1. International Economics
International Trade and Foreign Exchange

2. International Trade
International trade is based on David Ricardo’s Theory of Comparative Advantage
A country has an absolute advantage
when it can produce a product more
efficiently than can another country.
Trade between countries is beneficial
when one country has a comparative
advantage – the ability to produce a product relatively
more efficiently, or at a lower opportunity cost.

3. PPC for each country… United States Brazil Coffee (tons) Wheat (tons)45 40 35 30 25 20 15 10 5
Wheat (tons) A B

4. Total output will be greatest when each good is produced by the nation
that has the lowest domestic
opportunity cost for that good.
U.S has comparative advantage in wheat.
Brazil has comparative advantage in coffee
Output v. Input Method of Calculating Opportunity Costs

5. Key Terms and Concepts in Trade
Imports
Exports
Protective Tariff
Revenue Tariff
Quota

6. Protectionist Arguments
National Defense
Infant Industry
Domestic Jobs
Trade Imbalance (surplus v. deficit)

7. Examples of Economic Trade Organizations
World Trade Organization - WTO (1995)
G-20
General Agreement on Tariffs and Trade - GATT (1948)
European Union - EU (1993)
North American Free Trade Agreement - NAFTA (1994)
Organization of Petroleum Exporting Countries – OPEC (1960)

8. U.S. Import Transaction
American exports create a foreign demand for dollars which creates a supply of foreign currencies which are available to American buyers. Financing an American export reduces the supply of foreign currencies available and increases the domestic money supply.

9. Balance of Payments Current Account Balance on Goods & Services
Balance on Current Account Trade Deficits & Surpluses
Capital Account
Balance on Capital Account
Official Reserves
Balance of Payment Deficits & Surpluses

10. Foreign Exchange
What is the foreign exchange market and how does it affect the value of the dollar?

11. The Market for CurrencyP S
EXCHANGE
RATE: $2 = £1 3 2 1
Dollar
depreciates
Dollar price of one pound
Dollar
appreciates D Q
Quantity of pounds

12. International Exchange Rate Systems
The Gold Standard: Fixed Exchange Rates Devaluation
The Bretton Woods System
IMF - Pegged Exchange Rates
Official Reserves
Gold Sales
IMF Borrowing
Managed Floating Exchange Rates
G-8 Nations Interventions

13. Recent U.S. Trade Deficits
Causes of the Trade Deficits
American Economic Growth
Declining U.S. Savings Rates
Implications of U.S. Trade Deficits
Increased Current Consumption
Increased U.S. Indebtedness

14. Globalization and Economic Development
Emerging Markets
The Asian Tigers
Outsourcing
Developing Countries
IMF
World Bank
Grameen Bank and Microlending