Macroeconomics AP: Unit

Showing posts with label Unit_6-7. Show all posts

Thursday, April 28, 2016

Protectionism vs. Trade

Arguments for protectionism

Military Self-Sufficiency

not economic, political and military
need to preserve industries that are essential for national defense
point: when you do this, you will incurs economic costs
what counts as "essential?"

Diversification for Stability

common in economies dependent on one or two products (Saudi Arabia)
need to diversify at home because changes to the dependent product markets can be devastating
not relevant to the US

Infant Industry

need to shelter young industries temporarily until they compete globally
which industries will be capable of competing in the future?
protection may not be temporary

Protection Against Dumping

dumping: the sale of a product in a foreign country at prices either below cost or below the prices commonly charged at home.
tactic for driving competitors in other countries out of business.
US imposes antidumping duties where it find it
hard to differentiate between dumping and competition

Increased Domestic Employment

tariff to "save our jobs"
common during recessions
idea is to protect certain jobs by blocking foreign imports
jobs are also created, only some gone
maintaining status quo by making neighbors poorer
trade wars likely

Cheap Foreign Labor

domestic workers must be shielded from counties where wages are low
ignores the fact that trade benefits both parties
ignores comparative advantage
ignores differences in labor productivity

Big Picture: Protectionist actions will benefit some part of the economy at the expense of the rest of the economy, and in some cases, the rest of the world.

Let's talk about labor in the third world

Wednesday, April 27, 2016

Trade and Growth

We already know

people and nations trade to improve their standard of living
trade is voluntary
trade will only occur if both sides expect to gain something

a nation will import if world price < domestic price
a nation will export is world price > domestic price

allows nations to specialize in what they do best

recall: law of comparative advantage: through specialization and trade, nations are able to go beyond their PPF

short and sweet: free trade makes everyone better off

but....

Barriers to trade

tariff: excise taxes on imported goods

revenue tariff: taxes on imported goods not produced domestically in order to raise revenue for the federal government.
protective tariff: tax designed to shield domestic producers from foreign competition

nontariff barrier: licensing requirements imposed on domestic importers of foreign goods.
quotas. By restricting licensing, governments can restrict imports.

voluntary export restriction: voluntary limitations agreed to in the hopes of avoiding more stringent trade barriers.

Quota: legal limit placed on the amount of a good that can be imported in a given year.

Effects:

quotas generate revenue for foreign producers by keeping prices high.
tariffs generate revenue for the domestic government.
in both cases, the prices for domestic consumers are higher.
limit potential gains from trade
protect domestic sellers and the expense of domestic buyers

they also

reduce efficiency in the allocation of scarce resources
(slows economic growth!)

Tuesday, April 26, 2016

BoP and FOREX

(Balance of Payments and Foreign Exchange)

First, some differentiation

Balance of Trade: looks only at a nation's exports and imports of goods.
Balance of Payments: considers all economic transfers.

For the current and capital accounts:

if foreign currency is used to complete the transaction, it is a debt (negative)
if foreign currency is earned in a transaction, it is a credit (positive)

Trade requires nations to exchange currencies

exchange rate: the price of one currency in terms of another. Generally set by supply and demand.

Appreciation:

increase in the value of a nation's currency in foreign exchange markets
tends to reduce exports and increase imports

Depreciation:

decrease in the value of a nation's currency in foreign exchange markets
tends to increase exports and decrease imports

Monetary and Fiscal policies can affect exchange rates, and therefore the international balance of trade and balance of payments.

Recall: Three rules for S/D of currency graphs

Always change the D line on one currency graph, the S line on the other currency’s graph.
Move the lines of the two currency graphs the same direction. (demand moves out, supply moves out, etc.)
One currency will appreciate, the other will depreciate.

Recall: Shifters of currency supply and demand

taste and preferences

demand for products increases
so will demand for currency
cell phones, other electronics, etc.

price level (inflation

consumers will seek cheaper goods if domestic prices rise

income

imports vary directly with its income level
income rises, people buy more domestic good and more foreign goods.

real interest rates

higher real interest rates will attract investment as foreigners seek higher returns

Balance of Payments

Balance of payments (BoP) accounts: an accounting record of all monetary transactions between a country and the rest of the world

These include:
Current Accounts
    Goods: Consumer, Capital, Agricultural
    Services: Receipts versus Payments
        (includes Travel, Royalties, License Fees)

Capital / Financial Accounts
    “Net Capital Account Payments”
    Assets: Purchases of Securities, Direct Investment Payments

Official Reserve Assets

Why keep track of this?

To establish the ability to balance accounts and trade in the future
Fixed vs. floating exchange rates

Individuals and Businesses record stuff like...

Job income, interest income, consumption payments, investment payments

So nations are expected to keep track of this responsibly

Why? helps stabilize currencies and trade expectations for future investments

International BOP can be summarized as a ledger sheet for each trading nation.

Current Account keeps track of the difference between a country's total exports and total imports. (physical stuff, services, investment income, transfers)

trade deficit = importing more than you export (Xn is a negative number)
trade surplus = exporting more than you import (Xn is a positive number)

Capital Account (sometimes called the Financial Account) keeps track of ownership of assets. (foreigners who own US assets and US citizens who own foreign assets)

Net Capital Outflow

Terms:
Current Account (CA): An immediate and final transaction
CA Net Exports                                 Export values minus Import values
CA Balance of Trade                        (Goods and Services)
CA Balance on Goods & Services   Tourism Expenditures
CA Trade Balance

CA Net Investments: Payments on prior stock and bond investments like dividend payments
CA Net Transfers: Aid, Transfers and Remittances, Royalty Payments

Capital and Financial Account (KA): Purchases and payments are made that hope to create future revenues and obligations (people buy stuff as an investment)

KA Real and Financial Assets: Stocks, Bonds, Land, Companies, Franchises, ….

Reserves: Used to balance out accounts if Current Accounts don’t equal Capital and Financial Accounts

Official Reserves: Gold and Currency Holdings
Official Settlements: Also Gold and Currency Holdings
Special Drawing Rights at the IMF: Funds held by the International Monetary Fund

BOP Assets or Credits: A positive number for a nation

Currency Inflows: Wealth amounts coming into a country as a result of the transaction
Currency Demand: Wealth amounts are therefore demand for the currency of the country

BOP Liabilities or Debits: A negative number for a nation

Currency Outflows: Wealth amounts leaving a country as a result of the transaction
Currency Supply: Wealth amounts are therefore supply of the currency moving out of the country

A Final Word on Balances

There is constant news and discussion about the USA’s massive and increasing Trade Deficit.

This is most obvious in the imbalance of imports versus exports,
the US imports hundreds of billions more annually that it exports.

The two major culprits are usually:

oil imports
trade with China.

We do export lots of items,

mostly heavy equipment and services
but those amounts do not equal the oil imported and the lack of ability to sell goods to China. (right now)

what really occurs

oil producing nations and China turn around and use lots of the extra dollars they receive and invest in US stocks and bonds (Capital and Financial Account Asset for the US).

People in the US worry when

China tries to buy stuff like US car companies
US ports (blocked by the government)
China tries to buy the panama canal
resource rich areas in Africa

Monday, April 25, 2016

Exchange Rates, Supply and Demand of Currencies

Currencies as part of Supply and Demand

All major currencies of the world “float” on supply and demand markets.
Some minor currencies are “pegged” to other major currencies like the

US dollar and the Euro,
but rise and fall in value with those major currencies.

The only major currency that is “fixed” in exchange rates by governmental decree is the People’s Republic of China’s Yuan.

The Chinese government does adjust the “fixed” rate occasionally,
most recently as a response to US pressure to balance trade issue flaws.

Currencies either “appreciate” or “depreciate” in EP.

When changes occur between two countries’ economies, the currencies will reflect those changes:

When other countries want something from us they are demanding dollars.

When we want something from other countries we are supplying dollars.

three rules of currency demand graphs

Always change the D line on one currency graph, the S line on the other currency’s graph.
One currency will appreciate, the other will depreciate.
Move the lines of the two currency graphs the same direction and you will end up with the correct answer.

How do currencies move?

Fads, tastes, and political actions like boycotts, occur in a country as it deals with another country.
The country with less inflation has the more attractive economy compared to a trading partner.
The country with better investment opportunities (higher real interest rates for investments) has the more attractive economy.
The country “expected” to improve its economic standing more quickly than trading partners will have the more attractive economy.
If the overall real wealth of one country improves, compared to the wealth of a trading partner, the improving country will have the more attractive economy.