International
Economics
Chapters 30 - 32
Trade: Exports and Imports
n
US Exports:
n
goods and
services Americans sell to foreigners
n
US Imports:
n
goods and
services foreigners sell to Americans
Trade deficit
n
Imports exceed
Exports
n
The US
has:
n
a trade deficit
for manufactured goods
n
…and a trade
surplus for services
International Trade
n
Since the 1960s,
the volume of international trade has increased for:
n
US
n
Rest of the world
n
US is the largest
exporter and the largest importer
n
Canada is our largest trading partner
International Trade
n
Trade between
private sector buyers and sellers who live in different nations
n
All behavior
patterns and incentives that apply to market behavior apply to international
trade
International Trade
n
Start with a
closed economy: price is PUS.
n
Foreign firms can
produce at a lower cost and sell at a lower price, PW.
n
Now open the
economy: foreign firms will enter the US market.
International Trade
n
Low-cost foreign
firms expand to the US
(1).
n
High-cost US
firms lose sales; cut production (2).
n
US consumers pay lower prices (3).
n
More wants/needs
are filled (4).
n
Imports sold in
US by foreign firms (5).
International Trade
n
Start with a
closed economy: price is PF.
n
US firms can produce at a lower cost and sell at a lower
price, PW.
n
Now open the
economy: US firms will enter the foreign market.
International Trade
n
Low-cost American
firms expand to a foreign country (1).
n
High-cost foreign
firms lose sales; cut production (2).
n
Foreign consumers
pay lower prices (3).
n
More wants/needs
are filled (4).
n
Exports sold in
foreign country by US firms (5).
The Basis for International Trade
n
Comparative advantage
– the ability to make a product at a lower opportunity cost than a competitor.
n
Foreign producer
has a comparative advantage in his product.
n
US producer has a comparative advantage in his product.
The Basis for International Trade
n
If foreign firms
produce at a lower opportunity cost than US firms,
n
They have the
comparative advantage.
n
Lower production
costs
n
Sell here at a
lower price
n
Foreign firms
profit and expand, and create jobs in the foreign country.
n
US firms lose sales, suffer losses and exit the industry, eliminating
jobs in the US.
The Basis for International Trade
n
If US firms
produce at a lower opportunity cost than foreign firms,
n
They have the
comparative advantage.
n
Lower production
costs.
n
Sell there at a
lower price.
n
US firms profit
and expand, creating jobs in the US.
n
Foreign firms
lose sales, suffer losses and exit the industry, eliminating jobs in the
foreign country.
Results of International Trade
n
In both
countries, low-cost firms:
n
expand their
markets
n
make profits
n
sell at a lower
price
n
drive high-cost
firms (both home and abroad) out of the industry.
Results of International Trade
n
In both
countries:
n
Low-cost firms
create new jobs.
n
High-cost firms
eliminate jobs.
n
Consumers buy
more at lower prices.
n
Standard of
living goes up.
n
There is a net
job increase.
Results of Free
International Trade
n
Inefficient,
wasteful, high-cost firms lose
n
Efficient,
low-cost, internationally competitive firms win
n
Consumers in all
countries win, they end up paying less for all goods
n
More output is
produced using fewer scarce resources, satisfying more wants and needs
n
Standard of
living rises in both countries
Protected International Trade
n
The government
interferes to “protect” the high-cost domestic firm, who doesn’t want to:
n
lose customers
n
eliminate jobs
n
Laws are passed
that will put the low-cost foreign firm at a disadvantage.
Tariff
n
A tax placed on
the imported good
Quota
n
A limit on the
number of goods that may be imported.
Results of Protected International Trade
n
Retaliation:
n
The other country
will a put a tariff or quota on the first nation’s goods
n
Restricting
imports reduces exports.
n
Internationally
competitively US firms lose sales and jobs.
Results of Protected International Trade
n
Inefficient,
wasteful, high-cost firms win
n
Efficient,
low-cost, internationally competitive firms lose
n
Consumers in all
countries lose, they end up paying more for all goods
n
Less output is
produced using more scarce resources, satisfying fewer wants and needs
n
Standard of
living falls in both countries
World Trade Organization
n
Goal: to “help
trade flow smoothly, freely, fairly, and predictably.”
n
Intended result:
freer international trade.
Paying for International Trade
n
Exports are paid
for in foreign funds.
n
They are used by
the US
to pay for imported goods
n
Imports require
us to pay out dollars.
n
They are used by
foreigners to pay for American exports
Foreign exchange market
n
Supply:
n
Those with one
currency for sale and will accept the other currency in payment.
n
Demand:
n
Those needing to
buy one currency using the other currency to pay for it.
Demand for a currency
n
Importers
n
Travelers
n
An increase in
demand for goods of a nation will increase the demand for its currency, and
vice versa
Supply of a currency
n
Exporters
n
Central bank
n
An increase in
exports to a nation will increase the supply of that nation’s currency in the
foreign exchange market, and vice versa
The foreign exchange market (2 charts)
The foreign exchange market
n
The market for euro:
n
An increase in
demand for the euro increases the price of the euro in dollars
n
The euro
appreciates and the dollar depreciates
n
Vice versa for a
decrease in demand for the euro
The foreign exchange market (2 charts)
The foreign exchange market
n
The market for dollars:
n
An increase in
demand for the dollar increases the price of the dollar in euros
n
The dollar
appreciates and the euro depreciates
n
Vice versa for a
decrease in demand for the dollar
The foreign exchange market
n
The two exchange
rates must be reciprocals of each other
n
If 1 euro = $1.50
n
Then $1 = 0.667
euro
Balance of Payments
n
If imports >
exports, foreign traders will hold a surplus of dollars.
n
They save or
directly invest these dollars
n
Savings are
borrowed by investors in $-based assets (mainly in the US)
n
Thus the trade
deficit generates an equal sized capital inflow into the US
A flexible exchange rate system
n
A free market for
currencies:
n
Not much
government interference.
n
An increase in
demand or a decrease in supply of a currency will increase its exchange rate
(appreciate its value)
n
A decrease in
demand or an increase in supply of a currency will decrease its exchange rate
(depreciate its value)
A fixed exchange rate system
n
Each government
fixes an exchange rate for its currency
n
Leads to
surpluses or shortages in the foreign exchange market
n
An excessive
surplus leads to devaluation of the currency
n
An excessive
shortage leads to a revaluation of the currency
Why Did the Dollar Depreciate against the
Euro?
n
The price of the
dollar (in terms of Euros) decreased.
n
Two
possibilities:
n
Supply of dollars
increased.
n
Demand for
dollars decreased.
n
The price of the
Euro (in terms of dollars) increased.
n
Two
possibilities:
n
Demand for Euros
increased.
n
Supply of Euros
increased.
Why Did the Dollar Depreciate against the
Euro?
n
The US
increased its demand for imported goods.
n
This increases
the demand for foreign currencies (the Euro)
n
This increases
the supply of dollars in the foreign exchange market to buy the foreign-made
goods.
Globalization
n
The importance of
international trade is growing:
n
more
international trade
n
more foreign
investment in America
n
more American
investment in other countries
Globalization
n
Increased
rapidly:
n
after the end of
the Cold War.
n
as technological
changes reduced the costs of transportation and communications.
n
as markets became
more open (less protection).
Benefits
n
Increased
international trade.
n
Higher standards
of living in trading countries.
n
Lower prices for
goods.
n
Greater variety
of products available.
n
Increased
productivity and innovation.
Costs
n
More off-shoring
(outsourcing).
n
Shifting of jobs
from one country to another.
n
Increased market
power for international corporations.
Outsourcing and the US
n
Many US jobs have been outsourced to other countries.
n
Many foreign jobs
have been outsourced to the US.
n
So far, more jobs
have been outsourced into the US
than out of the US.
n
Net US job
increase due to outsourcing.
Outsourcing and the US
n
Why do we only
hear about job loss in the US
due to outsourcing?