Lecture Essentials of economics (3/e): Chapter 16 - Brue, McConnell, Flynn

Chapter 16 - International trade and exchange rates. In this chapter we will take a look at some key facts about international trade and then start evaluating international trade using comparative advantage. We will also use demand and supply curves to explain how countries determine which goods they will import, which goods they will export, and the price that is charged for these goods.

Chapter 16

International

Trade and Exchange Rates

• Trade deficit with China

• $273 billion in 2010

Global Snapshot

Global Snapshot

• Assumptions

• Two nations

• Same size labor force

• Constant costs in each country

• Different costs between countries

• United States absolute advantage in both

• Opportunity cost ratio

• Slope of the curve

• Soybeans sacrificed per ton of avocados

Comparative Advantage

• Self-sufficiency output mix

• Specialization and trade

domestic opportunity cost

States

Production Alternatives Product A B C D E

Production Alternatives Product A B C D E

Mexico’s Production Possibilities

U.S Production Possibilities

• Mexico will pay less than 4A for 1S

Country

(1)

Outputs before Specialization

(2)

Outputs after Specialization

(3)

Amounts Traded

(4)

Outputs Available after Trade

(5) Gains from Specialization and Trade (4) – (1)

United

States

Specialization According to Comparative Advantage

and the Gains from Trade (in Tons)

$1 Will Buy…

44.49 Indian rupees 0.62 British pounds 0.96 Canadian dollars 11.72 Mexican pesos 0.82 Swiss francs 0.71 European euros 79.2 Japanese yen

1058 South Korean won 6.5 Swedish kronor 4.3 Venezuelan bolivares fuertes

D

S1

Dollar appreciates (pound

depreciates)

Dollar depreciates (pound

appreciates)

Exchange rate: $2 = £1

$2

$3

$1

• Relative inflation rate changes

• Relative interest rates

• Speculation

higher-priced domestic goods

become more expensive as import

competition declines

Three Arguments for Protection

international trade

American workers to workers

abroad

Trade (GATT)

Agreement (NAFTA)

• Three principles:

• Equal, nondiscriminatory trade

between member nations

• Reduction in tariffs

• Elimination of import quotas

to circumvent environmental and

worker-protection laws

between member nations

nations outside the EU

Canada, and Mexico

between the countries

• Causes of trade deficits

• High U.S growth (relatively)

• Price of oil

• Implications of trade deficits