1 Chapter 11 International Trade These slides supplement the textbook, but should not replace reading the textbook

2 All nations can increase productivity, lower prices, increase jobs and standard of living Why trade with other nations?

3 Because the worlds resources are not evenly distributed around the globe Why is trade advantageous for all countries?

4 An increase in exports increases GDP A decrease in exports decreases GDP How does foreign trade effect GDP?

5 Shifts in the Economys PPF An increase in available resources Food Clothing FF'F' A A'A' Without international trade With international trade

6 It has something that other countries want What gives a countys currency value?

7 The price of one countrys currency measured in terms of another countrys currency What is a countrys exchange rate?

8 An increase in the number of units of a currency needed to purchase one unit of foreign exchange What does it mean when a currency is depreciated?

9 A decrease in the number of units of a currency needed to purchase one unit of foreign exchange What does it mean when a currency is appreciated?

10 The supply and demand for that currency on the international market What determines the exchange rates of different currencies?

11 Rates are determined by the forces of demand and supply without government intervention What are flexible exchange rates?

12 This is called floating What is it called when currencies are allowed to fluctuate?

13 Foreigners demand a another countrys currency for what that currency can buy in that country What determines the demand for a currency on the international market?

14 When citizens of a country buy goods and services from another country What determines the supply for a currency on the international market?

15 price levels rates of interest rates of growth political & economic stability What determines different exchange rates? Relative …

16 Equilibrium in the World Market Quantity on world market Value of the dollar D S Surplus Shortage

17 0 Effects of an Increase in Demand S D' D Value of the dollar Quantity on world market

18 0 Effects of an Decrease in Demand S D' D Value of the dollar Quantity on world market

19 Effects of a Decrease in Supply 0 D S S Value of the dollar Quantity on world market

20 Effects of a Increase in Supply 0 D S S Value of the dollar Quantity on world market

21 A dirty float occurs when a country influences the demand and/or supply of its currency on the international market What is a dirty float?

22 An exchange rate system that combines features of freely flexible rates with intervention by central banks What is a managed float system?

23 A managed float system What kind of system do we have today?

24 The measure of money that enters and leaves a country via trade with other nations What is the balance of trade?

25 The value of a countrys imports of goods is less than the value of its exports of goods What is a favorable balance of trade?

26 The value of a countrys imports of goods is greater than the value of its exports of goods What is an unfavorable balance of trade?

27 investments travel sending gifts How can money leave or enter a country other than trade?

28 Money can leave a country because of trade - but more money can enter the country in other areas Can the balance of payments offset the balance of trade?

29 Summarizes all economic transactions that occur during a given time period between residents of that country and residents of other countries What is a countrys balance-of-payments?

30 When there is more money entering a country than there is leaving a country What is a payments surplus?

31 If it is too favorable over time it can cause inflation When can a payments surplus be a problem?

32 When there is more money leaving a country than there is entering a country What is a payments deficit?

33 If it is too unfavorable it can cause unemployment When can a payments deficit be a problem?

34 When the amount of money entering equals the amount of money leaving At what point is equilibrium reached?

35 With a lot more money entering over a time, a currency will appreciate in value With a lot more money leaving over time, a currency will depreciate in value How are Balance of Payments Problems Resolved?

36 The value of a countrys currency fluctuates as the supply fluctuates on the world market Why is there a balance in the balance of payments?

37 An arrangement whereby the currencies of most countries are convertible into gold at a fixed rate What is the gold standard?

38 From 1879 to 1914, the international financial system operated under a gold standard When was the gold standard?

39 Any increase in the money supply would be limited to a countrys gold holdings What is one advantage of the gold standard?

40 Yes! If countries demanded payment for goods and services in gold we would pay in gold Did America honor gold payments after WWI?

41 During the Depression of the 1930s foreigners demanded payment in gold, thus depleting our gold supply What happened to this practice of paying in gold?

42 During World War I, the gold standard collapsed, limiting trade during the 1920s and 1930s When did the gold standard end?

43 The value of each currency was pegged to an ounce of gold What is the fixed exchange rate system?

44 From about 1945 to 1972 When was the fixed exchange rate system?

45 All foreign exchange rates were fixed in terms of the dollar and the dollar could be converted to gold at a fixed exchange rate What was the Bretton Woods Agreement?

46 $35 an ounce Under the Bretton Woods Agreement how much did we agree to exchange foreign holdings of dollars?

When was the Bretton Woods Agreement?

48 An increase in the official pegged price of foreign exchange in terms of the domestic currency What is currency devaluation?

49 An reduction in the official pegged price of foreign exchange in terms of the domestic currency What is currency revaluation?

50 Helps facilitate exchange rates by allowing countries to trade currencies What is the International Monetary Fund?

When was the IMF established?

52 How does the IMF help countries?

53 If the U.S. wants to devalue the dollar it will borrow dollars from the IMF and buy other currencies around the world If the U. S. wants to revalue the dollar it will borrow other currencies from the IMF and buy dollars around the world

54 Each country knew what its currency was worth in relation to foreign currencies What was the advantage of the fixed rate system?

55 The inflation in the 1970s led to a change in the value of all currencies What happened to the fixed exchange rate system?

56 In 1972 we uncoupled the dollar from the pegged international monetary system In what year did the Bretton Woods System collapse?

57 Yes! By each country specializing in certain exports non-productive activity is lessened Does specialization increase productivity?

58 In those goods and services that it has a comparative advantage What should a country specialize?

59 Producing something with lower opportunity costs than others What is comparative advantage?

60 Producing something better than others What is absolute advantage?

61 It should produce those things in which it has a comparative advantage What should a country produce?

62 Even if Americans were best at making wicker baskets our opportunity costs would be very high in this activity What is an example of comparative advantage?

63 If a country has a comparative advantage in a product that product should be produced if the job can be done good enough What is the good enough rule?

64 differences in resources economies of scale differences in tastes What are the reasons for international specialization?

65 When the world price is... > our price, export < our price, import = our price, will not trade When will we trade?

66 When the high wage worker is a lot more productive than the low wage worker When would a high wage worker be cheaper than a low wage worker?

67 Infrastructure Capital Education Skills Attitude What makes one worker more productive than another? Better

68 There are good and bad reasons for trade restrictions Why have trade restrictions?

69 tariffs import quotas export subsidies licensing agreement unreasonable standards How do we restrict trade?

70 Specific - applied to a specific good, like a barrel of oil Ad Valorem- a percentage of the price of imports at the port of entry What are two types of tariffs?

71 An increase in prices A decrease quantity in supplied A lower standard of living What are the effects of a tariff or quota?

72 The practice of selling a commodity abroad at a price that is below its cost or below the price charged in the home market What is dumping?

73 What are the three types of dumping?

74 Predatory is when the purpose of dumping is to drive competitors out of the market, this is rare Long-term is when there are economic reasons that a product can be sold at a low price, for example, less competition Sporadic occurs when there are excess inventories

75 What are arguments for tariffs and quotas?

76 National defense Protect infant industries Protect against predatory dumping Reduce unemployment Protect temporary declining industries Promote variety

77 What are arguments against trade restrictions?

78 Leads to retaliation Subsidizes weakness Works against comparative advantage Problems with policing & enforcing Encourages rent seeking

79 Treat all nations equally Reduce tariff rates Reduce import quotas What is the World Trade Organization (WTO)?

80 A market in Europe begun in 1958 as a way of creating barrier-free trade in Europe What is the Common Market?

81 Passed during the Clinton Administration to remove barriers of trade with Mexico What is North American Free Trade Agreement (NAFTA)?

82 END