1. International Economics
Topic 10
International Economics

2. International Economics
International trade
Microeconomic perspective
Comparative advantage
Trade barriers vs. free trade
International finance
Macroeconomic perspective
Exchange rate determination

3. US Trade US trade deficit in goods and surplus in services
US exports about 13% of its output
Chemicals
Agricultural products
Consumer durables
Semiconductors
Aircraft
U.S. provides about 8.5% of world’s exports

4. US Trade Principal U.S. imports include: Petroleum Automobiles Metals
Household appliances
Computers

5. Why do countries trade? Nations have different resource endowments
Labor intensive
Land intensive
Capital intensive
Comparative advantage
A nation has a comparative advantage in good A when it has a lower opportunity cost of producing A,compared with another nation.

6. Comparative Advantage
Vegetables (Tons) 30 25 20 15 10 5 35 40 45
Beef (Tons)
(b) Mexico 12 18 8 4 A Z
(a) United States

7. Comparative Advantage

8. Trade Barriers and Export Subsidies
Tariffs, import quota, nontariff barrier (NTB), voluntary export restriction (VER), and export subsidies
Effects of trade barriers on prices, consumption, production, etc.
Arguments for trade protection

9. Multilateral Trade Agreements
General Agreement on Tariffs and Trade (GATT, )
World Trade Organization (WTO, 1995)
European Union (EU)
North American Free Trade Agreement (NAFTA)

10. International Finance
Lending and borrowing among countries
International asset transactions
Currency exchange – daily global currency transaction volume is several trillion $.

11. Exchange Rates The price of a currency in terms of another currency
€1=$1.252
Demand vs. supply
Appreciation vs. depreciation
Revaluation vs. devaluation

12. Exchange Rate Determination
Determinants of exchange rates
Factors that change demand/supply
Changes in tastes
Relative income changes
Relative price-level changes
Purchasing-power-parity theory
Relative interest rates
Relative expected returns on assets
Speculation