International Trade

Unit 5: International Trade Key Terms Export - goods/services sold to other countries Import - goods/services bought from other countries Net Exports (XN) - Exports - Imports Trade Surplus - Exports more than imports Trade Deficit - Imports more than exports Balance of Payments - Summary within a given year, prepared in domestic currency, of all economic transactions between one country and the rest of the world. Current Account - * Trade in goods/services (Net Exports) * Investment Income * Money transfers Example: money Japanese car companies make producing cars in the US Capital Account - * Purchase and sale of financial assets abroad Example: US company buys a hotel in Russia Foreign Exchange (FOREX) Appreciation - The US dollar will appreciate relative to another currency if demand for the dollar   increases or if supply decreases. This will cause US exports to decrease and imports to increase. Depreciation - The US dollar will depreciate relative to another currency if demand for the dollar decreases or if supply increases. This will cause US exports   to increase and imports to decrease. FOREX Shifters 1. Change in Tastes 2. Change in Relative Incomes 3. Changes in Relative Price Level 4. Changes in Relative Interest Rates Appreciation and Depreciation 1. If American tourists increase visits to Japan, the supply of US dollars will increase and the demand for Japanese yen will increase. The dollar will depreciate and the yen will appreciate. 2. If the US government significantly decreases personal income taxes, the dollar will depreciate and the yen will appreciate. 3. If inflation in Japan rises significantly faster than in the US, the dollar will appreciate and the yen will depreciate. 4. If Japan has a large budget deficit that increases Japanese interest rates, the dollar will appreciate and the yen will depreciate. 5. If Japan places high tariffs on all US imports, the dollar will appreciate and the yen will depreciate. 6. The US suffers a larger recession, the dollar will appreciate and the yen will depreciate. 3. Country X has a flexible exchange rate and international capital mobility. Political turmoil outside of Country X generates capital flow into Country X. (a) Using a correctly labeled foreign-exchange market graph, explain the impact of the capital inflow on the international value of the currency of Country X. (b) For Country X, explain the effect of the change in the international value of its currency on each of the following:   (i) Exports (ii) Imports   a) Investors of foreign countries will demand Country X's currency, causing appreciation. b) i) Exports become more expensive and decrease. ii) Imports become cheaper and increase. 2. Balance of payments accounts record all of a country's international transactions during a year. (a) Two major subaccounts in the balance of payments accounts are the current account and the capital account. In which of these subaccounts will each of the following transactions be recorded? (i) A United States resident buys chocolate from Belgium.   **Current Account** (ii) A United States manufacturer buys computer equipment from Japan. **Current Account** (b) How would an increase in the real income in the United States affect the United States current account   balance? Explain. For terms of trade, look at what they don't have the comparative advantage in. Terms of trade: 5H = 1B or 1H = 1/5 B This trade benefits Artland because 3H = 1B. This trade does not benefit Rayland because 1H = 1/3 B The diagram above shows the production possibilities curves for two countries: Artland and Rayland. Using equal amounts of resources, Artland can produce 600 hats or 300 bicycles,   whereas Rayland can produce 1,200 hats or 300 bicycles. (a) Calculate the opportunity cost of a bicycle in Artland.   2 Hats (b) If the two countries specialize and trade, which country will import bicycles? Explain. Artland will import bicycles. (c) If the terms of trade are 5 hats for 1 bicycle, would trade be advantageous for each of the following?   (i) Artland Yes (ii) Rayland No (d) If productivity in Artland triples, which country has the comparative advantage in the production of hats? Artland