10/22/20141 International Trade and Exchange Rates Chapter 12

2 Outline Trade Facts Trade Facts Comparative Advantage and Specialization Comparative Advantage and Specialization The Foreign Exchange Market The Foreign Exchange Market Government and Trade Government and Trade Three Arguments for Protection Three Arguments for Protection

10/22/20143 Outline Trade Adjustment Assistance Trade Adjustment Assistance Multilateral Trade Agreements and Free- Trade Zones Multilateral Trade Agreements and Free- Trade Zones U.S. Trade Deficits U.S. Trade Deficits

10/22/20144 Trade Facts Run Snapshot 12.1 Snapshot 12.1 Snapshot 12.2 Snapshot 12.2

10/22/20145 Comparative Advantage and Specialization CA: Production possibilities analysis CA: Production possibilities analysis – Assumptions and comparative costs – Terms of trade – Gains from specialization and trade Trade with increasing costs Trade with increasing costs

10/22/20146 The Foreign Exchange Market Exchange rates Exchange rates Depreciation and appreciation Depreciation and appreciation

10/22/20147 The Foreign Exchange Market Determinants of exchange rates Determinants of exchange rates – Tastes – Relative income – Relative price levels – Relative interest rates – Changes in relative expected returns on stocks, real estate, and production facilities – Speculation

10/22/20148 Government and Trade Trade protections and subsidies Trade protections and subsidies Economic impacts of tariffs Economic impacts of tariffs – Direct effects – Indirect effects Net costs of tariffs Net costs of tariffs So why government trade protections? So why government trade protections? – Misunderstanding the gains from trade – Political considerations

10/22/20149 Three Arguments for Protection Increased domestic employment argument Increased domestic employment argument Cheap foreign labor argument Cheap foreign labor argument Protection-against-dumping argument Protection-against-dumping argument

10/22/ Trade Adjustment Assistance

10/22/ Multilateral Trade Agreements and Free-Trade Zones General Agreement on Tariffs and Trade (GATT) General Agreement on Tariffs and Trade (GATT) World Trade Organization (WTO) World Trade Organization (WTO) European Union (EU) European Union (EU) North American Free Trade Agreement (NAFTA) North American Free Trade Agreement (NAFTA)

10/22/ U.S. Trade Deficit Causes of the trade deficits Causes of the trade deficits Implications of U.S. trade deficits Implications of U.S. trade deficits – Increased current consumption – Increased U.S. indebtedness – Downward pressure on the dollar