Chapter 10
International Trade
These slides supplement the
textbook, but should not
replace reading the textbook
1
Why trade with
other nations?
All nations can increase
productivity, lower
prices, increase jobs
and standard of living
2
Why is trade advantageous
for all countries?
Because the world’s
resources are not evenly
distributed around the globe
3
How does foreign
trade effect GDP?
An increase in exports
increases GDP
A decrease in exports
decreases GDP
4
Shifts in the Economy’s PPF
Food
An increase in available resources
A'
A
Without
international trade
With international
trade
F F'
Clothing
5
What gives a county’s
currency value?
It has something that
other countries want
6
What is a country’s
exchange rate?
The price of one country’s
currency measured in
terms of another
country’s currency
7
What does it mean when a
currency is depreciated?
An increase in the
number of units of a
currency needed to
purchase one unit of
foreign exchange
8
What does it mean when a
currency is appreciated?
A decrease in the number
of units of a currency
needed to purchase one
unit of foreign exchange
9
What determines the
exchange rates of
different currencies?
The supply and demand
for that currency on the
international market
10
What are flexible
exchange rates?
Rates are determined by
the forces of demand
and supply without
government intervention
11
What is it called
when currencies are
allowed to fluctuate?
This is called floating
12
What determines the
demand for a currency on
the international market?
Foreigners demand a
another country’s currency
for what that currency can
buy in that country
13
What determines the
supply for a currency on
the international market?
When citizens of a country
buy goods and services
from another country
14
What determines
different exchange
rates? Relative …
price levels
rates of interest
rates of growth
political & economic stability
15
Value of the dollar
Equilibrium in the World Market
Surplus
Shortage
S
D
Quantity on world market
16
Value of the dollar
Effects of an Increase in Demand
S
0
D'
D
Quantity on world market
17
Value of the dollar
Effects of an Decrease in Demand
S
D
0
D'
Quantity on world market
18
Value of the dollar
Effects of a Decrease in Supply
S’
S
D
0 Quantity on world market
19
Value of the dollar
Effects of a Increase in Supply
S
S’
D
0 Quantity on world market
20
What is a dirty float?
A dirty float occurs when
a country influences the
demand and/or supply
of its currency on the
international market
21
What is a
managed float system?
An exchange rate system
that combines features
of freely flexible rates
with intervention by
central banks
22
What kind of system
do we have today?
A managed float system
23
What is the
balance of trade?
The measure of money that
enters and leaves a country
via trade with other nations
24
What is a favorable
balance of trade?
The value of a country’s
imports of goods is less
than the value of its
exports of goods
25
What is an unfavorable
balance of trade?
The value of a country’s
imports of goods is
greater than the value
of its exports of goods
26
How can money leave
or enter a country
other than trade?
investments
travel
sending gifts
27
Can the balance of
payments offset the
balance of trade?
Money can leave a country
because of trade - but
more money can enter the
country in other areas
28
What is a country’s
balance-of-payments?
Summarizes all economic
transactions that occur
during a given time period
between residents of that
country and residents of
other countries
29
What is a
payments surplus?
When there is more
money entering a
country than there
is leaving a country
30
When can a payments
surplus be a problem?
If it is too favorable over
time it can cause inflation
31
What is a
payments deficit?
When there is more money
leaving a country than
there is entering a country
32
When can a payments
deficit be a problem?
If it is too unfavorable it can
cause unemployment
33
At what point is
equilibrium reached?
When the amount of money
entering equals the
amount of money leaving
34
How are Balance of
Payments Problems
Resolved?
With a lot more money entering
over a time, a currency will
appreciate in value
With a lot more money leaving
over time, a currency will
depreciate in value
35
Why is there a balance in
the balance of payments?
The value of a country’s
currency fluctuates as
the supply fluctuates on
the world market
36
What is the
gold standard?
An arrangement whereby
the currencies of most
countries are convertible
into gold at a fixed rate
37
When was the
gold standard?
From 1879 to 1914, the
international financial
system operated under
a gold standard
38
What is one advantage
of the gold standard?
Any increase in the money
supply would be limited to
a country’s gold holdings
39
Did America honor
gold payments after
WWI?
Yes!
If countries demanded
payment for goods
and services in gold
we would pay in gold
40
What happened to this
practice of paying in gold?
During the Depression of
the 1930’s foreigners
demanded payment in
gold, thus depleting our
gold supply
41
When did the
gold standard end?
During World War I, the
gold standard collapsed,
limiting trade during the
1920s and 1930s
42
What is the fixed
exchange rate system?
The value of each
currency was pegged
to an ounce of gold
43
When was the fixed
exchange rate system?
From about 1945 to 1972
44
What was the Bretton
Woods Agreement?
All foreign exchange
rates were fixed in terms
of the dollar and the
dollar could be
converted to gold at a
fixed exchange rate
45
Under the Bretton
Woods Agreement how
much did we agree to
exchange foreign
holdings of dollars?
$35 an ounce
46
When was the Bretton
Woods Agreement?
1944
47
What is currency
devaluation?
An increase in the official
pegged price of foreign
exchange in terms of
the domestic currency
48
What is currency
revaluation?
An reduction in the official
pegged price of foreign
exchange in terms of the
domestic currency
49
What is the International
Monetary Fund?
Helps facilitate exchange
rates by allowing
countries to trade
currencies
50
When was the IMF
established?
1944
51
How does the IMF
help countries?
52
If the U.S. wants to devalue
the dollar it will borrow dollars
from the IMF and buy other
currencies around the world
If the U. S. wants to revalue
the dollar it will borrow other
currencies from the IMF and
buy dollars around the world
53
What was the
advantage of the fixed
rate system?
Each country knew what
its currency was worth in
relation to foreign
currencies
54
What happened to
the fixed exchange
rate system?
The inflation in the 1970’s
led to a change in the
value of all currencies
55
In what year did the
Bretton Woods
System collapse?
In 1972 we uncoupled
the dollar from the
pegged international
monetary system
56
Does specialization
increase productivity?
By each country
Yes! specializing in certain
exports non-productive
activity is lessened
57
What should a
country specialize?
In those goods and
services that it has a
comparative advantage
58
What is
comparative advantage?
Producing something
with lower opportunity
costs than others
59
What is
absolute advantage?
Producing something
better than others
60
What should a
country produce?
It should produce those
things in which it has a
comparative advantage
61
What is an example of
comparative advantage?
Even if Americans were
best at making wicker
baskets our opportunity
costs would be very
high in this activity
62
What is the
good enough rule?
If a country has a
comparative advantage in a
product that product should
be produced if the job can
be done good enough
63
What are the reasons
for international
specialization?
differences in resources
economies of scale
differences in tastes
64
When will we trade?
When the world price is ...
> our price, export
< our price, import
= our price, will not trade
65
When would a high wage
worker be cheaper than a
low wage worker?
When the high wage
worker is a lot more
productive than the
low wage worker
66
What makes one worker
more productive than
another? Better
• Infrastructure
• Capital
• Education
• Skills
• Attitude
67
Why have
trade restrictions?
There are good and bad
reasons for trade
restrictions
68
How do we
restrict trade?
tariffs
import quotas
export subsidies
licensing agreement
unreasonable standards
69
What are two
types of tariffs?
 Specific - applied to a
specific good, like a barrel of
oil
 Ad Valorem- a percentage
of the price of imports at the
port of entry
70
What are the effects
of a tariff or quota?
An increase in prices
A decrease quantity in
supplied
A lower standard of living
71
What is dumping?
The practice of selling a
commodity abroad at a
price that is below its cost
or below the price charged
in the home market
72
What are the three
types of dumping?
73
Predatory is when the
purpose of dumping is to
drive competitors out of the
market, this is rare
Long-term is when there are
economic reasons that a
product can be sold at a low
price, for example, less
competition
Sporadic occurs when there
are excess inventories
74
What are arguments
for tariffs and quotas?
75
 National defense
 Protect infant industries
 Protect against predatory
dumping
 Reduce unemployment
 Protect temporary declining
industries
 Promote variety
76
What are arguments
against trade restrictions?
77
Leads to retaliation
Subsidizes weakness
Works against comparative
advantage
Problems with policing &
enforcing
Encourages rent seeking
78
What is the
World Trade
Organization (WTO)?
Treat all nations equally
Reduce tariff rates
Reduce import quotas
79
What is the
Common Market?
A market in Europe
begun in 1958 as a way
of creating barrier-free
trade in Europe
80
What is North American
Free Trade Agreement
(NAFTA)?
Passed during the Clinton
Administration to remove
barriers of trade with Mexico
81
END
82