International Focus
International Trade
n
Trade between people and businesses who operate
in different countries.
n
Exports – goods produced here and sold to
people/firms in other countries
n
Imports – goods produced in foreign countries
and sold to people/firms here
International Trade
n
Trade deficit –
imports exceed exports.
n
Outcome:
n
we end up with
more satisfying goods than they do
n
they end up with
unspent dollars
n
What do they do
with those dollars?
n
they save them in
banks
n
banks then loan
them to borrowers who want to buy assets priced in dollars
Accounting for International Trade
n
Current account:
n
primarily follows
trade
n
US has a current
account deficit
n
A net $ outflow
n
Capital account:
n
primarily follows
asset purchases and sales
n
US has a capital
account surplus
n
A net $ inflow
n
International
trade brings foreign-made goods to the US and generates foreign investment in
US assets
n
Balance of
Payments: $ outflow = $ inflow
Specialization and Trade
n
Country A has the comparative advantage over
Country B if:
n
Country A can produce a good at a lower
opportunity cost than country B can.
n
A should specialize in that good and B should
become A’s customer.
Specialization and Trade
n
This is true for individuals, too:
n
Alice has the comparative advantage over Betty
if:
n
Alice can produce a good at a lower opportunity
cost than Betty can.
n
Alice should specialize in that good and Betty
should become Alice’s customer.
Specialization and Trade
n
People in countries that specialize and trade
have:
n
expertise in production
n
efficiency in resource use
n
a wider choice of goods
n
goods at lower prices
n
a higher standard of living
How does international trade begin?
n
Firms in country
A produce a good, but at a high
opportunity cost.
n
It is sold
domestically at a high price, PA.
How does international trade begin?
n
A firm in country
B produce that same good but at a lower
opportunity cost.
n
They enter
country A’s market, and…
n
They sell the
good at a lower price, PB.
How does international trade begin?
n
Supply for the
good in country A shifts right and prices fall.
n
The firms from B
gain sales: A’s imports (1).
n
Home firms from A
lose sales (2); some from A quit business.
n
Customers in A
buy more at lower prices.
What is the Outcome of Free International Trade?
n
In each country,
high cost, internationally noncompetitive firms lose sales.
n
cut back on
production or go out of business
n
lay off workers;
destroy jobs
n
In each country,
low cost, internationally competitive firms gain sales.
n
expand production
n
hire more
workers; create jobs
n
Increased
international trade requires expansion of the transportation industry.
n
create jobs in
transportation
What is the Outcome of Free International Trade?
n
Lower cost
foreign firms take sales away from high cost US firms in America.
n
American jobs are
lost.
n
Foreign jobs are
created.
n
Lower cost US
firms take sales away from high cost foreign firms in their country.
n
Foreign jobs are
lost.
n
US jobs are
created.
n
Goods are shipped
from one country to the other.
n
Transport jobs
are created.
n
In both
countries, there is a net job increase.
What is the Outcome of Free International Trade?
n
In each country,
consumers are better off:
n
they pay less for
goods
n
they have a wider
variety to choose from
n
their income can
buy more goods
n
their standard of
living goes up
n
In each country,
resources are more efficiently used by specialists
n
more is produced
from the same consumption of resources
Protection Policy
n
Domestic high cost, noncompetitive industries
seek protection from government from foreign competition.
n
They are afraid of:
n
Loss of jobs
n
Loss of sales
n
Going out of business
Protection Policy
n
Government imposes tariffs or quotas in imported
goods.
n
tariff – a tax on each imported good
n
quota – a restriction on the number of goods
that can be imported
Results of Protection Policy
n
In both countries:
n
High cost, inefficient firms win.
n
Low cost, inefficient firms lose.
n
Consumers lose.
n
Export firms lose sales.
n
There is a net job loss.
n
In both countries, standard of living falls.
Excuses to Protect
n
National defense argument.
n
Infant industry argument.
n
Antidumping argument.
n
Foreign subsidy argument.
n
Low wages argument.
n
Saving domestic jobs argument.
Foreign Exchange
n
International commerce requires two
transactions:
n
The exchange of goods for money, and…
n
The exchange of one currency for another.
Foreign Exchange Market
n
European sellers of imports to US and US travelers
to Europe have a:
n
supply of dollars.
n
demand for euros.
n
US sellers of exports to Europe and European
travelers to US have a:
n
supply of euros.
n
demand for dollars.
The foreign exchange market
n
The market for
the Euro:
n
S: supply of
Euros
n
D: demand for
Euros
n
P1: the price of
one Euro in terms of dollars
n
Q1: the total
number of Euros that will be bought and sold
The foreign exchange market
n
The market for
the Euro:
n
An increase in
demand for the Euro increases its price in dollars
n
The Euro
appreciates and the dollar depreciates
The foreign exchange market
n
The market for
the Euro:
n
An decrease in
demand for the Euro decreases its price in dollars
n
The dollar
appreciates and the Euro depreciates
Foreign Exchange Market
n
Start: $1.30 = 1
Euro or $1.00 = 0.77 Euro
n
If dollar price
of Euros falls:
n
$1.20 = 1 Euro
n
then, $1.00 =
0.833 Euro
n
the Euro price of
a dollar rises.
n
If dollar price
of Euros rises:
n
$1.40 = 1 Euro
n
then, $1.00 =
0.714 Euro
n
the Euro price of
a dollar falls.
Flexible Exchange Rate System
n
Exchange rates change daily as the demand for a
currency or the supply of a currency changes.
n
Exchange rates must always be reciprocals of
each other.
n
Exchange rates of multiple currencies must
always be compatible.
n
Or, arbitrageurs will enter the market and cause
them to be compatible.
Macro Events and Exchange Rates
n
US Economic Growth?
n
US Incomes rise.
n
Demand for imports increase.
n
Demand for Euros increases.
n
Dollar price of the Euro rises.
n
Dollar depreciates against the Euro.
n
Vice Versa applies.
Macro Events and Exchange Rates
n
US has high inflation?
n
US goods prices rise.
n
Consumers substitute foreign goods.
n
Demand for imports increase.
n
Demand for Euros increases.
n
Dollar price of the Euro rises.
n
Dollar depreciates against the Euro.
n
Vice Versa applies.
Macro Events and Exchange Rates
n
US has high interest rates?
n
Europeans want to invest in US.
n
Demand for dollars increases.
n
Euro price of the dollar rises.
n
Dollar price of the Euro falls.
n
Dollar appreciates against the Euro.
n
Vice Versa applies.
Fixed Exchange Rates
n
Each country’s central bank controls its
exchange rate at a fixed level.
n
Shortage of dollars?
n
Fed buys Euros or gold for dollars, or
n
Dollar is revalued to a new fixed rate.
n
Surplus of dollars?
n
Fed sells Euros or gold for dollars, or
n
Dollar is devalued to a new fixed rate.
Fixed Exchange Rates
n
Devaluations are hard on people living in the
country
n
Their money is suddenly less valuable.
n
Their savings are less valuable.
n
Everything imported suddenly is higher priced.
Domestic prices rise, too.
n
Inflation is worse.
n
The central bank has a finite supply of Euros or
gold to maintain the fixed rate.
Fixed or floating?
n
Gold standard
n
Breton Woods Agreement
n
Floating the dollar
Other currency arrangements
n
One area decides
to use the same currency:
n
USA
n
The Euro area
n
A country adopts
another country’s currency:
n
Panama and
Ecuador use the US $
n
Albania uses the
Euro.
n
A country pegs
its currency to a major currency:
n
French-speaking
Africa pegs to the Euro.
Globalization
n
Since 1990 end of the Cold War, international
trade has expanded significantly.
n
Markets for goods and services have become
worldwide.
n
Markets for labor also have become worldwide.
n
Outsourcing
n
Immigration, legal and illegal.
Outsourcing and the US
n
Foreign businesses have outsourced more jobs to
the US than US business have outsourced abroad!
n
Why do we only hear about job loss in the US due
to outsourcing?