Jason Majewski - Quia
Unit VII – International Trade (5% of AP Microeconomics Exam and 10-15% of Macroeconomics Exam)
Objectives:
• NCEE Content Standard 5 – Voluntary exchange occurs only when all participating parties expect to gain. This is true for trade among individuals or organizations within a nation, and among individuals or organizations in different nations.
• NCEE Content Standard 6 – When individuals, regions, and nations specialize in what they can produce at the lowest cost and then trade with others, both production and consumption increase.
• NCEE Content Standard 7 – Markets exist when buyers and sellers interact. This interaction determines market prices and thereby allocate scarce goods and services.
• NCEE Content Standard 8 – Prices send signals and provide incentives to buyers and sellers. When supply or demand changes, market prices adjust, affecting incentives.
• NCEE Content Standard 9 – Competition among sellers lowers costs and prices, and encourages producers to produce more of what consumers are willing and able to buy. Competition among buyers increases prices and allocates goods and services to those people who are willing and able to pay the most for them.
Vocabulary: (Big Topics in Bold)
Comparative Advantage Absolute Advantage Gains from trade
Terms of Trade (Opportunity Cost) Consumer Surplus Producer Surplus
World Price Domestic Price Exports
Imports Tariffs Quotas
Deadweight Loss Protectionism Free Trade
Trade Deficit and Surplus Balance of Trade Current Account
Capital Account Net Exports Net Capital Outflow
Capital Flight Nominal Exchange Rate Real Exchange Rate Appreciation Depreciation Purchasing Power Parity
Interest Rate Parity Trade Policy Floating Exchange Policy
Fixed Exchange Policy Revaluation Devaluation
Numbers:
Comparative Advantage and Terms of Trade
Visuals:
Supply and Demand (Product)
Supply and Demand (Exchanges)
Supply and Demand (Loanable Funds)
AP Macroeconomics Activity Book (answers to Unit 7 M/C sample questions for Unit 7)
1. D 6. D 11. B 16. C
2. E 7. B 12. C 17. B
3. B 8. A 13. C 18. E
4. D 9. B 14. C 19. A
5. D 10. B 15. D 20. B
Unit VII Calendar:
|Monday |Tuesday |Wednesday |Thursday |Friday |
|January 27 |28 |29 |30 |31 |
|Go over midterm |Introduction to Trade |Barriers of Trade |Barriers of Trade |Current Accounts |
| | | | | |
| |Hwk: Read Modules 4 and 44 | | | |
| | |Hwk: AP Macro Activity 7-2 |Hwk: Read Module 41 |Hwk: AP Macro Activity 7-1 |
|February 3 |4 |5 |6 |7 |
|Current Accounts |Exchange Rates |Exchange Rates |Exchange Rates |Loanable Funds |
| | | | | |
|Hwk: Read Module 42 and | |Hwk: AP Macro Activities |Hwk: Read Module 43 |Hwk: AP Macro Activity 7-5 |
|Balance of Payments packet | |7-3, 7-4 | |and Build your Human Capital |
|due Wednesday | | | | |
|10 | | | | |
|Unit 7 Test | | | | |
AP Macroeconomics Resource Manual (answers to Unit 7 activities)
Activity 7-1
1. Debit, Current 2. Debit, Financial
3. Debit, Current 4. Credit, Current
5. Credit, Current
6. Debit, Current
7. Debit, Current
8. Credit, Financial
9. Credit, Financial
10. Debit, Current
11. Credit, Current
12. Debit, Financial
2. The financial account will run a deficit. The current account plus the financial account must sum to zero.
3. Increase in loanable funds supply curve.
Activity 7-2
1. Decrease in supply curve 2. Q is lower and P is higher
3. National defense, infant industry, dumping, preservation of domestic jobs, manufacturing a diverse and stable economy, prevention of exploitation.
Activity 7-3
1. $55.05, $75.10, Depreciated 2. $249, $270, Depreciated
3. $73,977.37, $77,343.04, Depreciated 4. $2.82, $2.79, Appreciated
5. $101.41, $128.57, Depreciated
6. $1,152, $1,134, Appreciated
7. Canadian investors will demand US dollars to purchase US investments, causing the US dollar to appreciate. The supply of Canadian dollars will increase because Canadians are trading Canadian dollars for US dollars. The Canadian dollar will depreciate.
8. The demand for pesos will increases to pay for the beach vacations. The supply of euros increases because the French are exchanging euros for Mexican pesos. The Mexican peso is appreciating, and the euro is depreciating.
9. Demand for Japanese yen increases as US children buy more Japanese video games; the supply of dollars to the exchange market increases. The US dollar depreciates. The Japanese yen appreciates.
Activity 7-4
1.
a. Increase, the increase in disposable income increases demand for all goods, including foreign goods. Furthermore, the increase in US prices makes foreign goods relatively less expensive.
b. Decrease (long term), the relative price to foreigners of US goods has increased, so foreigners buy less.
c. Increase, the increase in disposable income increases aggregate demand.
d. Increase, the price level as a result of the increase in aggregate demand.
2.
a. Increase, each dollar buys more yen; therefore, Japanese goods are cheaper in US dollars and imports from Japan increase.
b. Decrease, it takes more yen to buy each dollar, therefore, US goods cost more in yen than previously and exports to Japan decrease.
c. Decreases, exports decrease and imports increase so aggregate demand decreases
d. Decreases, the decrease in aggregate demand cause the price level to decrease.
3.
a. Increase, each dollar buys more pounds; therefore, British goods are cheaper in US dollars and imports from Great Britain increase.
b. Decrease, It takes more pounds to buy each dollar; therefore, US goods cost more in pounds than previously and exports to Great Britain decrease.
c. Decreases, Exports decrease and imports increase so Aggregate demand decreases.
d. Decreases, The decrease in aggregate demand causes the price level to decrease.
4.
a. Decrease, each dollar buys fewer euros; therefore, European goods are more expensive in US dollars and imports fall.
b. Increase, each euro buys more dollars; therefore, US goods are less expensive and exports increase.
c. Increases, if imports fall and exports increase, Xn will increase and therefore AD will increase.
d. Increases, The increase in aggregate demand causes the price level to increase.
5.
a. Increase, Each US dollar buys more Canadian dollars; therefore, Canadian goods are cheaper in US dollars and imports from Canada increase.
b. Decrease, It takes more Canadian dollars to buy each US dollar; therefore, US goods cost more in Canadian dollars than previously and exports to Canada decrease.
c. Decreases, Exports decrease and imports increase so aggregate demand decreases
d. Decreases, the decrease in aggregate demand causes the price level to decrease.
Activity 7-5
1. Surplus, Increase
2. Increase demand for US dollar, Increase supply for Japanese Yen
3. Decrease supply for loanable funds. Product is sold in Japan by US. Money is in Japan in US bank account.
4. Deficit, Decrease
5. Increase demand for US dollar, Increase supply of Euro
6. Increase supply for loanable funds. Product sold in US by Europe. Money is in US in European bank account.
7. Crowding Out
8. Increase, Decrease
9. Decrease, Decrease, Decrease Supply of loanable funds
10. Increase supply of loanable funds
11. Increase demand for US dollar, Increase supply for British pound.
12. Appreciation of US dollar, more expensive exports
13. Decrease supply of loanable funds
What you should know at the end of this unit?
• A low domestic price indicates that the country has a comparative advantage in producing the good and that he country will become an exporter. A high domestic price indicates the opposite and the country will become an importer.
• When a country allows trade and becomes: Exporter – producers gain, consumers lose; Importer – producers lose, consumers gain. In both cases, the gains from trade exceed the losses.
• A tariff – a tax on imports – moves a market closer to the equilibrium that would exist without trade and, therefore, reduces the gains from trade. Domestic producers and government gain, losses to consumers exceed these gains.
• Arguments for trade restrictions: job protection, national security, etc. These arguments do have merit, but economists believe that free trade is usually the better policy.
• Net Exports are the value of domestic goods and services sold abroad (exports) minus the value of foreign goods and services sold domestically (imports). Net capital outflow is the acquisition of foreign assets by domestic residents (capital outflow) minus the acquisition of domestic assets by foreigners (capital inflow). Because every international transaction involves an exchange of an asset for a good or service, an economy’s net capital outflow always equals its net exports.
• An economy’s saving can be used to finance investment at home or buy assets abroad. Thus, national saving equals domestic investment plus net capital outflow.
• The nominal exchange rate is the relative price of the currency of two countries, and the real exchange rate is the relative price of the goods or services of two countries. When the nominal exchange rate changes so that each dollar buys more foreign currency, the dollar is said to appreciate or strengthen. When the nominal exchange rate changes so that each dollar buys less foreign currency, the dollar is said to depreciate to weaken.
• According to the theory of purchasing power parity, a dollar (or a unit of any other currency) should be able to buy the same quantity of goods in all countries. This theory implies that the nominal exchange rate between the currencies of two countries should reflect the price levels in those two countries. As a result, countries with relatively high inflation should have depreciating currencies, and countries with relatively low inflation should have appreciating currencies. Continue on next page
• In the market for loanable funds, the real interest rate adjusts to balance the supply of loanable funds (from national saving) and the demand for loanable funds (from domestic investment and net capital outflow). In the market for foreign currency exchange, the real exchange rate adjusts to balance the supply of dollars (from net capital outflow) and the demand for dollars (for net exports). Because net capital outflow is part of the demand for loanable funds and because it provides the supply of dollars for foreign currency exchange, it is the variable that connects these two markets.
• A policy that reduces national saving, such as a government budget deficit, reduces the supply of loanable funds and drives up the interest rate. The higher interest rate reduces net capital outflow, which reduces the supply of dollars in the market for foreign currency exchange. The dollar appreciates, and net exports fall.
• A trade restriction increases net exports for a given exchange rate and, therefore, increases the demand for dollars in the market for foreign currency exchange. As a result, the dollar appreciates in value, making domestic goods more expensive relative to foreign goods. This appreciation offsets the initial impact of the trade restriction on net exports.
• When investors change their attitudes about holding assets of a country, the ramifications for the country’s economy can be profound. In particular, political instability can lead to capital inflight, which tends to increase interest rates and cause the currency to depreciate.
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