1. Unit 5: International Economics 1. Absolute advantage- When one country can produce more of a product than another country with the same amount of resources. 2. Comparative advantage- When one country can produce a product at a lower opportunity cost than another country. When one country can produce a product relatively more efficiently than another country. Countries should concentrate on making those things that they are best at.

2. Unit 5: International Economics 3. Specialization- concentrating on the production of a few particular products or tasks to boost efficiency and productivity. 4. Import- a product manufactured outside of a country and brought for sale into another country. 5. Export- a product manufactured within one country and sold in another country. ONE COUNTRIES IMPORTS ARE ANOTHER COUNTRIES EXPORTS!

3. International Linkages United States Economy Other National Economies Goods & Services Capital & Labor Information & Technology Money Trade Flows Resource Flows Information & Technology Flows Financial Flows

4. United States and World Trade Volume Dependence Trade Patterns Financial Linkages Volume and Pattern

5. Exports of Goods & Services – 2005 Selected Countries as a Percent of GDP Belgium Netherlands South Korea Germany Canada New Zealand Italy France United Kingdom Spain Japan United States Source: IMF, International Financial Statistics, 2005 11% 87% 71% 44% 40% 38% 28% 27% 26% 25% 13%

6. GLOBAL PERSPECTIVE Germany United States China Japan France Netherlands Italy United Kingdom 0 2 4 6 8 10 12 10.0 8.9 6.5 6.2 4.9 3.9 3.8 Source: World Trade Organization Shares of World Exports, Selected Nations Percentage Share of World Exports, 2004

7. Volume and Pattern U.S. Trade as a Percentage of GDP Inflation Adjusted to Dollar Value in 2000 Source: Bureau of Economic Analysis Percentage of GDP Exports Imports

8. Volume and Pattern Principal U.S. Exports & Imports – 2005 in Billions of Dollars Chemicals Consumer Durables Agricultural Products Semiconductors Computers Generating Equipment Automobiles Aircraft Medical Telecommunications Petroleum Automobiles Household Appliances Computers Metals Clothing Consumer Electronics Generating Equipment Semiconductors Telecommunications ExportsImports Source: Department of Commerce Data $68.6 53.5 52.9 47.2 45.5 33.2 30.4 29.1 27.6 25.6 $251.6 123.7 97.1 93.3 83.8 79.1 47.3 43.1 37.1 25.8

9. Volume and Pattern U.S. Exports & Imports – 2005 in Goods by Area Industrial Countries Developing Countries Total Industrial Countries Developing Countries Total Exports toImports from Source: Survey of Current Business, April 2006 Value Billions Of Dollars Value Billions Of Dollars $483 410 $893 $770 904 $1,674 Imports Exceed Exports by $781 Billion That’s over 15,620,000 jobs at $50,000 each! Was $484 Billion in 2002 & $346 Billion in 1999

10. United States and World Trade Transportation Technology Communications Technology General Decline in Tariffs Multinational Corporations Rapid Trade Growth

11. Participants in International Trade Source: World Trade Organization Comparative Exports - 2004 Germany United States China Japan France Netherlands Italy United Kingdom Canada Belgium South Korea Mexico Russia Taiwan Singapore 0 100 200 300 400 500 600 700 800 900 $912 $819 $593 $566 $449 $358 $349 $347 $317 $307 $254 $189 $184 $183 $180 GLOBAL PERSPECTIVE Billions of Dollars

12. Advantages and Disadvantages of Free Trade Advantages 1.Lower Prices 2.Greater Variety/ Choices 3.Increased Employment 4.Increased Quality 5.Increased Living Standards 6.Better Relations Disadvantages 1.Loss of Some Domestic Jobs 2.Decrease in profits for some domestic businesses 3.Decline of Some Domestic Businesses

13. Who Gains and Who Loses from Free Trade Gainers 1.Consumers 2.Workers for Importing Companies 3.Importing Businesses Losers 1.Some Domestic Workers 2.Some Domestic Businesses 3.Government loss of tariff (tax) revenue

14. Unit 5: International Economics 6. Barriers to Trade- actions taken by governments to slow or stop trade between countries. A. Tariff- a tax on an imported good B. Quota- a limit on the number of imports C. Embargo- a total ban on an imported product (done for political NOT economic reasons)

15. D Domestic S Domestic 0 Price Quantity P2P2 Q2Q2 Barriers to Trade- Quotas and Embargoes: A quota a limit is placed on the amount of a product that is allowed into a country. An embargo is a complete ban on imports. S Quota S Total P1P1 P0P0 Q3Q3 Q1Q1 Q0Q0 Embargo: Price of P 2 and Quantity of Q 2. Domestic Production is Q 2. Quota: Price of P 1 and Quantity of Q 1. Domestic Production is Q 3. Free trade: Price of P 0 and Quantity of Q 0. Domestic Production is Q 4. Q4Q4 Quotas and embargoes ↓ total Q, Q 0 to Q 2, and ↑ P, but ↑ domestic Q, Q 4 to Q 2.

16. Who Gains and Who Loses from Quotas and Embargoes Gain- Domestic Companies, Domestic Workers Loses- Consumers, Foreign Companies, Foreign Workers

17. D Domestic S Domestic 0 Price Quantity Barriers to Trade- Tariffs: A tax on imports S Tariff S Total P1P1 P0P0 Q3Q3 QTQT Q0Q0 Tariff: Price of P T and Quantity of Q T. Domestic Production is Q 3. Free trade: Price of P 0 and Quantity of Q 0. Domestic Production is Q 4. Q4Q4 Tariffs ↓ total Q, Q 0 to Q T, and ↑ P, P 0 to P T but ↑ domestic Q, Q 4 to Q 3. Amount of Tariff ($)

18. Quantity Price 0 DdDd SdSd PdPd Q S d + Q PtPt PwPw abcd Economic Effects of a Protective Tariff or an Import Quota

19. Who Gains and Who Loses from Tariffs Gain- Domestic Companies, Domestic Workers, The Federal Government Loses- Consumers, Foreign Companies, Foreign Workers

20. Unit 5: International Economics Nontariff Barriers (NTB's) D. Technical and health regulations- rules preventing imports on health, safety, and technical grounds E. Domestic subsidies- government support payments to an industry threatened by imports. F. Voluntary Trade Restraints- a voluntary agreement by one country to limit exports on certain products to another country. G. Cartel- A group of countries which band together to control the trade of a particular product.

21. D Domestic S Domestic w/o Subsidy 0 Price Quantity S Total w/o Subsidy P0P0 PSPS QDQD Q0Q0 QSQS With Subsidy: Price of P S and Quantity of Q S. Domestic Production is Q 3. Free trade: Price of P 0 and Quantity of Q 0. Domestic Production is Q 4. Q3Q3 Domestic Subsidies ↑ total Q, Q 0 to Q S, and ↓ P, P 0 to P S but ↑ domestic Q, Q 4 to Q 3. Foreign Production is Q S – Q 3. Barriers to Trade- Domestic Subsidies (Money given to Domestic companies to fund costs of production) Ex: R and D for pollution controls, hybrid cars, money for technology, etc. S Domestic w/ Subsidy S Total w/ Subsidy Q4Q4 PDPD

22. Who Gains and Who Loses from Quotas and Embargoes Gain- Domestic Companies, Domestic Workers, Auto Consumers (New Car Buyers) Loses- Foreign Companies, Foreign Workers, Domestic Taxpayers

23. Unit 5: International Economics 7. Protectionism- a belief which supports imposing barriers to trade to "protect" domestic industries. 8. General Agreement on Tariffs and Trade (GATT)- international treaty and trade talks designed to reduce barriers to trade. Lasted from just after WWII till 1990’s when it was replaced by the World Trade Organization (WTO).

24. The Case for Protection: A Critical Review Military Self-Sufficiency Argument Diversification-for-Stability Argument Infant Industry Argument Counterarguments Strategic Trade Policy Protection-Against-Dumping Argument Dumping Increased Domestic Employment Argument Smoot-Hawley Tariff Act Cheap Foreign Labor Argument

25. Unit 5: International Economics 9. World Trade Organization (WTO)- International trade court which resolves trade disputes between countries. 10. Dumping- Selling a product in another country for less than its cost of production. This will undercut domestic industries. The cause of many cases before the WTO. Ex: Early 2000’s- Asian steel companies sold steel in the U.S. below the cost of American producers. Ex: Currently- American grain farmers sell wheat, corn, etc. below the costs of farmers in most developing countries.

26. The WTO Protests Various Protest Groups Angrily Target WTO Environmentalists, Socialists, Anarchists Labor Protections Environmental Standards Desire to Liberalize Trade Through Multilateral Negotiations International Labour Organization (ILO)

27. Government and Trade Trade War Smoot-Hawley Tariff Act of 1930 Reciprocal Trade Agreements Act of 1934 Negotiating Authority Generalized Reductions Most-Favored-Nation Clauses Multilateral Trade Agreements And Free-Trade Zones

28. Government and Trade General Agreement on Tariffs and Trade (GATT) Equal Trade Treatment Reduction in Tariffs Elimination of Import Quotas Uruguay Round Multilateral Trade Agreements And Free-Trade Zones

29. Government and Trade World Trade Organization (WTO) Doha Round (Doha, Qatar) The European Union (EU) EU Trade Bloc The Euro Multilateral Trade Agreements And Free-Trade Zones

30. Government and Trade North American Free Trade Agreement (NAFTA) Canada, Mexico, and U.S. Fears and Accomplishments Job Creation Higher Standard of Living Multilateral Trade Agreements And Free-Trade Zones

31. Top 12 Globalized Nations - 2005 Source: A. T. Kearney, Foreign Policy 1-Singapore 2-Ireland 3-Switzerland 4-United States 5-Netherlands 6-Canada 7-Denmark 8-Sweden 9-Austria 10-Finland 11-New Zealand 12-United Kingdom GLOBAL PERSPECTIVE Global Competition

32. Unit 5: International Economics 11. Exchange Rates- the value of one country's money as compared to another country's money. (Dollars ($) vs. Yen (¥), Pound (£) vs. Euro (€), Pesos vs. Yuan/ Renminbi) 12. Devaluation- A decrease in the governmentally defined value of a currency.

33. Unit 5: International Economics 13. Depreciation- when one country's currency (money) decreases in value relative to another country's currency. 14. Appreciation- when one country's currency (money) increases in value relative to another country's currency.

34. Exchange Rates Foreign Currency Per U.S. Dollar $1 Will Buy 44.3 Indian rupees.57 British pounds 1.16 Canadian dollars 10.7 Mexican pesos 1.31 Swiss francs.83 European euros 117 Japanese yen 975 South Korean won 7.8 Swedish kronors March 2006 GLOBAL PERSPECTIVE

35. Exchange Rates Dollar – Yen Market P Q Quantity of yen Dollar price of 1 yen.01 QeQe DyDy SySy Exchange Rate: $.01=¥1 G 5.1

36. Determinants of D and S in the FOREX/ Currency Exchange market Determinants of S of $/ D for foreign currency 1. Dollars used to buy imports 2. Dollars used to buy foreign investments (stocks and bonds) 3. Dollars used to buy foreign real assets (factories, buildings) Determinants of D for $/ S of foreign currency 1. Foreigners who buy U.S. exports 2. Foreign currency used to buy U.S. investments (stocks and bonds) 3. Foreign currency used to buy U.S. real assets (factories, buildings)

37. Exchange Rates- Dollar Appreciates D0D0 S 0 Peso Price of $ (Pesos/$) Quantity of $ P0P0 Q0Q0 D S0S0 0 $ Price of peso ($/Peso) Quantity of Pesos P0P0 Q0Q0 Graph AGraph B FOREX or Currency Exchange Market D1D1 Q1Q1 P1P1 S1S1 P1P1 Q1Q1 Graph A: An ↑ in D for $ from D 0 to D 1 will cause the P of $ to ↑ (appreciate) from P 0 to P 1 and Q ↑ from Q 0 to Q 1. Graph B: An ↑ in S of pesos from S 0 to S 1 will cause the P of pesos to ↓ (depreciate) from P 0 to P 1 and Q ↑ from Q 0 to Q 1. Rates from Oanda.com Oanda.com

38. OR

39. Exchange Rates- Dollar Appreciates D0D0 S0S0 0 Peso Price of $ (Pesos/$) Quantity of $ P0P0 Q0Q0 S0S0 0 $ Price of peso ($/Peso) Quantity of Pesos P0P0 Q0Q0 Graph AGraph B FOREX or Currency Exchange Market Q1Q1 P1P1 S1S1 P1P1 Q1Q1 Graph A: A ↓ in S of $ from S 0 to S 1 will cause the P of $ to ↑ (appreciate) from P 0 to P 1 and Q ↓ from Q 0 to Q 1. Graph B: A ↓ in D for pesos from D 0 to D 1 will cause the P of pesos to ↓ (depreciate) from P 0 to P 1 and Q ↓ from Q 0 to Q 1. D0D0 D1D1

40. So

41. Exchange Rates- Dollar Appreciates D0D0 S 0 Peso Price of $ (Pesos/$) Quantity of $ P0P0 Q0Q0 D S0S0 0 $ Price of peso ($/Peso) Quantity of Pesos P0P0 Q0Q0 Graph AGraph B FOREX or Currency Exchange Market D1D1 Q1Q1 P1P1 S1S1 P1P1 Q1Q1 An in ↑ D for one currency causesan ↑ in S for the other currency!

42. AND

43. Exchange Rates- Dollar Appreciates D0D0 S0S0 0 Peso Price of $ (Pesos/$) Quantity of $ P0P0 Q0Q0 S0S0 0 $ Price of peso ($/Peso) Quantity of Pesos P0P0 Q0Q0 Graph AGraph B FOREX or Currency Exchange Market Q1Q1 P1P1 S1S1 P1P1 Q1Q1 D0D0 D1D1 A ↓ S for one currency causesa ↓ in D for the other currency!

44. We also need to consider:

45. Exchange Rates- Dollar Depreciates Graph AGraph B FOREX or Currency Exchange Market Graph A: An ↓ in D for $ from D 0 to D 1 will cause the P of $ to ↓ (depreciate) from P 0 to P 1 and Q ↑ from Q 0 to Q 1. Graph B: An ↓ in S of pesos from S 0 to S 1 will cause the P of pesos to ↓ (appreciate) from P 0 to P 1 and Q ↓ from Q 0 to Q 1. Rates from Oanda.com Oanda.com S0S0 0 $ Price of peso ($/Peso) Quantity of $ P0P0 Q0Q0 P1P1 Q1Q1 D0D0 D1D1 D0D0 S0S0 0 Peso Price of $ (Pesos/$) Quantity of Pesos P0P0 Q0Q0 Q1Q1 P1P1 S1S1

46. OR

47. Exchange Rates- Dollar Depreciates Graph AGraph B FOREX or Currency Exchange Market Graph A: An ↑ in S of $ from S 0 to S 1 will cause the P of $ to ↓ (depreciate) from P 0 to P 1 and Q ↑ from Q 0 to Q 1. Graph B: An ↑ in D for pesos from D 0 to D 1 will cause the P of pesos to ↑ (appreciate) from P 0 to P 1 and Q ↑ from Q 0 to Q 1. D S0S0 0 $ Price of peso ($/Peso) Quantity of $ P0P0 Q0Q0 S1S1 P1P1 Q1Q1 D0D0 S 0 Peso Price of $ (Pesos/$) Quantity of Pesos P0P0 Q0Q0 D1D1 Q1Q1 P1P1

48. Exchange Rates Changing Rates: Depreciation and Appreciation Equals Dollar Price of Foreign Currency Rises International Value of Dollar Falls (Dollar Depreciates) Foreign Currency Price Of Dollar Falls International Value of Foreign Currency Rises (Foreign Currency Appreciates)

49. How ∆ value of the $ effects x, m, and AD If the $ appreciates  U.S. citizens buy more pesos (pesos/Mexican products cost less) → ↑ m, ↓ x (N x ↓) → ↓ AD If the $ depreciates  U.S. citizens buy less pesos (pesos/Mexican products cost more) → ↓ m, ↑ x (N x ↑ ) → ↑ AD

50. How ∆ consumer tastes effects U.S. $ value, x, m, and AD If British citizens love (demand) American products→ ↑ D for $, ↑ S of £  $ appreciates, £ depreciates  ↑ m, ↓ x (N x ↓) → ↓ AD → ↓ RGDP, ↓ PL, ↑ U The opposite will happen if Americans love (demand) British products.

51. How ∆ foreign incomes effects U.S. $ value, x, m, and AD If Spanish become richer (Spain’s RGDP ↑) → ↑ D for American Products  ↑ D for $, ↑ S of €  $ appreciates, € depreciates  ↑ m, ↓ x (N x ↓) → ↓ AD → ↓ RGDP, ↓ PL, ↑ U The opposite will happen if American incomes ↑ (U.S. RGDP ↑).

52. How ∆ U.S. price level effects U.S. $ value, x, m, and AD If PL (inflation) in U.S. ↓ relative to Germany → German consumers want to buy cheaper U.S. products → ↑ D for $, ↑ S of €  $ appreciates, € depreciates  ↑ m, ↓ x (N x ↓) → ↓ AD → ↓ RGDP, ↓ PL, ↑ U The opposite will happen if American prices ↑ relative to German prices.

53. How ∆ U.S. interest rates effects U.S. $ value, x, m, and AD If interest rates in U.S. ↑ relative to Japan → Japanese investors put their money in U.S → ↑ D for $, ↑ S of ¥  $ appreciates, ¥ depreciates  ↑ m, ↓ x (N x ↓) → ↓ AD → ↓ RGDP, ↓ PL, ↑ U The opposite will happen if American interest rates ↓ relative to Japanese rates.

54. Unit 5: International Economics 15. Balance of Trade- A comparison of exports vs. imports (goods and services). Trade Deficit occurs when imports > exports (g & s). Trade Surplus occurs when exports > imports (g & s).

55. U.S. Trade Balances in Goods and Services Select Nations, 2004 Goods and Services SurplusGood and Services Deficit Australia Belgium Canada China Germany Mexico Netherlands +6.8 -66.5 -45.8 +4.4 -162 -45.1 +11.8 Source: BEA GLOBAL PERSPECTIVE -10-20-30-40-50-60-70-160 10 20 Japan -75.6

56. Unit 5: International Economics 16. Current Account- The sum of ($) inflows (credits) and outflows (debits) of: Exports and Imports of goods and services (balance of trade) Net investment income (dividends, interest) Net transfers (Money sent to family members in another country, foreign aid)

57. Unit 5: International Economics Current Account Deficit occurs when the sum of the 3: B of T + Net Investment Income + Net Transfers = negative. Current Account Surplus occurs when the sum of the 3: B of T + Net Investment Income + Net Transfers = positive.

58. Advantages and Disadvantages of Trade Deficit/ Current Account Deficit Advantages 1.↑ current consumption 2.↑ Investment in the U.S capital stock 3.↑ Productive capacity/ growth Disadvantages 1.↓ future consumption 2.↑ debt for the U.S. 3.↑ foreign ownership of U.S. assets

59. Blue = countries in current account surplus; Red = countries in current account deficit, 2005

60. Unit 5: International Economics 17. Capital (Financial) Account- The sum of $ inflows (credits) and $ outflows (debits) of: The capital account consists of borrowing (inflow of $) and lending (outflow of $) to buy and sell: Real assets- capital goods like factories, buildings, land, machinery Financial assets- savings, stocks, bonds

61. Unit 5: International Economics Capital (Financial) Account Deficit occurs when capital ($) outflows (debits/ borrowing) exceed capital inflows (credits/ lending). When the sum of the capital account is negative. Capital Outflows > Capital Inflows Capital (Financial) Account Surplus occurs when capital ($) inflows (credits/ lending) exceed capital outflows (debits/ borrowing). When the sum of the capital account is positive. Capital Inflows > Capital Outflows

62. Unit 5: International Economics 18. Balance of Payments- Balance on the Current Account + Balance on Capital Account= 0 once official reserves (gold, foreign currency held by the government are taken into account). A deficit on the current account = A surplus in the capital account Or in the other case, A surplus on the current account = A deficit on the capital Account

63. Unit 5: International Economics OR (in plain english): A country can only consume more than it produces (a current account deficit) if it borrows from abroad (a capital account surplus).

64. Unit 5: International Economics OR put another way: Money flowing into the U.S. to be invested to buy real or financial assets → ↑ capital account → $ appreciates → foreign goods become cheaper → ↑m, ↓x (↓ N x ) → ↓ current account. Because the exchange rate changes, the capital account and the current account offset each other.

65. So if: Balance on the Current Account + Balance on Capital Account = 0 Then: Balance on the Current account = - Balance on the capital account

66. Q 0 Dollar Price of 1 Pound Quantity of Pounds P The Market for Foreign Currency (Pounds) DlDl SlSl Dollar Depreciates (Pound Appreciates) Dollar Appreciates (Pound Depreciates) Exchange Rate: $2 = £1 $2 $3 $1 QlQl

67. Q 0 Dollar Price of 1 Pound Quantity of Pounds P The Market for Foreign Currency (Pounds) DlDl SlSl Exchange Rate: $2 = £1 $2 $3 $1 QlQl D2D2 Exchange Rate: $3 = £1 Balance Of Payments Deficit Q2Q2 x a b c

68. Unit 5: International Economics 20. International Monetary Fund (IMF)- International agency which helps to stabilize exchange rates and promote trade. 21. World Bank- International agency which provides loans to developing countries.