1. The Falling Peso [Who Wins?]
Winners [anyone buying with dollars]
1. American tourists to Mexico
2. People who send dollars to family or friends in Mexico
3. U.S. businesses that buy from Mexico
4. American consumers who buy Mexican imports
5. Those who primarily do business in dollars
Losers [anyone buying with pesos]
1. Mexicans who buy American products
2. Mexican businesses that buy supplies from the U.S.
3. American businesses that sell products to Mexico
4. Mexican visitors to the U.S.
5. Those who primarily do business in pesos
$1 = P $24,000 car = 84,000 pesos
$1 = P $24,000 car = 312,000 pesos

2. 2002 AP Essay on Higher Interest Rates in the U.S.
2002 FRQ
The real interest rates [RIR] in the U.S. & Japan are equal to 7% [say 9%-2%=7%].
The real interest rate in the U.S. increases to 8% while the real interest rate in
Japan decreases to 6%.
a. How & why will financial capital flows be affected
by this change in real interest rates?
[financial capital, not real capital]
b. Using a correctly labeled graph for the yen
market, show and explain how the value of
the yen will change relative to the value of
the dollar.
c. Explain how the change in the value of the
yen will affect each of the following in the U.S.
(1.) Imports from Japan
(2.) Exports to Japan
[Nominal IR-Inflation = RIR]
$/¥ D1 S D2
$1.15 E1 A
$1.00 E2
(D)
# of Yen

3. FRQ 2006
1. Assume that the U.S. trades with Japan. Draw a correctly labeled graph
of the foreign exchange market for the U.S. dollar. Let’s say that
United States output [GDP] decreases. Show & explain how the supply
of the U.S. dollar will be affected in the foreign exchange market..
S2$ D$
¥/$
S1$
¥120
Answer 1: The decrease in
real U.S. output will cause
job losses in the U.S. and
decrease the dollars supplied
for Japanese goods. E2
¥100 E1
Quantity of Dollars
2. Given your answer in 1, indicate what will happen to the
value of the U.S. dollar relative to the Japanese yen.
Answer 2: Due to the decrease in supply of U.S. dollars
[as shown above], it will take more yen to purchase a dollar,
depreciating the yen and therefore appreciating the dollar.

4. Other Strange Sounding Currencies
India’s Rupee Brazil’s Real Nicaragua’s Cordoba
Indonesia’s Rupiah Costa Rica’s Colon (100 centimos)
Brazil’s Real Guatemala’s Quetzal
Laos Kip Zambia’s Kwacha
Eritrea’s Birr Croatia’s Kuna
Iran’s Rial Botswana’s Pula
Spain’s Peseta Venezuela’s Bolivar
Kuwait’s Dinar Bulgaria’s Lev (100 stotinki)
Saudi Arabia’s Riyal China’s Renminbi
Mongolia’s Tugrik (mongo) Russia’s ruble
Gambia’s Dalasi (bututs) Ghana’s Cedi
Hungary’s Forint (filler) Haiti’s Gourde
S. Korean won (100 chon) Thailand’s Baht (100 satang) 5
Kuna
Kip
Afghanistan’s Afgani (puls)
The Afghan note–10,000 Afghanis is worth
25 U.S. cents; or $1 = 40,000 Afghanis.
The $25 million reward for Osami is worth
950 billion Afghanis. With a typical wage
of $4 a month, the typical Afghan could
live 500,000 years off the reward.
[worth 25 cents]

5. In Afghanistan, there are trillions of
Afghan bills but they have little value.
They are burning much of the currency
and hope to shrink the currency notes from
$15 trillion all the way down to $15 billion.
The Afghan has become diluted in value, almost worthless,
because of overprinting and counterfeiting. They are
tossing old bills into an incinerators to make Afghans
more scarce.
[worth 12.5 cents]
And why haven’t
we bee able to
find Osama?

6. APPRECIATION of a Currency
1. Increase in taste
[more demand for a country’s products or assets]
2. Increase in interest rates
[Overseas investors increase their investments there.]
3. Decrease in price level
[overseas buyers want to buy our cheaper goods.]
4. Decrease in growth rate
[A country’s declining economy results
in them buying less from other countries;
decreasing demand for their currency
and thus appreciating the declining
economy’s currency] 5.
Decrease in the price of a currency
relative to the other

7. (50%) 1. If Mexico increases their investments in the U. S
(50%) 1. If Mexico increases their investments in the U.S., the supply of Mexican
pesos to the foreign exchange market and the dollar price of the peso will
most likely change in which of the following ways?
Supply of Pesos Dollar Price of Peso
a. increase increase
b. increase decrease
c. decrease increase
d. decrease decrease
e. decrease not change
(41%) 2. If the real interest rate in Canada increases relative to the real interest rate
in Japan and there are no trade barriers between the two countries, then for
Canada, which of the following will be true of its financial capital, the value
of its currency, and its exports?
Capital Flow Currency Exports
a. Inflow Appreciation Increase
b. Inflow Appreciation Decrease
c. Inflow Depreciation Increase
d. Outflow Depreciation Increase
e. Outflow Appreciation Decrease
From 2005 AP Macro MC Exam
As pesos are exchanged for dollars, peso
supply increase in depository institutions.
There is an increase in demand for the
dollar and it appreciates, decreasing the
dollar price of the peso.
The higher real IR in Canada
would attract more financial
capital “inflows” from overseas,
appreciating the Canadian
dollar, and decreasing its
exports because they are
now more expensive.
Remember that physical capital ‘chases’ lower interest rates and financial capital 'chases' higher interest rates.  

8. Capital Stock in International Value United States of the Dollar
(51%) 3. With an increase in investment demand in the U.S. the real interest rate
rises. In this situation, the most likely change in the capital stock in the U.S.
and in the international value of the dollar would be which of the following?
Capital Stock in International Value
United States of the Dollar
a. Increase Decrease
b. Increase No change
c. Increase Increase
d. Decrease Increase
e. No change Decrease
(64%) 4. Which of the following would cause the U.S. dollar to
increase in value compared to the Japanese yen?
a. An increase in the money supply in the U.S.
b. An increase in interest rates in the U.S.
c. An increase in the U.S. trade deficit with Japan
d. The U.S. purchase of gold on the open market
e. The sale of $2 billion dollars worth of Japanese television sets to the U.S.
More real investment would result in an
increase in real capital stock in the U.S.
The increase in the real interest rate would
increase financial investment demand
for the dollar as it appreciates.
(71%) 5. Which of the following best explains why many U.S. economists support
free trade?
a. Workers who lose their jobs can collect unemployment compensation.
b. It is more important to reduce world inflation than to reduce U.S. unemployment.
c. Workers are not affected; only business suffer.
d. The long-run gains to consumers & some producers exceed the losses to other producers.
e. Government can protect U.S. industries while encouraging free trade.

9. Appreciation/Depreciation Practice
1. If Japan buys 10 million iPhones
the dollar would (appr/depr) and our
imports from Japan would (incr/decr).
2. If U.S. in. rates are increasing faster
than Japan’s, the dollar would (appr/depr)
and our exports would (increase/decrease).
3. If prices are dropping more in Japan
than in the U.S., the yen will (appr/depr)
and Japan’s imports will (increase/decrease).
4. If the U.S. growth rate is faster than that of Japan,
the dollar will (appreciate/depreciate) and U.S.
imports from Japan will (increase/decrease).
5. If the dollar price of the yen decreases, the
dollar has (appreciated/depreciated) and our

10. Appreciation/Depreciation Practice [continued]
6. If Russia sells 10 bil. worth of oil to the
U.S. the ruble would (appr/depr) and their
imports from the U.S. would (incr/decr).
7. If U.S. in. rates are decreasing faster here
than in Canada, the dollar would (appreciate/
depreciate) & U.S. exports would (incr/decr).
8. If prices are increasing more in Japan
than in the U.S., the dollar will (appr/depr)
and our exports will (increase/decrease).
9. If the U.S. growth rate is slower than that of Canada,
the Canadian dollar will (appreciate/depreciate) & Canada’s
exports to the U.S. will (increase/decrease).
10. If the dollar price of the euro increases, the
dollar has (appreciated/depreciated) and our our
imports from France will (increase/decrease).

11. Practice Quiz 1 1. If more Thai bahts are required to buy a dollar,
then the baht has (appreciated/depreciated), &
Thai exports to the U.S. should (increase/decrease).
2. If Latvia’s demand for U.S. iFuzzy iWuzzies decrease,
then Latvia’s Lat will (apprec/deprec) & Latvia’s
imports from the U.S. will (increase/decrease).
3. If in. rates are decreasing faster in S.Korea[4%]
than in Cuba[8%], the Korean won will (appr/depr)
& Korea’s exports to Cuba will (increase/decrease).
4. If Malaysia’s price level is decreasing faster than that of Brazil,
the Malaysian ringgit will (apprec/deprec) & Malaysia’s exports
to Brazil will (increase/decrease).
5. If growth rate is less rapid in Djibouti than in Swaziland,
then the Djibouti bouti will (appreciate/depreciate) and
Djibouti’s exports will (increase/decrease).
6. If the Euro price of the S. Korean won decreases, the Euro has
(apprec/deprec) & European exports to Korea will (incr/decr).
7. If interest rates are increasing faster in Zambia than in Spain,
the Zambian Kwachi will (appreciate /depreciate) and Zambia’s
imports from Spain will (increase/decrease).

12. Practice Quiz 2 1. If Korea buys 2 million fewer American autos
the dollar would (appreciate/depreciate) & our
exports to Korea would (increase/decrease).
2. If U.S. interest rates decrease faster than
Haiti’s, the dollar would (appreciate/depreciate) &
our imports would (increase/decrease).
3. If prices are dropping more in Mexico than
in the U.S., the peso will (appreciate/depreciate)
and Mexico’s exports will (increase/decrease).
4. If the U.S. growth rate is faster than that
of China, the dollar will (appreciate/depreciate) and U.S.
exports to China will (increase/decrease).
5. If the dollar price of the renminbi increases, the
dollar has (appreciated/depreciated) and our imports
from China will (increase/decrease).
6. If Zimbabwe wants to buy 3 million American iFuzzy iWuzzys,
the dollar (appreciates/depreciates) and our imports from
Zimbabwe should (increase/decrease).
7. If the bouti price of the dollar increases the bouti will
(appreciate/depreciate) and their exports will (increase/decrease).
Practice Quiz 2

13. Practice Quiz 3 1. If Djibouti buys 4 mil. more U.S. iFuzzy iWuzzies
the dollar would (appreciate/depreciate) & our
exports to Djibouti would (increase/decrease).
2. If U.S. interest rates are increasing faster
than Cuba’s, the dollar would (appr/depr) &
our imports from Cuba would (incr/decr).
3. If prices are increasing more in Canada than
in the U.S., the Canadian loonie will (appr/depr)
and Canada’s exports will (increase/decrease).
4. If the U.S. growth rate is slower than that
of China, the dollar will (appreciate/depreciate) and U.S.
exports to China will (increase/decrease).
5. If the dollar price of the renminbi decreases, the
dollar has (appreciated/depreciated) and our
imports from China will (increase/decrease).
6. If the Congo wants to buy 2 million American iPiggy iWiggies,
the dollar (appreciates/depreciates) and our imports from
the Congo should (increase/decrease).
7. If the euro price of the dollar decreases the euro will
(appreciate/depreciate) and their exports will (increase/decrease).
Practice Quiz 3

14. Balance of Payments [BOP]
Measure of money inflows and outflows between the U.S. and the Rest of the World (ROW).
Inflows are referred to as CREDITS
Outflows are referred to as DEBITS
Balance of Payments is divided into 3 accounts.
Current Account – transactions that involve “the three nets”, net exports, net investment and net transfers
Capital/Financial Account [Capital Account is “net debt forgiveness” and Financial Account is net purchases of real and financial assets]
Official Reserves Account – net foreign currency
[foreign currency holdings of the Fed]

15. Double Entry Bookkeeping
OUT
Every transaction in the balance of payments is recorded twice in accordance with standard accounting practice.
Ex. U.S. manufacturer, John Deere, exports $50 million worth of farm equipment to Ireland.
A credit of $50 million to the current account.
( - $50 million worth of farm equipment or physical assets).
A debit of $50 million to the capital/financial account.
( + $50 million worth of Euros or financial assets).
Notice that the two transactions offset each other. Theoretically, the balance of payments should all ways equal zero…Theoretically

16. Double Entry Bookkeeping
OUT
Lucky for you, in AP Macroeconomics we only worry about the 1st half of the transaction. We simplify and see the export of farm equipment as a credit (inflow of dollars) to the current account.
Why then, did I mention double entry bookkeeping?
To help you understand that the current account and capital/financial account are intrinsically linked together and help balance each other?
Yes, that’s it!

17. Current Account – “the three nets”
Net Exports or Balance of Trade
Exports of Goods/Services – Import of Goods/Services
Exports create a credit to the balance of payments
Imports create a debit to the balance of payments
Net Investment Income [Interest, dividend, rent & profit income]
Interest, dividend, and profit income earned by Americans abroad minus the same income paid to foreigners.
Ex. Payments to American basketball players playing for European teams minus payments to Manu Ginobli, Yao Ming, Pau Gasol, Steve Nash and Dirk playing in the U.S.
Net Transfers
Foreign aid, pensions, money sent back home, etc.
Ex. Mexican migrant workers send money to family in Mexico. [Mexican workers send $24 billion back to Mexico.]
MVP
Capital/Financial Account
Capital Account [net “debt forgiveness”] & Financial Account [foreign purchase
of U.S. real & financial assets & U.S. purchase of foreign real & financial assets.]

18. Balance of Payments – sum of all the transactions that take place between U.S. residents and the residents of all foreign nations.
There are three components: the Current Account, the Capital/ Financial Account, and the Official Reserves.
The Current Account includes [3 nets]four things:
1. Goods [balance on goods (merchandise)]
2. Services [balance on goods and services]
3. Net investment income [interest, dividend, & profit income]
4. Net transfers [foreign aid, pensions, money sent back home, etc.]
The Capital and Financial Account includes three items:
1. Balance on capital account [net “debt forgiveness”]
2. Foreign purchases of U.S. assets [real or financial] in U.S.
3. U.S. purchases of foreign assets [real or financial] abroad.
The difference between these two accounts is the “balance of payments.”
They should balance.
If not, official reserves will be used to balance them.
[a + here means we will export a stock of foreign money ($’s will enter the U.S.)]
[a – here means we will import a stock of foreign money ($’s will exit the U.S.)]
Net Exports
Financial
Account

19. 18th Ed. Balance of Payments - 2009
[If you bought a parachute from a factory in Germany–Current Account] [If you bought a parachute factory in Germany – capital investment, so Capital Account]
18th Ed. Balance of Payments
Current Account [trade in currently produced goods, svcs, net investment & transfers]
(1) U.S. goods exports……………………………………………$+1,046
(2) U.S. goods imports………………………………………..…... -1,563
(3) Balance on goods [visibles]………..…………………………………………..$-517
(4) U.S. exports of services [shipping, insur., tourists, bank.] +509
(5) U.S. imports of services…………………………………..…….- 371
(6) Balance on services [invisibles]………………………
(7) Balance on goods and services…………………………………….…………
(8) Net investment income (income earned for svc of exported capital [money]
[Profits received from overseas investment (interest, dividends, and rents)]
………………………………………………………………………
(9) Net transfers (gifts given to the indivs, foreign aid, pensions, etc.)…… - 130
(10) Balance on current account…………………………………………………..-420
Capital Account [a “net” account that mainly measures “debt forgiveness”]
(11) Balance on capital account ………………………………..…………………....-3
Financial Account [buying/selling of physical & financial assets (stock/bonds)]
(12) Foreign purchases of assets in the U.S. …………………
(12) U.S. purchases of assets abroad……………….…………… -125
(13) Balance on financial account…………………………………………….…..+423
(14) Balance on capital and financial account………………………………….+420 $0 $0

20. Current or Capital/Financial Account
Current Account - something is physically transferred to another country.
Capital/Financial Acct – nothing is physically transferred but ownership of
the real [land/factory] or financial asset [stocks/bonds].
_____ 1. Joe buys $30,000 worth of stock from Korea’s Hyundai.
_____ 2. France buys bombers and machine guns manufactured
in N. Carolina.
_____ 3. Toyota builds a Tundra manufacturing plant in
San Antonio, TX.
_____ 4. An American purchases a Japanese made Toyota Prius.
_____ 5. Boeing sells a new 787 to France.
_____ 6. An ARAMCO employee working in Saudi Arabia sends
most of his pay to his family in Plano, TX.
_____ 7. Americans donate $100 million in earthquake relief to
Chinese relief organizations.
_____ 8. The U.S. exports 50 tons of steel to Ireland.
_____ 9. Ford buys three manufacturing plants in Taiwan.
_____ 10. Japanese banks purchase U.S. Treasury Bonds.
Cap/Finan.
Cur.Acct
Cap/Finan.
Cur.Acct
Cur.Acct
Cur.Acct
Cur.Acct
Cur.Acct
Cap/Finan.
Cap/Finan.

21. Current Acct+Capital/Financial Acct = 0 Capital/Financial Acct
Current=Short term
Capital=Long term
Current Acct+Capital/Financial Acct = 0
Capital/Financial Acct
From the 2005 Macro MC Exam [Most Missed Question]
(16%) 7. If a country has a current account deficit, which of the following must be true?
a. It must also show a deficit in its capital/financial account.
b. It must show a surplus in its capital/financial account.
c. It must increase the purchases of foreign goods and services.
d. It must increase the domestic interest rates on its bonds.
e. It must limit the flow of foreign capital investment.

22. Question 2 from 2008 FRQ: 6 pts [2+2+2]
2. Balance of payments accounts record all of a country’s international transactions during a year.
Two major subaccounts in the balance of payments accounts are the current account and the capital/financial account.
In which of these subaccounts will each of the following transactions be recorded?
(i) A United States resident buys chocolate from Belgium.
Answer to 2. (a) (i):
Chocolate from Belgium would go in the current account as it includes the import of goods.
1 pt – current account
(ii) A United States manufacturer buys computer equipment from Japan.
Answer to 2. (a) (ii):
Computer equipment by a U.S. manufacturer would also be classified as an import so it would also go on the current account.
1 pt – current account
(b) How would an increase in the real income in the United States affect the United States current
account balance? Explain.
Answer to 2. (b):
An increase in real income would make U.S. citizens richer. We would buy more imports,
decreasing net exports, and increasing the deficit on the current account.
2 pts - 1 pt – imports increase or Xn decrease.
1 pt – current account balance decreases or current account balance goes into deficit.

23. 17th Ed. U.S. Goods export………………….…….…..+$100
U.S. Goods imports……………………………...-80
U.S. Service exports…………………………
U.S. Service imports………………………….…-90
Net Investment income………………..……….+20
Net transfers………………………………….…..-15
Balance on capital account …………………….-5
Foreign purchase of assets in the U.S………+45
U.S. purchases of assets abroad……………..-10
Official Reserves…………………………………. -5
17th Ed.
1. The U.S. is experiencing a balance on goods (deficit/surplus) of ($10/$20/$30)
billion.
2. The U.S.’s balance on goods & services is a (deficit/surplus) of ($30/$40)
3. The U.S.’s balance on the current account is a (deficit/surplus) of ($25/$35).
4. The balance on the capital and financial account is a (surplus/deficit) of
($25/$30/$40).
5. The U.S. is experiencing a balance of payments (surplus/deficit) of $5.
[don’t include official reserves here]
6. The “official reserves account indicates the U.S. (imported/exported)
$5 billion of its stock of foreign reserves.
[A + here means we will export a stock of foreign money ($’s will enter U.S.)]
[A – here means we will import a stock of foreign money ($’s will exit U.S.)]

24. 18th Ed. -$25 $5 $30 $5 -$30 -$50 U.S. Goods export………………….…….…..+$100
U.S. Goods imports……………………………...-80
U.S. Service exports…………………………
U.S. Service imports………………………….…-90
Net Investment income………………..……….+20
Net transfers………………………………….…..-15
Balance on capital account …………………….-5
Foreign purchases of assets in the U.S…… +45
U.S. purchases of assets abroad…………… -10
Official Reserves…………………………………. -5
Balance on Goods
$20
G/S
-$30
Bal. on Curr. Acct.
-$50
Current
Account
-$25 $5
18th Ed.
Balance of
Payments $5
Balance on Cap.
& Financial Acct.
$30
1. The U.S. is experiencing a balance on goods(deficit/surplus)of ($10/$20/$30).
2. The U.S.’s balance on goods & services is a (deficit/surplus) of ($30/$40) bil.
3. The U.S.’s balance on the current account is a (deficit/surplus) of ($25/$35).
4. The balance on the capital and financial account is a (surplus/deficit) of
($25/$30/$40).
5. The U.S. is experiencing a balance of payments (surplus/deficit) of $5.
[don’t include official reserves here]
6. The “official reserves account indicates the U.S. (imported/exported)
$5 billion of its stock of foreign reserves.
[A + here means we will export a stock of foreign money ($’s will enter U.S.)]
[A – here means we will import a stock of foreign money ($’s will exit U.S.)]

25. Answer the next 8 questions[33-40]
33. The balance on goods is a
(deficit/surplus) of ($25/$30/$40) billion.
34. The balance on goods and services is a
(deficit/surplus) of ($25/$45/$55) billion
35. The balance on the current account is a
(deficit/surplus) of ($20/$25/$30) billion.
36. The balance on the capital account is a
(deficit/surplus) of ($10/$20/$30) billion.
37. This country is experiencing a balance of payment
(surplus/deficit) of ($10/$20).[Do not include official reserves]
38. The “official reserves” account indicates this country (imported/exported) $10 billion of its
stock of foreign reserves.
39. If the foreign purchases of U.S. assets had been +$45 instead of +$30, then this country would have to (import/export) a $5 billion stock of foreign currency & official reserves would read (-$5/+$5).
40. The current account, capital account, & official reserves must always net to (0/50/100).
Goods exports……….………………..+$45
Goods imports….………………………-$75
Service exports……………………….+$15
Service imports………………………..-$10
Net investment income……………..-$10
Net Transfers………………………… +$15
Balance on capital account…………. -$5
Foreign purchases of U.S. Assets..+$30
U.S. purchases of assets abroad… -$15
Official Reserves………………………+$10
17 Ed.
-$20
-$10 $5
$10
$25
$45
-$5
41. We give (inpayments/outpayments) for imports & get (inpayments/outpayments) for exports.
42. U.S. export transactions create foreign (demand for/supply) dollars[appreciation] & this
satisfaction (increases/decreases) the supplies of foreign monies held by U.S. banks [depreciation].
43. If we brought home our 40,000 troops in South Korea, this would contribute to a
U.S. balance of payments (surplus/deficit).
44. U.S. tourists traveling in large numbers to Europe would contribute to a U.S. balance of
payments (surplus/deficit).
45. The U.S. balance of payments show the balance between (all/some of) the payments the
U.S. receives from foreign countries and (all/some of) the payments which we make to them.
46. If a nation’s merchandise exports are $60 billion, while its merchandise imports are
$70 billion, this nation is experiencing a balance of trade (surplus/deficit) of $10 billion.
47. The (current/capital) account includes trade in currently produced goods/services[X-M].
48. The (current or capital/financial) account reflects flows of real [land, factories, etc.] and
financial assets [securities].
49. There (must/must not) always be a balance of a nation’s total international payments.
[includes “official reserves”]
50. A deficit on the current account tends to cause a (deficit/surplus) on the capital account.

26. Review for Global Trade
“I have a comparative advantage.”
Review for Global Trade

27. Absolute & Comparative
Advantage Review
[Outputs & Inputs]

28. Comparative Advantage
Brazil’s DCC
Peru’s DCC
1C = __ P
__ C = 1P 2
1C = __P
1 P = __C 10 10 2 5
Pastries 5
2 ½
Pastries
2 ½ 5 10 5 10
Crusts
Crusts
Terms of Trade
[or anywhere between ½ P & 2 P]
[like ¾ , 1 ¼ , 1 ½, or 1 ¾ P]
1C = ____ 1P
Peru will produce Crusts and trade with Brazil for 1 Pastry [better than ½ P]
Brazil will produce Pastries & trade with Peru for 1 Crust [better than ½ C]
*Both Brazil and Peru are able to consume (CPC) beyond their PPCs.
_______ has an absolute advantage [absolutely more] in pastries.
Brazil
_______ has an absolute advantage [absolutely more] in crusts.
Peru

29. Going to turn inputs into outputs
Mexico’s PPF (tons)
U.S. PPF (tons) 60 90
Product A B C D E
Avocados
Soybeans
DCC: 1S costs ___A
___ S costs 1A
Product A B C D E
Avocados
Soybeans
DCC: 1S costs ___A
___ S costs 1A
Avocados
Avocados 4
24 A
33 A
57 A 3
19 S
9 S
28 S
1/3 30 15
Terms of Trade: 1S = ___ A
Soybeans
3.5
Soybeans
1. In Mexico, the opportunity cost of 1S is (1/3 or 4 or 5 ) avocados.
2. If these 2 nations specialize, Mexico will produce (avocados/soybeans) & the
U.S. will produce (avocados/soybeans).
3. Mexico has an absolute disadvantage in
(avocados only/soybeans only/both avocados and soybeans).
4. If both produced at combination “C” prior to specialization, what would be the
gains after trade? (0/3/2/10) tons of avocados and (1/3/2/10) tons of soybeans.
5. The terms of trade would be 1 ton of soybeans for (1/3/4/3.5) tons of avocados.
Djibouti
Caviar 10 hours
Wheat 5 hours
DCC: Djibouti
1C costs ___ W
___C costs 1W
Mexico
Caviar 18 hours
Wheat 6 hours
DCC: Mexico
1C costs ___ W
___C costs 1W 2 3
1/3
Terms of Trade: 1C = ___ W
Going to turn inputs into outputs
2.5
6. (Djibouti/Mexico) has an absolute advantage in both commodities.
7. (Djibouti/Mexico) has a comparative advantage in producing wheat.
8. (Djibouti/Mexico) has an absolute disadvantage in both commodities.
9. Djibouti/Mexico) has a comparative advantage in caviar.
10. Trade can occur between the two when 1 caviar is exchanged for(1/2.5/3) wheat. 29

30. Absolute Advantage [Outputs v
Absolute Advantage [Outputs v. Inputs] Remember that with outputs or quantity, the larger number indicates absolute advantage; that country can produce “absolutely more” with the same inputs, and is more efficient.
Product
Market
And with inputs (hours), the smaller number indicates absolute
advantage; that country is more efficient because it can produce
a good “absolutely faster” the same output.
Resource
Market

31. “Let’s change inputs into outputs.”
Output v. Input
[Comparative & Absolute Advantage]
Rabbit
1 G = 3 B
1/3 G=1B
Rabbit
1 B = 3 G
1/3 B=1G
Wabbit
1 G = 2 B
1/2 G=1B
Wabbit
1 B = 2 G
1/2 B=1G
Rabbit
Wabbit
Rabbit
Wabbit
Terms of Trade: 1G = 2.5 B
Terms of Trade: 1B = 2.5 G
Product Market [outputs]
Country Guns Butter
Rabbit units 120 units
Wabbit 20 units units
Resource Market [inputs]
Country Guns Butter
Rabbit hours 120 hours
Wabbit 20 hours hours
What country has an absolute
advantage in guns?
What country has an absolute
advantage in guns?
Rabbit
Wabbit
Why does Rabbit have an
absolute advantage in guns?
Why does Wabbit have an
absolute advantage in guns?
Wabbit can produce guns
absolutely faster than Rabbit
[20 hours v. 40 hours]
Rabbit can produce absolutely
more guns than Wabbit
[40 units v. 20 units]
What country has a comparative
advantage in guns?
What country has a comparative
advantage in guns?
Rabbit
Wabbit
“Let’s change inputs into outputs.”
Wabbit can produce guns at a lower
opportunity cost [2 butters v. 3 butters]
Rabbit can produce guns at a lower
opportunity cost [1/3 butter v. 1/2 butter]

32. “Strong Dollar” 81 82 83 84 85 81 82 83 84 85 81 82 83 84 85 Exports
Strong and Weak Dollar
As Interest Rates Rose . . .
[all the way to 13%]
“Strong Dollar”
The dollar got stronger and stronger
“Exports decreased. Agricultural exports dropped from $44 billion to $28 billion as foreign agricultural goods became cheaper.”
Exports
[Decreased]
Imports
[Increased]
Imports increased as they became cheaper.

33. U.S. will supply more $s for ¥. U.S. will supply fewer $s for ¥.
Appreciation/Depreciation
D1$ S$
[Exchange Rate: $1 = Y100]
Price D2
Japan will supply
less yen for dollars.
¥/$
¥ looking for $’s
$’s looking for ¥
S2¥
U.S. will supply more $s for ¥. D¥
$/¥
¥150 E2 D$ S$
¥/$ S$
S1¥ D
¥150
S2¥ E2 S$
$1.50 E2
Yen
depreciates D D $1
¥100 E1
¥100 A
Yen
appreciates A
.50 E2 A
¥50 E2
¥50 D
# of ¥ A
Japan will supply
more yen for dollars. E3
# of Dollars A D D3
U.S. will supply fewer $s for ¥.
Quantity of Dollars
X M D A
M X
+ -
Taste [products/assets]
+ -
+ -
Interest Rates
+ -
+ -
Price Level
+ -
+ -
Growth Rate
+ -
+ -
Currency Price
+ -

34. APPRECIATION of a Currency
1. Increase in taste
[more demand for a country’s products or assets]
2. Increase in interest rates
[Overseas investors increase their investments there.]
3. Decrease in price level
[overseas buyers want to buy our cheaper goods.]
4. Decrease in growth rate
[A country’s declining economy results
in them buying less from other countries;
decreasing demand for their currency
and thus appreciating the declining
economy’s currency] 5.
Decrease in the price of a currency
relative to the other

35. Quiz 4 1. If Costa Rica buys 1 mil. fewer Dell computers
the dollar would (appreciate/depreciate) & our
exports to Costa Rica would (increase/decrease).
2. If U.S. interest rates decrease faster than
Thailand’s, the baht would (appreciate/depreciate) &
their imports would (increase/decrease).
3. If prices are dropping more in Mexico than
in the U.S., the peso will (appreciate/depreciate)
and Mexico’s exports will (increase/decrease).
4. If Afghanistan’s growth rate is faster than that of China,
the Afghani will (appreciate/depreciate) and Afghanistan’s
exports to China will (increase/decrease).
5. If the dollar price of the Kwacha [Zambia] increases,
the dollar has (appreciated/depreciated) and our
imports from Zambia will (increase/decrease).
6. If Haiti wants to buy 3 million more American iDoggy iWoggies,
the dollar (appreciates/depreciates) and our imports from
Haiti should (increase/decrease).
7. If the quetzal (Guatemala) price of the dollar increases the
quetzal will (appreciate/depreciate) and their imports will (increase/decrease).
Quiz 4

36. Quiz 5 1. If Djibouti buys 2 mil. fewer U.S. iFuzzy iWuzzies
the dollar would (appreciate/depreciate) & our
exports to Djibouti would (increase/decrease).
2. If U.S. interest rates are increasing faster
than Ghana’s, the dollar would (appr/depr) &
our imports from Ghana would (incr/decr).
3. If prices are increasing more in Eritrea than
in the U.S., the Eritrean birr will (apprea/deprea)
and Eritrea’s imports will (increase/decrease).
4. If the U.S. growth rate is faster than that of Botswana,
the dollar will (appreciate/depreciate) and U.S.
exports to Botswana will (increase/decrease).
5. If the dollar price of the Croatian kuna increases, the
dollar has (appreciated/depreciated) and our
imports from Croatia will (increase/decrease).
6. If the Congo wants to buy 6 million Lindsay Lohan
dolls, the dollar (appreciates/depreciates) and our
imports from the Congo should (increase/decrease).
7. If the markka (Finland) price of the dollar increases the
markka will (appreciate/depreciate) and their imports will (increase/decrease).
Quiz 5
Lohan Doll

37. 17th Ed. -$25 $5 $30 $5 -$30 -$50 U.S. Goods export………………….…….…..+$100
U.S. Goods imports……………………………...-80
U.S. Service exports…………………………
U.S. Service imports………………………….…-90
Net Investment income………………..……….+20
Net transfers………………………………….…..-15
Balance on capital account …………………….-5
Foreign purchases of assets in the U.S…… +45
U.S. purchases of assets abroad…………… -10
Official Reserves…………………………………. -5
Balance on Goods
$20
G/S
-$30
Bal. on Curr. Acct.
-$50
Current
Account
-$25 $5
Balance of
Payments $5
Balance on Cap.
& Financial Acct.
$30
1. The U.S. is experiencing a balance on goods(deficit/surplus)of ($10/$20/$30).
2. The U.S.’s balance on goods & services is a (deficit/surplus) of ($30/$40) bil.
3. The U.S.’s balance on the current account is a (deficit/surplus) of ($25/$35).
4. The balance on the capital and financial account is a (surplus/deficit) of
($25/$30/$40).
5. The U.S. is experiencing a balance of payments (surplus/deficit) of $5.
[don’t include official reserves here]
6. The “official reserves account indicates the U.S. (imported/exported)
$5 billion of its stock of foreign reserves.
[A + here means we will export a stock of foreign money ($’s will enter U.S.)]
[A – here means we will import a stock of foreign money ($’s will exit U.S.)]

38. The End

39. D A D A S$ M X X M Appreciation/Depreciation D1$ + - + - + - + - + -
Price D2
¥/$
¥ looking for $’s
$’s looking for ¥
¥150 E2 D
Yen
depreciates
¥100
[Exchange Rate: $1 = Y100] E1 A
Yen
appreciates
¥50 E3 D3
Quantity of Dollars
X M D A
M X
+ -
Taste [products/assets]
+ -
+ -
Interest Rates
+ -
+ -
Price Level
+ -
+ -
Growth Rate (Y)
+ -
Currency Price
+ -
+ -

40. Graph Both Countries D S D S D S D S D S S D D D S S
1. Show how an “ increase in taste”
for Japanese cars would affect the
market for the Yen and the Dollar.
$ Price of Yen
Yen Price of $ $1 e1
¥100 e1
# of Yen
# of Dollars D S D S
2. How would an increase in Mexico’s
real interest rate affect the value of
the Peso and the value of the Euro?
Euro Price of Peso
Peso Price of Euro
€100 e1
P16 e1
# of Pesos
# of Euros D S S D
3. How would high inflation in South
Korea affect the market for the Won
and the Dollar?
$ Price of Won
Won Price of $ $1 e1
W1,030 e1
# of Won
# of Dollars D D S S
4. How would a U.S. economic
expansion affect the value of the
Dollar and the value of the Yen?
Yen Price of $
¥100 e1
$ Price of Yen $1 e1
# of Dollars
# of Yen

41. Graph Both Countries D S D S D S D S D S S D D D S S ¥ price of $
5. There is a change in consumer
preferences [Taste] for U.S. Goods
by the Japanese.
¥100 e1 $1 e1
# of Dollars
# of Yen
¥ price of $
$ price of ¥ D S D S
6. Interest Rates in the U.S.
INCREASE relative to the Interest
Rates in Japan.
¥100 e1 $1 e1
# of Dollars
# of Yen
¥ price of $
$ price of ¥ D S S D
7. There is a change in consumer
preferences [Taste] for Japanese
cars, computers and airplanes by
Americans.
¥100 e1 $1 e1
# of Dollars
# of Yen
¥ price of $
$ price of ¥
8. The U.S. economy is in a
strong recovery after the GREAT
RECESSION. GDP, or National Y,
in the U.S. is now HIGHER and
Americans have more DI. D D S S
¥100 e1 $1 e1
# of Dollars
# of Yen