Chapter 16 - International trade and exchange rates. In this chapter we will take a look at some key facts about international trade and then start evaluating international trade using comparative advantage. We will also use demand and supply curves to explain how countries determine which goods they will import, which goods they will export, and the price that is charged for these goods.
Chapter 16 International Trade and Exchange Rates McGrawHill/Irwin Copyright © 2013 by The McGrawHill Companies, Inc. All rights reserved Copyright © 2014 by The McGrawHill Companies, Inc. All rights reserved 11 Trade Facts • U.S trade deficit in goods • $646 billion in 2010 • U.S trade surplus in services • $146 billion in 2010 • Canada largest U.S trade partner • Trade deficit with China • $273 billion in 2010 • Dependence on oil LO1 162 Trade Facts • Principal U.S exports include • Chemicals • Agricultural products • Consumer durables • Semiconductors • Aircraft • United States provides about 8.5 percent of world’s exports 163 Some Key Trade Facts • Principal U.S imports include • Petroleum • Automobiles • Metals • Household appliances • Computers 164 Global Snapshot 165 Global Snapshot 166 Comparative Advantage • Assumptions • Two nations • Same size labor force • Constant costs in each country • Different costs between countries • United States absolute advantage in both • Opportunity cost ratio • Slope of the curve • Soybeans sacrificed per ton of avocados 167 Comparative Advantage • Self-sufficiency output mix • Specialization and trade • Produce the good with the lowest • domestic opportunity cost Opportunity cost of one ton of soybeans: • Three tons of avocados in United States • Four tons of avocados in Mexico 168 Comparative Advantage Mexico’s Production Possibilities Production Alternatives Product A B C D E Avocados 20 24 40 60 Soybeans 15 10 U.S Production Possibilities Production Alternatives Product A B C D E Avocados 30 33 60 90 Soybeans 30 20 19 10 169 Comparative Advantage • Terms of trade • United States: 1S = 3A • United States will sell 1S for more than 3A • Mexico: 4A = 1S • Mexico will pay less than 4A for 1S • Settle between the two • Depends on supply/demand factors • Assume 1S = 3.5A 1610 Exchange Rates • • • • • Demand for pounds Supply of pounds Market equilibrium Increase in dollar price of pounds • Dollar depreciates • Pound appreciates Decrease in dollar price of pounds • Dollar appreciates • Pound depreciates 1613 Flexible Exchange Rates The Market for Foreign Currency (Pounds) Dollar price of pound P $3 $2 $1 Dollar depreciates (pound appreciates) Exchange rate: $2 = £1 S1 Dollar appreciates (pound depreciates) D1 Q1 Quantity of pounds Q 1614 Flexible Exchange Rates • Determinants of exchange rates • Factors that shift demand/supply • Changes in tastes • Relative income changes • Relative inflation rate changes • Relative interest rates • Relative expected returns on assets • Speculation 1615 Trade Barriers and Export Subsidies • Tariffs • Import quota • Nontariff barrier (NTB) • Voluntary export restriction (VER) • Export subsidy 1616 Economic Impact of Tariffs • Direct effects • Decline in consumption • Increase in domestic production • Decline in imports • Tariff revenue • Indirect effects 1617 Net Costs of Tariffs • Price of imported product goes up • Consumers shift purchases to higher• priced domestic goods Domestically produced goods become more expensive as import competition declines 1618 Three Arguments for Protection • Increased domestic employment • Cheap foreign labor • Protection against dumping 1619 Trade Adjustment Assistance • Trade Adjustment Assistance Act • Designed to help individuals hurt by • international trade Offshoring of jobs • Shifting of work previously done by American workers to workers abroad 1620 Multilateral Trade Agreements • General Agreement on Tariffs and • • • Trade (GATT) World Trade Organization (WTO) European Union (EU) North American Free Trade Agreement (NAFTA) 1621 GATT • Three principles: • Equal, nondiscriminatory trade between member nations • Reduction in tariffs • Elimination of import quotas 1622 WTO • Established by Uruguay Round of • • • GATT 153 member nations in 2011 Oversees trade agreements and rules on disputes Critics argue that it may allow nations to circumvent environmental and worker-protection laws 1623 European Union • Initiated in 1958 as Common Market • Abolished tariffs and import quotas • • between member nations Established common tariff with nations outside the EU Created euro zone with one currency 1624 NAFTA • Agreement between United States, • • • Canada, and Mexico Established a free trade zone between the countries Trade has increased in all countries Enhanced standard of living 1625 U.S. Trade Deficits • Large and persistent • Causes of trade deficits • High U.S growth (relatively) • China • Price of oil • Low U.S saving rate • Implications of trade deficits • Increased current consumption • Increased indebtedness 1626 Billions of Dollars U.S. Trade Deficits 1627 ... • domestic opportunity cost Opportunity cost of one ton of soybeans: • Three tons of avocados in United States • Four tons of avocados in Mexico 16 8 Comparative Advantage Mexico’s Production... advantage in both • Opportunity cost ratio • Slope of the curve • Soybeans sacrificed per ton of avocados 16 7 Comparative Advantage • Self-sufficiency output mix • Specialization and trade •... world’s exports 16 3 Some Key Trade Facts • Principal U.S imports include • Petroleum • Automobiles • Metals • Household appliances • Computers 16 4 Global Snapshot 16 5 Global Snapshot 16 6 Comparative Advantage