Economics Unit 4 International Economics

33 UNIT 4: International Economics What is trade? - It involves buying and selling goods and services internationally. Globalization: The spread of products, tech, info, jobs across the globe. - Main mechanism - international trade Absolute advantage (recall): when the country is the only source of a product or is able to make more of a product using the same or fewer resources than others - France has this advantage in wine, though is being challenged by Italy and Spain Comparative advantage (recall): when a good or service can be produced at a lower opportunity cost than another Opportunity cost (recall): The benefit you miss when one alternative is chosen over the other. Efficiency: The output for a given amount of time and within a given amount of resources. Balance of trade: The difference in value of a nation's imports and exports during a specific period. *exports-imports* Balance of payments: The difference between flow of money into the country and flow going out. *includes everything - imports, exports, tourism, loans, foreign aid* Trade surplus: The selling of more products than purchasing, results in favourable balance Trade deficit: The purchasing of more products than selling, unfavourable balance 34 { 2 Key Measures of Effectiveness of International Trade } 1. Managing the National Credit Card - Trade deficits aren’t always bad. It’s good if the economy is strong enough to keep growing. - Trade surpluses can be bad possibly for consumers, and the domestic goods prices might get high. 2. Balance of payments - Having unfavourable balance of payments is bad for the stability of a country’s currency. (esp in long run) - Many are worried about the U.S dollar due to this. (They have many negative balances, and to cover the debt, they borrow from other countries.) - *U.S imports more than it exports* Benefits of International Trade Why Nations Trade: - High monetary value for international trade - Different countries produce different products - Economies of scale - Gaining resources needed by a certain country - Free trade - New ideas and technology - Reduces hostility and violence between countries - Increases competition - Greater efficiency in production process - Foreign exchange ~ Overall economic growth ~ Importing: buying products overseas and reselling in one’s country 35 - For many - this is the biggest link to the global market Exporting: selling domestic products to foreign customers - Companies can identify an international market and become exporters to get into the global arena. Factors to consider when deciding between importing and exporting: 1. Cost of labour 2. Knowledge capital 3. Resource availability International licensing agreement: Allows foreign companies to sell domestic company’s products or use its property in exchange for royalty fees. International franchise: when domestic companies give foreign companies the right to use its brand and sell its products (A popular form of global expansion, expanding overseas) - Example: McDonalds, KFC, hotel chains Types of Trade Protection Tariff: The most common form of trade restriction, which protects domestic industries from foreign competition and increases revenue for the government. Effects: - Increased quality supplied, decreased quality demanded - Domestic consumers are at a disadvantage - Domestic producers are at an advantage 36 - Foreign producers are at a disadvantage - Government earns revenue from the tariffs Quota: The limit on the amount of goods that can be imported over a certain period of time (usually a year), and the effects are tariffs. Embargo: extreme quota, where imports and exports to a country are banned Dumping: selling exported goods below the price that producers would normally charge in domestic market Subsidies (recall): government payments to certain industries to promote and regulate trade Exchange Rates Exchange rates: value of one currency relative to another U.S. Dollar Hypothetical exchange rate between US dollar and Euro: - Number of US dollars per euro: 1.5 dollars = 1 euro - Number of euros per dollar: 0.67 euro = 1 dollar - Estimates 62% of world’s currency reserves (IMF), most commonly traded - - Foreign Currency Reserves: assets held by central banks in foreign currencies - Kept as backup funds in in the case where nation currency devalues Post World War 2 - currency of western EU, Australia, Japan were pegged by USD - Pegged: country maintains its currency value at fixed exchange rate relative to USD 37 - Relative strength is strong - Many countries adopted/rely on USD, thus are willing to hold large amounts of it Strengthening dollar: buys more of another currency Weakening dollar: buys less of another currency Changes in Exchange Rate Appreciation: an increase in the exchange rate for a currency - Caused by increase in demand or increase in supply - Requires a higher amount of the foreign currency to purchase one dollar - Dollar is worth more in this case - More expensive for foreigners to buy exports, cheaper for countries to buy imports Depreciation: a decrease in the exchange rate for a currency - Caused by increase in demand or increase in supply - Requires less of the foreign currency to purchase one dollar - Dollar is worth more in this case - Cheaper for foreigners to buy exports, more expensive for countries to buy imports *Both appreciation and depreciation affect imports and exports Causes of changes in exchange rate: - Foreign demand for domestic exports - Domestic demands for imports - Relative inflation rates 38 - Investment from foreign countries - Changes in income Effects of changes in exchange rate: - Cost-push inflation - Demand-pull inflation - Effects employment - Effects economic growth - Effects on foreign debt Balance of Payments 1. Balance of payments: All transactions between residents of a country and residents of all other countries. (usually over the course of a year) - Having unfavourable balance of payments is bad for the stability of a country’s currency, especially for the long term (Many are worried about the U.S dollar due to this) - They have many negative balances, and to cover the debt, they borrow from other countries *U.S also imports more than it exports* Structure of the balance of payments: Includes: 1. Balance of trade in goods 2. Current transfers 3. Balance on current amount 4. Capital account 5. Financial account 39 Example of balance of payments 17 -