International Trade and Finance The industrialized countries need the economic recovery of the Third World, need these billions of human beings, potential buyers of our products. This is not only a generous attitude, it is a self-serving one. -Francois Mitterrand
Trade Trade allows counties to consume goods and services exceeding their production possibilities curve.
2
Graphic: US Trading Partners, 2012 CANADA 16.1% EUROPEAN UNION 21%
JAPAN 5.7%
MEXICO 12.9%
3
CHINA 14%
Absolute Advantage the ability of a country to produce a good using fewer resources than another country
4
Comparative Advantage the ability of a country to produce a good at a lower opportunity cost than another country
5
Specialization When countries specialize, they produce those goods and services in which they have a comparative advantage. When countries specialize, total world output increases and the potential for greater total world consumption increases. 6
A
Grain (tons per year)
100
Chart: US Production and Consumption
80
B´ (with trade) B (without trade)
70
60
40
PPCUS 20
C 0
7
10
20
30
40
Steel (tons per day)
50
Chart: Japanese Production and Consumption
Grain (tons per year)
100
80
60
D
E (without trade) E´ (with trade)
40 30 20
PPCJapan
F 0 8
10
20
30
40
Steel (tons per day)
50
Free Trade
the flow of goods between countries without restrictions or special taxes
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Protectionism the government’s use of embargoes, tariffs, quotas and other restrictions to protect domestic producers from foreign competition embargo – a law that bars trade with
another country tariff – a tax on imports quota – a limit on the quantity of a good that may be imported in a given time period 10
Chart: US Tariff Rates, 1820-2005
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US Tariff Rates, 1820-2005 US Tariff Rates, 1820–2005 (on the previous slide) shows average tariff rates on dutiable imports in the US since 1820. The high tariffs of the early nineteenth century were typically justified as being necessary to allow US firms to gain a competitive foothold in the world economy. As domestic industries became established, tariff rates fell. Subsequent increases in tariffs were a response in part to internal crises: the Civil War and the Great Depression. Tariff rates have fallen dramatically since 1930. 12
Arguments for Protectionism infant industry national security domestic employment cheap foreign labor free trade agreements
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Free Trade Agreements Nations negotiate reductions in trade barriers. North America Free Trade Agreement (NAFTA) - a 1993 free trade agreement between the US, Canada and Mexico
14
Balance of Trade the value of a nation’s merchandise imports subtracted from its merchandise exports
15
Chart: US Balance of Trade, 1980-2010
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Chart: Top Countries with which the US Has A Trade Deficit, 2011
17
Balance of Payments a bookkeeping record of international transactions between countries during a given period of time The balance of payments always equals zero … the current account deficit should equal the capital account surplus. 18
Example: Balance of Payments
19
Current Account the first section of the balance of payments, which includes trade in currently produced goods and services A current account deficit is financed by a capital account surplus.
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Capital Account records payment flows for financial capital
21
Comparing Current and Capital Accounts
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Example: Current Account and Capital Account
23
Exchange Rate the number of one nation’s currency that equals one unit of another nation’s currency
For example, if $1.81 is exchangeable for £1 (British pound), the exchange rate is: 1 / 1.81 = .552 pounds per dollar Supply and demand for foreign exchange determine the exchange rate.
24
Chart: Supply and Demand for Dollars Price (yen per dollar)
200
D for $ (Japanese citizens)
150
E
100 50
0
25
S of $ (US citizens)
100
200
300
400
500
Quantity of dollars (millions per day)
Depreciation When the price of the currency falls in relation to another currency it is said to have depreciated. When a country’s currency depeciates, its goods and services cost foreign consumers less.
26
Appreciation When the price of a currency rises in relation to another currency, it is said to have appreciated in value. When a country’s currency appreciates, its goods and services cost foreign consumers more.
27
Changes in Demand and/or Supply The demand and/or supply of the currency can
change in the international market. Demand can change if there is a change in: ● tastes and preferences ● relative price levels
● relative interest rates
Supply can change if there is a change in: relative incomes relative price levels
relative interest rates 28
Chart: Decrease in Demand 250
Price (yen per dollar)
S 200
E1 150
E2 D1
100
D2
50
100 29
200
300
400
500
Quantity of Dollars (millions per day)
Graphic: Decrease in Demand
US exports less popular
30
decrease in the demand for dollars
value of the dollar falls (depreciates)
Chart: Decrease in Supply 250
Price (yen per dollar)
S2 200
S1
E2
150
E2
100
D 50
100 31
200
300
400
500
Quantity of Dollars (millions per day)
Graphic: Decrease in Supply
Japanese imports less popular
32
decrease in the supply of dollars
value of the dollar rises (appreciates)
Changes in Demand and/or Supply When demand and/or supply changes, the currency seeks a new equilibrium and the currency’s value changes.
33
Graphic: Impact of Relative Price Changes on Exchange Rates Japanese buy more US exports
Japanese price level rises
34
US citizens buy fewer Japanese imports
increase in demand for dollars
value of dollar rises (appreciates)
decrease in supply of dollars
Chart: The Effects of a Shift in Supply on Market Equilibrium S2
300 250
S1
E2
200 150
E1
100
D2
50
D1 100
35
200
300
400
500
Quantity of dollars
600
700
The End 36
