International Economics International Trade and Foreign Exchange

International Trade International trade is based on David Ricardo’s Theory of Comparative Advantage A country has an absolute advantage when it can produce a product more efficiently than can another country. Trade between countries is beneficial when one country has a comparative advantage – the ability to produce a product relatively more efficiently, or at a lower opportunity cost.

PPC for each country… United States Brazil Coffee (tons) Wheat (tons) 45 40 35 30 25 20 15 10 5 5 10 15 20 25 30 5 10 15 20 Wheat (tons) A B

Total output will be greatest when each good is produced by the nation that has the lowest domestic opportunity cost for that good. U.S has comparative advantage in wheat. Brazil has comparative advantage in coffee Output v. Input Method of Calculating Opportunity Costs

Key Terms and Concepts in Trade Imports Exports Protective Tariff Revenue Tariff Quota

Protectionist Arguments National Defense Infant Industry Domestic Jobs Trade Imbalance (surplus v. deficit)

Examples of Economic Trade Organizations World Trade Organization - WTO (1995) G-20 General Agreement on Tariffs and Trade - GATT (1948) European Union - EU (1993) North American Free Trade Agreement - NAFTA (1994) Organization of Petroleum Exporting Countries – OPEC (1960) www.opec.org

U.S. Import Transaction American exports create a foreign demand for dollars which creates a supply of foreign currencies which are available to American buyers. Financing an American export reduces the supply of foreign currencies available and increases the domestic money supply.

Balance of Payments Current Account Balance on Goods & Services Balance on Current Account Trade Deficits & Surpluses Capital Account Balance on Capital Account Official Reserves Balance of Payment Deficits & Surpluses

Foreign Exchange What is the foreign exchange market and how does it affect the value of the dollar?

The Market for Currency P S EXCHANGE RATE: $2 = £1 3 2 1 Dollar depreciates Dollar price of one pound Dollar appreciates D Q Quantity of pounds

International Exchange Rate Systems The Gold Standard: Fixed Exchange Rates 1879 - 1934 Devaluation The Bretton Woods System IMF - Pegged Exchange Rates Official Reserves Gold Sales IMF Borrowing Managed Floating Exchange Rates G-8 Nations Interventions

Recent U.S. Trade Deficits Causes of the Trade Deficits American Economic Growth Declining U.S. Savings Rates Implications of U.S. Trade Deficits Increased Current Consumption Increased U.S. Indebtedness

Globalization and Economic Development Emerging Markets The Asian Tigers Outsourcing Developing Countries IMF World Bank Grameen Bank and Microlending