Class Notes 11


AED Economics 200 Principles of Food and Resource Economics Winter, 2003

	11. International Trade and International Finance
	Patterns of U.S. Trade -
		major exports - autos, computers, aircraft, ag. products, scientific instruments, coal, plastics major imports - oil, autos, clothing, iron, steel, office machines, footwear, fish, coffee, diamonds
	Why trade? Just like individuals, different countries have different natural resources, labor conditions, skills.
		Should we raise oranges in Ohio and not in Florida? Individuals and countries trade for the same reasons-
		-specialization and division of labor -gains in efficiency and total output
	Comparative advantage - country gains if it produces those products where it has the greatest relative advantage
		-self sufficiency in expensive -example, lawyer who can type well hires secretary to type -absolute advantage vs. comparative advantage
		Graphic Models of comparative advantage
		-production possibilities curve -terms of trade (i.e., relative prices)

GAIN FROM TRADE EXAMPLE
		Prod.	+Imports	-Exports	=Consumption	Prod.	+Imports	-Exports	=Consumption
		Western Ohio				Eastern Ohio
		--------------------Corn---------------------				--------------------Corn------------------
Before Trade		50	0	0	50	10	0	0	10
After Trade		70	0	15	55	0	15	0	15
		------------------Wood----------------------				---------------------Wood---------------------
Before Trade		25	0	0	25	20	0	0	20
After Trade		15	15	0	30	40	0	15	25
A	Before Trade:
	Opportunity cost
	Eastern Ohio			1 cord Wood = 1/2 bu. Corn
	Western Ohio			1 cord Wood = 2 bu. Corn
B	Assumption:
	Trade occurs with exchange at 1 cord Wood = 1 bu. Corn

	Arguments for trade
	Accommodates differences between resource endowments and tastes - consumers and producers gain. Economies of size gives advantage to global companies Promotes competition Interdependence of nations Must be buyers as well as sellers
	Arguments against trade
	Lost jobs and profits Dependency on critical import - national defense Unsafe products Quid pro quo - one thing in return for another Infant industry Destruction of culture
Trade protectionism
	Non-tariff barriers Tariffs Quotas Subsidies to producers Voluntary export (import) restraints
Move toward freer trade
	General Agreement of Tariffs and Trade (GATT)
		World Trade Organization (WTO)
	Regional Agreements
		N. Amer. Free Trade Agreement (NAFTA) Free Trade Area of the Americas (FTAA)
	Bilateral Agreements
International Finance
1.	Balance of Payments - periodic statement of money value of all transactions between one country and another. Transactions
		-supplying country's currency - Debit (-) (e.g., buying coffee from Brazil) -demanding country's currency - Credit (+) (e.g., selling corn to Japan)
2.	Components of balance of payments
	a.	Current Account - payments related to goods and services
		Exports of goods and services (Credit) Merchandise Trade Balance Imports of goods and services (Debit) Net Unilateral Transfers (Debit, if sending money abroad) Current Account Balance
	b.	Capital Account - payments related to assets and debt
		Inflow of Capital (Credit) Outflow of Capital (Debit) Capital Account Balance
	c.	Official Reserve Account - changes in govt. holding of gold, foreign currencies, reserve position in Int'l. Monetary Fund
		Decrease (Credit) Increase (Debit)
	d.	Balance of Payments = Current Account
		+ Capital Account +Official Reserve Account +Statistical Discrepancy =0
Currency Exchange
	Flexible Exchange Rates vs. Fixed Exchange Rates Exchange Rate - conversion rate of one currency to another Exchange Rates from WSJ Demand for and Supply of Currencies
		- Determined by Balance of Payments Forces - At equilibrium exchange rate, demand for currency (credits) is equal to supply of currency (debits)
	Supply and Demand Diagrams - Supply of U.S. dollar equal to Demand for British pound (Exhibit 20-5) Changes in Equilibrium Rate, ceteris paribus
		Changes in National Income - increase in foreign purchases (imports) causes home country currency to depreciate Inflation - increase in country's inflation rate will cause home country currency to depreciate Real interest rates - decrease in real interest rate will cause currency to depreciate
In equilibrium, supply and demand for currency are in balance
	- there is no surplus or deficit in balance of payments account
In disequilibrium, then either
	Supply of currency exceeds demand, and - currency is "overvalued" - something must be done to remove surplus from market or - black market develops Supply of currency less than demand, and - currency is "undervalued" - something must be done to provide currency for market
Fixed exchange rates = governments agree on constant exchange rate, and exchange rate is not allowed to "float" Persistent imbalances
	- what might govt. do to maintain fixed rate? options: affect income, inflation, real interest
History of Exchange Rates (since mid 1800s)
	Gold Standard -define value of currency in terms of ounces of gold -convert currency to gold and vice versa -link available money supply to gold Bretton Woods System (1944-71) -fixed exchange rates -countries would buy and sell currencies to maintain rates -International Monetary Fund - countries could borrow currencies to finance purchase and sales Managed flexible exchange rates (1971- ) -floating exchange rates -central banks intervene to manipulate rate sometimes -smaller countries "peg" their currencies to a larger country's
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