1 International Economics

2 International trade – Microeconomic perspective – Comparative advantage – Trade barriers vs. free trade International finance – Macroeconomic perspective – Exchange rate determination

3 US Trade US trade deficit in goods and surplus in services US exports about 13% of its output – Chemicals – Agricultural products – Consumer durables – Semiconductors – Aircraft – U.S. provides about 8.5% of world’s exports

4 US Trade Principal U.S. imports include: – Petroleum – Automobiles – Metals – Household appliances – Computers

5 Why do countries trade? Nations have different resource endowments – Labor intensive – Land intensive – Capital intensive Comparative advantage – A nation has a comparative advantage in good A when it has a lower opportunity cost of producing A,compared with another nation.

Comparative Advantage Vegetables (Tons) Beef (Tons) Vegetables (Tons) Beef (Tons) (b) Mexico A Z (a) United States

7 Comparative Advantage

8 Trade Barriers and Export Subsidies Tariffs, import quota, nontariff barrier (NTB), voluntary export restriction (VER), and export subsidies Effects of trade barriers on prices, consumption, production, etc. Arguments for trade protection

9 Multilateral Trade Agreements General Agreement on Tariffs and Trade (GATT, ) World Trade Organization (WTO, 1995) European Union (EU) North American Free Trade Agreement (NAFTA)

10 International Finance Lending and borrowing among countries International asset transactions Currency exchange – daily global currency transaction volume is several trillion $.

11 Exchange Rates The price of a currency in terms of another currency  €1=$1.252 Demand vs. supply Appreciation vs. depreciation Revaluation vs. devaluation

12 Exchange Rate Determination Determinants of exchange rates Factors that change demand/supply – Changes in tastes – Relative income changes – Relative price-level changes Purchasing-power-parity theory – Relative interest rates – Relative expected returns on assets – Speculation