Chapter 16: International Trade and Exchange Rates

Chapter 16International Trade and Exchange RatesMcGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reservedTrade FactsU.S. trade deficit in goods $646 billion in 2010U.S. trade surplus in services $146 billion in 2010Canada largest U.S. trade partnerTrade deficit with China$273 billion in 2010Dependence on oilLO116-*Trade FactsPrincipal U.S. exports includeChemicalsAgricultural productsConsumer durablesSemiconductorsAircraftUnited States provides about 8.5 percent of world’s exports16-*Some Key Trade FactsPrincipal U.S. imports includePetroleumAutomobilesMetalsHousehold appliancesComputers16-*Global Snapshot16-*Global Snapshot16-*AssumptionsTwo nationsSame size labor forceConstant costs in each countryDifferent costs between countriesUnited States absolute advantage in bothOpportunity cost ratioSlope of the curveSoybeans sacrificed per ton of avocadosComparative Advantage16-*Comparative AdvantageSelf-sufficiency output mixSpecialization and tradeProduce the good with the lowest domestic opportunity costOpportunity cost of one ton of soybeans:Three tons of avocados in United StatesFour tons of avocados in Mexico16-*Comparative AdvantageProduction AlternativesProductABCDEAvocados020244060Soybeans1510950Production AlternativesProductABCDEAvocados030336090Soybeans302019100Mexico’s Production PossibilitiesU.S. Production Possibilities16-*Comparative AdvantageTerms of tradeUnited States: 1S = 3AUnited States will sell 1S for more than 3AMexico: 4A = 1SMexico will pay less than 4A for 1SSettle between the twoDepends on supply/demand factorsAssume 1S = 3.5A16-*Comparative AdvantageCountry(1)Outputs before Specialization(2)Outputs after Specialization(3) Amounts Traded(4) Outputs Available after Trade(5) Gains from Specialization and Trade (4) – (1)Mexico24 avocados60 avocados-35 avocados25 avocados1 avocados9 soybeans0 soybeans+10 soybeans10 soybeans1 soybeansUnited States33 avocados0 avocados+35 avocados35 avocados2 avocados19 soybeans30 soybeans-10 soybeans20 soybeans1 soybeansSpecialization According to Comparative Advantage and the Gains from Trade (in Tons)16-*The Foreign Exchange Market$1 Will Buy44.49 Indian rupees0.62 British pounds0.96 Canadian dollars11.72 Mexican pesos0.82 Swiss francs0.71 European euros79.2 Japanese yen1058 South Korean won6.5 Swedish kronor4.3 Venezuelan bolivares fuertes16-*Exchange RatesDemand for poundsSupply of poundsMarket equilibriumIncrease in dollar price of poundsDollar depreciatesPound appreciates Decrease in dollar price of poundsDollar appreciatesPound depreciates16-*Q0Dollar price of 1 poundQuantity of poundsPFlexible Exchange RatesThe Market for Foreign Currency (Pounds)D1S1Dollarappreciates(pounddepreciates)Dollardepreciates(poundappreciates)Exchangerate: $2 = £1$2$3$1Q116-*Flexible Exchange RatesDeterminants of exchange ratesFactors that shift demand/supplyChanges in tastesRelative income changesRelative inflation rate changesRelative interest ratesRelative expected returns on assetsSpeculation16-*Trade Barriers and Export SubsidiesTariffsImport quotaNontariff barrier (NTB)Voluntary export restriction (VER)Export subsidy16-*Economic Impact of TariffsDirect effectsDecline in consumptionIncrease in domestic productionDecline in importsTariff revenueIndirect effects16-*Net Costs of TariffsPrice of imported product goes upConsumers shift purchases to higher-priced domestic goodsDomestically produced goods become more expensive as import competition declines16-*Three Arguments for ProtectionIncreased domestic employmentCheap foreign laborProtection against dumping16-*Trade Adjustment AssistanceTrade Adjustment Assistance ActDesigned to help individuals hurt by international tradeOffshoring of jobsShifting of work previously done by American workers to workers abroad16-*Multilateral Trade AgreementsGeneral Agreement on Tariffs and Trade (GATT)World Trade Organization (WTO)European Union (EU)North American Free Trade Agreement (NAFTA)16-*GATTThree principles:Equal, nondiscriminatory trade between member nationsReduction in tariffsElimination of import quotas16-*WTOEstablished by Uruguay Round of GATT 153 member nations in 2011Oversees trade agreements and rules on disputesCritics argue that it may allow nations to circumvent environmental and worker-protection laws16-*European UnionInitiated in 1958 as Common MarketAbolished tariffs and import quotas between member nationsEstablished common tariff with nations outside the EUCreated euro zone with one currency16-*NAFTAAgreement between United States, Canada, and MexicoEstablished a free trade zone between the countriesTrade has increased in all countriesEnhanced standard of living16-*U.S. Trade DeficitsLarge and persistentCauses of trade deficitsHigh U.S. growth (relatively)ChinaPrice of oilLow U.S. saving rateImplications of trade deficitsIncreased current consumptionIncreased indebtedness16-*U.S. Trade DeficitsBillions of Dollars16-*