes and Wheat Output (tons per hour)COUNTRY POTATOES WHEATU.S. 1 3Ireland 1 2 69
  • 70. 5. In Exhibit 11, which country has the comparative advantage in the production of potatoes? a. The United States because it requires fewer resources to produce potatoes. b. The United States because it has the lower opportunity cost of potatoes. c. Ireland because it requires fewer resources to produce potatoes. d. Ireland because it has the lower opportunity cost of potatoes. D. To produce 1 ton of potatoes, the opportunity cost for the U.S. is 3 tons of wheat. To produce 1 ton of potatoes, the opportunity cost for Ireland is 2 tons of wheat. 70
  • 71. 6. In Exhibit 11, the opportunity cost of wheat is a. 1/3 ton of potatoes in the United States and 1/2 ton of potatoes in Ireland. b. 2 tons of potatoes in the United States and 1 1/2 tons of potatoes in Ireland. c. 8 tons of potatoes in the United States and 4 tons of potatoes in Ireland. d. 1/2 ton of potatoes in the United State and 2/3 ton of potatoes in Ireland. A. U.S. 1 ton potatoes = 3 tons of wheat 1/3 ton of potatoes = 1 ton of wheat Ireland 1 ton potatoes = 2 tons of wheat 1/2 ton potatoes = 1 ton of wheat 71
  • 72. 7. In Exhibit 11, the opportunity cost of potatoes is a. 1/2 ton of wheat in the United States and 2/3 ton of wheat in Ireland. b. 2 tons of wheat in the United States and 1 1/2 tons of wheat in Ireland. c. 16 tons of wheat in the United States and 6 tons of wheat in Ireland. d. 3 tons of wheat in the United States and 2 tons of wheat in Ireland. D. U.S. 1 ton potatoes = 3 tons of wheat Ireland 1 ton potatoes = 2 tons of wheat 72
  • 73. 8. If the countries In Exhibit 11 follow the principle of comparative advantage, the United States should a. buy all of its potatoes from Ireland. b. buy all of its wheat from Ireland. c. buy all of its potatoes and wheat from Ireland. d. produce both potatoes and wheat and not trade with Ireland. A. The U.S. should specialize in the production of wheat when it has a comparative advantage (see question 6 for opportunity cost calculations). 73
  • 74. 9. A tariff increases the a. quantity of imports. b. ability of foreign goods to compete with domestic goods. c. prices of imports to domestic buyers. d. all of the above.C. A tariff is a tax, also called customs duties, on an import. 74
  • 75. 10. The infant industry argument for protectionism is based on which of the following views? a. foreign buyers will absorb all of the output of domestic producers in a new industry. b. the growth of an industry that is new to a nation will be too rapid unless trade restrictions are imposed. c. firms in a newly developing domestic industry will have difficulty growing if they face strong competition from established foreign firms. d. It is based on none of the above. C. It is difficult to make this argument because there is an arbitrary line between an “infant” and a “grown up” industry. 75
  • 76. 11. The figure that results when merchandise imports are subtracted from merchandise exports is a. the capital account balance. b. the balance of trade. c. the current account balance. d. always less than zero.B. The capital account records payments for financial capital, such as stocks and bonds. The current account includes trade in currently produced goods and services. 76
  • 77. 12. Which of the following international accounts records payments for exports and imports of goods, military transactions, foreign travel, investment income, and foreign gifts? a. The capital account. b. The merchandise account. c. The current account. d. The official reserve account.C. The capital account records payments for financial capital, such as stocks and bonds. The merchandise account is the value of a nation’s merchandise imports subtracted from its merchandise exports. There is no official reserve account. 77
  • 78. 13. Which of the following international accounts records the purchase and sale of financial assets and real estate between the United States and other nations? a. The balance of trade account. b. The current account. c. The capital account. d. The balance of payments account.C. The balance of trade is the value of a nation’s merchandise imports subtracted from its merchandise exports. The current account includes trade in currently produced goods and services. Balance of payments in a bookkeeping record of all international transactions in a given period of time. 78
  • 79. 14. If a Japanese radio priced at 2,000 yen can be purchased for $10, the exchange rate is a. 200 yen per dollar. b. 20 yen per dollar. c. 20 dollars per yen. d. none of the above. A. X yen / dollar = 2,000 yen / 10 dollars = 200 yen / dollar. 79
  • 80. 15. The United States a. was on a fixed exchange rate system prior to late 1971, but now is on a flexible exchange rate system. b. has been on a fixed exchange rate system since 1945. c. has been on a flexible exchange rate system since 1945. d. was on a flexible exchange rate system prior to late 1983, but now is on a fixed exchange rate system. A. For most years between World War II and 1971, were based primarily on gold. 80
  • 81. 16. Suppose the exchange rate changes so that fewer Japanese yen are required to buy a dollar. We would conclude that a. the Japanese yen has depreciated in value. b. U.S. citizens will buy fewer Japanese imports. c. Japanese will demand fewer U.S. exports. d. none of the above. B. When the dollar is weak or depreciates, U.S. goods cost foreign consumers less and they buy more U.S. exports. 81
  • 82. 17. Which of the following would cause a decrease in the demand for French francs by those holding U.S. dollars? a. Inflation in France, but not in the United States. b. Inflation in the United States, but not in France. c. An increase in the real rate of interest on investments in France above the real rate of interest on investments in the United States . d. None of the above. A. A rise in the French Franc relative price level causes the dollar to appreciate and demand for French Francs decreases. 82
  • 83. 18. An increase in the equilibrium price of a nation’s money could be caused by a (an) a. decrease in the supply of the money. b. decrease in the demand for money. c. increase in the supply of the money. d. increase in the demand for money. A. 83
  • 84. 250 Decrease in Supply S2200 Price (yen per dollar S1 E2150 E2100 D50 Quantity of Dollars (millions per day) 100 200 300 400 500 84
  • 85. 19. If the dollar appreciates (becomes stronger), this causes a. the relative price of U.S. goods to increase for foreigners. b. the relative price of foreign goods to decrease for Americans. c. U.S. exports to fall and U.S. imports to rise. d. a balance of trade deficit for the U.S. e. all of the above to occur E. 85
  • 86. 20. Which of the following would cause the U.S. dollar to depreciate against the Japanese yen? a. Greater popularity of U.S. exports in Japan. b. A higher price level in Japan. c. Higher real interest rates in the U.S. d. Higher incomes in the U.S.D. As a result of higher income, U.S. citizens buy more domestic products and imports. The supply curve for dollars shifts rightward and the equilibrium exchange rate decreases. 86
  • 87. Internet ExercisesClick on the picture of the book, choose updates by chapter for the latest internet exercises 87
  • 88. END 88