International Trade

I. Trade Deficits and Surpluses A. A Trade Surplus exists when a nation exports more goods and services than it imports A. A Trade Surplus exists when a nation exports more goods and services than it imports B. A Trade Deficit exists when a nation imports more goods and services than it exports. B. A Trade Deficit exists when a nation imports more goods and services than it exports.

I. Trade Deficits and Surpluses a. When a nation has a trade deficit, it is buying / consuming more in imports than it is earning / selling in exports. a. When a nation has a trade deficit, it is buying / consuming more in imports than it is earning / selling in exports. b. Nations can only do this by borrowing to pay for the difference. b. Nations can only do this by borrowing to pay for the difference. c. Because this debt must be repaid some day with interest, the debtor nation's future consumption will decrease. c. Because this debt must be repaid some day with interest, the debtor nation's future consumption will decrease.

I. Trade Deficits and Surpluses d. For the past several years, the United States has had huge trade deficits in the hundreds of billions of dollars. d. For the past several years, the United States has had huge trade deficits in the hundreds of billions of dollars.

II. The Foreign Exchange - The market in which one nation's currency, like US dollars, are exchanged for another nation's currency, like Japanese yen. The market in which one nation's currency, like US dollars, are exchanged for another nation's currency, like Japanese yen.

II. The Foreign Exchange - A. Why exchange currency? A. Why exchange currency? 1. To buy foreign made products (imports), we must pay for them using the foreign producers' currency. 1. To buy foreign made products (imports), we must pay for them using the foreign producers' currency. a. Japanese products must be paid for with yen a. Japanese products must be paid for with yen b. US products must be paid for with Dollars b. US products must be paid for with Dollars c. Therefore, to buy Japanese imports, we must exchange our dollars for yen. c. Therefore, to buy Japanese imports, we must exchange our dollars for yen.

II. The Foreign Exchange - B. Supply and Demand for Currency - Example: The British Pound in the foreign exchange market B. Supply and Demand for Currency - Example: The British Pound in the foreign exchange market 1. Supply of pounds comes from British citizens who want to exchange their pounds for dollars so that they can buy US exports. 1. Supply of pounds comes from British citizens who want to exchange their pounds for dollars so that they can buy US exports. 2. Demand for pounds comes from US citizens who want to exchange their dollars for pounds so that they can buy British imports. 2. Demand for pounds comes from US citizens who want to exchange their dollars for pounds so that they can buy British imports.

3. Graph - Supply and Demand for British Pounds.

II. The Foreign Exchange - C. Exchange Rates - How much of your currency it takes to buy 1 unit of another nation's currency. C. Exchange Rates - How much of your currency it takes to buy 1 unit of another nation's currency. 1. Formal Definition - The rate at which the currency of one nation can be exchanged for the currency of another nation 1. Formal Definition - The rate at which the currency of one nation can be exchanged for the currency of another nation 2. Exchange rates are determined in the foreign exchange market by the interaction of supply and demand for the foreign currency. 2. Exchange rates are determined in the foreign exchange market by the interaction of supply and demand for the foreign currency.

II. The Foreign Exchange - D. Appreciation and Depreciation D. Appreciation and Depreciation 1. Appreciation - When it costs less US money to buy a British Pound, then the dollar has appreciated and the pound has depreciated. 1. Appreciation - When it costs less US money to buy a British Pound, then the dollar has appreciated and the pound has depreciated. a. Example: $2 = £ 1  $1 = £1 a. Example: $2 = £ 1  $1 = £1 2. Depreciation - When it costs more US money to buy a pound, then the dollar has depreciated and he pound has appreciated. 2. Depreciation - When it costs more US money to buy a pound, then the dollar has depreciated and he pound has appreciated. a. Example: $2 = £ 1  $3 = £ 1 a. Example: $2 = £ 1  $3 = £ 1

II. The Foreign Exchange - 3. Increased US demand for the pound causes the pound to appreciate and the dollar to depreciate. 3. Increased US demand for the pound causes the pound to appreciate and the dollar to depreciate.

II. The Foreign Exchange - 4. Decreased US demand for the pound causes the pound to depreciate and the dollar to appreciate. 4. Decreased US demand for the pound causes the pound to depreciate and the dollar to appreciate.

E. Factors that determine the demand for pounds - Anything that increases or decreases the demand for British imports.

E. Factors that determine the demand for pounds 1. Changes in Consumer Tastes 1. Changes in Consumer Tastes a. If US consumers develop a taste for British goods, demand for pounds shifts to the right, the pound appreciates, and the dollar depreciates. a. If US consumers develop a taste for British goods, demand for pounds shifts to the right, the pound appreciates, and the dollar depreciates. b. If US consumers lose their taste for British goods, demand for pounds shifts to the left, the pound depreciates, and the dollar appreciates. b. If US consumers lose their taste for British goods, demand for pounds shifts to the left, the pound depreciates, and the dollar appreciates.

E. Factors that determine the demand for pounds 2. Income Changes 2. Income Changes a. If American's incomes go up, they will demand more of everything, including foreign made goods. a. If American's incomes go up, they will demand more of everything, including foreign made goods. b. If US incomes go up, demand for pounds shifts to the right, the pound appreciates, and the dollar depreciates. b. If US incomes go up, demand for pounds shifts to the right, the pound appreciates, and the dollar depreciates. c. If US incomes go down, demand for pounds shifts to the left, the pound depreciates, and the dollar appreciates. c. If US incomes go down, demand for pounds shifts to the left, the pound depreciates, and the dollar appreciates.

E. Factors that determine the demand for pounds 3. Relative Price-Level Changes 3. Relative Price-Level Changes a. If prices rise in the United States but not in Britain, Americans will demand more of the cheaper British goods. a. If prices rise in the United States but not in Britain, Americans will demand more of the cheaper British goods. b. If prices rise in the United States, demand for pounds shifts to the right, the pound appreciates, and the dollar depreciates. b. If prices rise in the United States, demand for pounds shifts to the right, the pound appreciates, and the dollar depreciates. c. If prices drop in the United States, demand for pounds shifts to the left, the pound depreciates, and the dollar appreciates. c. If prices drop in the United States, demand for pounds shifts to the left, the pound depreciates, and the dollar appreciates.

E. Factors that determine the demand for pounds 4. Relative Interest Rates 4. Relative Interest Rates a. If interest rates are high in Britain, people will want to invest in interest-earning investments there and will need to buy pounds to do it. a. If interest rates are high in Britain, people will want to invest in interest-earning investments there and will need to buy pounds to do it. b. If interest rates are high in Britain, demand for pounds shifts to the right, the pound appreciates, and the dollar depreciates. b. If interest rates are high in Britain, demand for pounds shifts to the right, the pound appreciates, and the dollar depreciates. c. If interest rates are low in Britain, demand for pounds shifts to the left, the pound depreciates, and the dollar appreciates. c. If interest rates are low in Britain, demand for pounds shifts to the left, the pound depreciates, and the dollar appreciates.

E. Factors that determine the demand for pounds 5. Speculation 5. Speculation a. Currency speculators buy currency if they believe that it is going to appreciate in the future. a. Currency speculators buy currency if they believe that it is going to appreciate in the future. b. If many speculators believe that pounds will appreciate, they will demand more pounds as an investment. b. If many speculators believe that pounds will appreciate, they will demand more pounds as an investment. c. This increased demand for pounds by speculators causes the very appreciation that they believed was going to occur, a self-fulfilling prophecy. c. This increased demand for pounds by speculators causes the very appreciation that they believed was going to occur, a self-fulfilling prophecy.

E. Factors that determine the demand for pounds 5. Speculation 5. Speculation d. If speculators purchase a lot of pounds, demand for pounds shift to the right, the pound appreciates and the dollar depreciates. d. If speculators purchase a lot of pounds, demand for pounds shift to the right, the pound appreciates and the dollar depreciates. e. If speculators sell a lot of pounds, demand for pounds shifts to the left, the pound depreciates and the dollar appreciates. e. If speculators sell a lot of pounds, demand for pounds shifts to the left, the pound depreciates and the dollar appreciates.

III. Finding Exchange Rates A. Exchange rates are found by using the same math you would use to solve for any variable. A. Exchange rates are found by using the same math you would use to solve for any variable. B. Always find the price of 1 unit of the currency you are looking for. B. Always find the price of 1 unit of the currency you are looking for. C. Variable Example: 200 X = 50 Y C. Variable Example: 200 X = 50 Y X = 50Y X = 50Y X = 1Y 2. 4X = 1Y

III. Finding Exchange Rates D. Currency Example: $200 = £50 D. Currency Example: $200 = £50 1. $200 = £50 1. $200 = £ $4 = £1 2. $4 = £1

IV. Exchange Rate Systems A. Flexible - Floating Exchange Rate System - Like the one we just described, it is a system that allows exchange rates to be determined by the interaction of supply and demand. A. Flexible - Floating Exchange Rate System - Like the one we just described, it is a system that allows exchange rates to be determined by the interaction of supply and demand. B. Fixed Exchange Rate System - A system in which the government buys and sells currency or exercises other controls to determine exchange rates as it sees fit. B. Fixed Exchange Rate System - A system in which the government buys and sells currency or exercises other controls to determine exchange rates as it sees fit.