Macroeconomics Unit 5 International Trade

Unit 5: International Trade Key Terms Exports- the sale of goods and service created by domestic producers and sold to foreigners Imports- the purchase of goods and service created by foreigners Net Exports (XN)- Exports Ð Imports. The difference between a nationÕs exports of goods and services and its imports of goods and services Trade Deficit- Exporting less than is imported (aka.trade gap) Trade Surplus-Exporting more than is imported. China has a huge trade surplus with the US. Interest Rates and Capital Flows Net Capital FlowThe difference between the amount of money coming into a country to buy domestic assets and the amount of money leaving a country to buy foreign assets. What is the difference between capital inflows and capital outflows? Inflows looks at money coming into the country to buy domestic assets and outflows looks at money going out of the country to buy foreign assets Interest rate ↑, the capital inflows __↑__ Interest rate ↓, the capital inflows __↓__ Interest rate ↑, the capital outflows __↓__ Interest rate ↓, the capital outflows ↑ The Foreign Exchange Market Draw the foreign exchange market for US dollars ($) relative to Japanese Yen (´) ´/$ S S1 Er Er1 Americans supply more dollars to get yen. The dollar depreciates D Q Q1 Quantity of Dollars Show on the graph what happens to the value of the dollar if American want more Japanese products Balance of Payments What is the Balance of Payments? Summary of all international transactions within a given year prepared in the domestic countryÕs currency. It has two accounts, the current account and the financial account. What is the Current Account? Measures the international trade in goods and services, investment income, and net transfer payments. What is the Financial Account? Measures the international trade of financial assets like stocks, bonds, and real estate. Balance of Payments Practice Identify if the example would be included in the current account or the financial account for the US 1. A US company sells ten jets in Canada Current 2. An American company buys a beach resort in Mexico Financial 3. A Chinese company sells toys in the US Current 4. An American on vacation buys Japanese government bonds Financial 5. An immigrant living in the US sends his earning to his family overseas Current (called remittance) 6. An American company produces and sells cars in the US Neither 7. An Italian tourists buys souvenirs in the US Current Currency Valuation Define AppreciationThe increase of value of a country's currency relative to a foreign currency Define DepreciationThe decrease of value of a countryÕs currency relative to a foreign currency FOREX Shifters 1. Changes in TastesEx: British tourists flock to the U.S 2. Changes in Relative Incomes (Resulting in more imports)- Ex: US growth increase US incomes 3. Changes in Relative Price Level (Resulting in more imports)- Ex: US prices increase relative to Britain 4. Changes in relative Interest Rates- Ex: If the US has a higher interest rate than Britain. Interest Rates and Foreign Exchange Draw the foreign exchange market for Mexican Pesos. Show what happens to the value of pesos relative to the US dollar if interest rates in Mexico increase $/Peso S1 Americans demand more Mexican S financial assets and Er1 Mexicans supply less pesos because they can earn a higher rate of Er return at home Appreciation and Depreciation Practice 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 the 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 depreciate D1 and the yen will appreciate 5. If Japan places high tariffs on all US imports, the D dollar will depreciate and the yen will appreciate 6. The US suffers a larger recession the dollar will Q Quantity of Pesos appreciate and the yen will depreciate Foreign Exchange and Net Exports Exchange Rate Regimes If a countryÕs currency appreciates, net exports __↓__ What are floating exchange rates? If a countryÕs currency depreciates, net exports __↑__ The value of a currency can fluctuate according to the 1. The US dollar will appreciate relative to another market and is not manipulated by the government currency if demand for the dollar increases or if What are fixed exchange rates? supply decreases . This will cause US exports to When the value of a currency is manipulated by the decrease and imports to increase . government to keep it at a specific level 2. The US dollar will depreciate relative to another How does a government fix, or peg, its exchange rate? currency if demand for the dollar decreases or if If the government wants to keep their currency supply increases . This will cause US exports to depreciated to promote trade, they buy other increase and imports to decrease . currencies to increase the supply of their currency