1. # McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. International Trade and Exchange Rates 20

2. 20-2 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

3. 20-3 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 LO1

4. 20-4 Some Key Trade Facts Principal U.S. imports include Petroleum Automobiles Metals Household appliances Computers LO1

5. 20-5 Global Snapshot LO1

6. 20-6 Global Snapshot LO1

7. 20-7 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 LO2 Comparative Advantage

8. 20-8 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 LO2

9. 20-9 Comparative Advantage LO2 Production Alternatives ProductABCDE Avocados020244060 Soybeans1510950 Production Alternatives ProductABCDE Avocados030336090 Soybeans302019100 Mexico’s Production Possibilities U.S. Production Possibilities

10. 20-10 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 LO2

11. 20-11 Comparative Advantage LO2 Country (1) Outputs before Specialization (2) Outputs after Specialization (3) Amounts Traded (4) Outputs Available after Trade (5) Gains from Specialization and Trade (4) – (1) Mexico 24 avocados60 avocados-35 avocados25 avocados1 avocados 9 soybeans0 soybeans+10 soybeans10 soybeans1 soybeans United States 33 avocados0 avocados+35 avocados35 avocados2 avocados 19 soybeans30 soybeans-10 soybeans20 soybeans1 soybeans Specialization According to Comparative Advantage and the Gains from Trade (in Tons)

12. 20-12 The Foreign Exchange Market LO3 $1 Will Buy… 44.49 Indian rupees 0.62 British pounds 0.96 Canadian dollars 11.72 Mexican pesos 0.82 Swiss francs 0.71 European euros 79.2 Japanese yen 1058 South Korean won 6.5 Swedish kronor 4.3 Venezuelan bolivares fuertes

13. 20-13 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 LO3

14. 20-14 Q 0 Dollar price of 1 pound Quantity of pounds P Flexible Exchange Rates The Market for Foreign Currency (Pounds) D1D1 S1S1 Dollar appreciates (pound depreciates) Dollar depreciates (pound appreciates) Exchange rate: $2 = £1 $2 $3 $1 Q1Q1 LO3

15. 20-15 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 LO3

16. 20-16 Trade Barriers and Export Subsidies Tariffs Import quota Nontariff barrier (NTB) Voluntary export restriction (VER) Export subsidy LO4

17. 20-17 Economic Impact of Tariffs Direct effects Decline in consumption Increase in domestic production Decline in imports Tariff revenue Indirect effects LO4

18. 20-18 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 LO4

19. 20-19 Three Arguments for Protection Increased domestic employment Cheap foreign labor Protection against dumping LO4

20. 20-20 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 LO5

21. 20-21 Multilateral Trade Agreements General Agreement on Tariffs and Trade (GATT) World Trade Organization (WTO) European Union (EU) North American Free Trade Agreement (NAFTA) LO5

22. 20-22 GATT Three principles: Equal, nondiscriminatory trade between member nations Reduction in tariffs Elimination of import quotas LO5

23. 20-23 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 LO5

24. 20-24 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 LO5

25. 20-25 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 LO5

26. 20-26 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 LO5

27. 20-27 U.S. Trade Deficits LO5 Billions of Dollars