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AP Macroeconomics

AP Macroeconomics. Unit 5. I. Trade Basics. Balance of trade: X - M Negative=trade deficit Positive=trade surplus Balance of payments: $ entering - $ leaving includes investment, foreign aid, etc. Max they can produce of each. Coco-nuts. Fish. Young Guy. 10. 10. Old Guy.

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AP Macroeconomics

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  1. AP Macroeconomics Unit 5

  2. I. Trade Basics • Balance of trade: X - M • Negative=trade deficit • Positive=trade surplus • Balance of payments: $ entering - $ leaving • includes investment, foreign aid, etc.

  3. Max they can produce of each Coco-nuts Fish Young Guy 10 10 Old Guy 4 8 II. Absolute Advantage • When 1 country is better at making something. • Young guy has absolute adv. in coconuts & fish.

  4. Max they can produce of each good Coco-nuts Fish Young Guy (A) 10 10 Old Guy (B) 4 8 II. Absolute Advantage

  5. Amounts they consume before trade Coco-nuts Fish Young Guy 6 4 Old Guy 2 4 III. Comparative Advantage

  6. What is young guy’s opportunity cost of coconuts? • Fish? • What is old guy’s opportunity cost of coconuts? • Fish?

  7. Opportunity Cost Coco-nuts Fish Young Guy 1 1 Old Guy 2 0.5 III. Comparative Advantage

  8. III. Comparative Advantage • Lower opportunity cost in a good = comparative advantage in that good • Countries benefit by making the things they have a comparative advantage in, and trading.

  9. Opportunity Cost Coco-nuts Fish Young Guy 1 fish 1 c-nut Old Guy 2 fish 0.5 c-nut III. Comparative Advantage

  10. III. Comparative Advantage • The Big Trick • “Steeper” PPF’s have the comparative advantage in the good on the vertical axis!

  11. Amounts they consume before trade Coco-nuts Fish Young Guy 6 4 Old Guy 2 4 III. Comparative Advantage

  12. Amounts they produce with trade Coco-nuts Fish Young Guy 10 0 Old Guy 0 8 III. Comparative Advantage

  13. Amounts they produce without trade Amounts they producewith trade Coco-nuts Coco-nuts Fish Fish Young Guy 6 4 Young Guy 10 0 Old Guy 2 4 Old Guy 0 8 III. Comparative Advantage Totals: 8 8 10 8

  14. Amounts they consume before trade Amounts they consume after trade Coco-nuts Coco-nuts Fish Fish Young Guy Young Guy 7 6 4 4 Old Guy Old Guy 2 3 4 4 III. Comparative Advantage

  15. Amounts they consume after trade Coco-nuts Fish Young Guy 7 4 Old Guy 3 4 III. Comparative Advantage • Terms of trade: • Old man trades 4 fish for 3 coconuts.

  16. Amounts they consume after trade Coco-nuts Fish Young Guy 7 4 Old Guy 3 4 III. Comparative Advantage

  17. III. Comparative Advantage

  18. III. Comparative Advantage Coconuts 10 6 B A 6 10 Fish

  19. Product per hour Corn Wheat Mike 8 6 John 2 4 Corn Wheat Mike’s O.C.: 6/8 8/6 John’s O.C.: 4/2 2/4 Who should make what? III. Comparative Advantage

  20. Input Method Apples needed to make one: PieJuice Jeff 5 3 Judy 6 3 Convert to outputs Units per apple: PieJuice Jeff 1/5 1/3 Judy 1/6 1/3 Jeff’s OC 5/3 3/5 Judy’s OC 6/3 3/6 Who should make what? III. Comparative Advantage

  21. III. Comparative Advantage • Terms of Trade: the rate by which one unit of one good will be traded for another good. • Determine each country’s O.C. of each good. Nebraska

  22. III. Comparative Advantage • Nebraska-Wheat; Florida-Pears • Now, Nebraska is willing to give up up to 4 wheat per pear, & Florida wants at least 3 wheat per pear. • Terms of Trade: 1 Pear will be traded for between 3 & 4 Wheat Nebraska

  23. III. Comparative Advantage • Other benefits of specialization: • More efficient use of resources. • Increased production without increase in resources. • Effects of specialization on PPC?

  24. Comparative Advantage • What is O.C. of each good for each country? • Who has comparative advantage in what? • What are the terms of trade?

  25. IV. Trade Barriers • tariff: tax on imports • revenue • protective

  26. IV. Trade Barriers • quota: limit on # of imports • link

  27. IV. Trade Barriers • embargo: all trade with a certain country made illegal • link

  28. IV. Trade Barriers • Trade embargo with Iran • Airplanes- 17 Iranian passenger jets have crashed in 25 years, killing 1,500 people • Oil- free trade with Iran would reduce the world price of oil by 10%.

  29. IV. Trade Barriers • standards: regulations on imports • Example (Listen, Don’t Write): • On imported beef, the U.S. requires • farm to fork trace-ability • enter U.S. through specified inspection posts • country of origin to have adequate food safety system

  30. Reinheitsgebot • Germany’s purity law • Lasted from 1516 to 1993. • “Beer can only be made using barley, hops, and water.” • Restricted trade because beer-makers in many other countries used wheat and rye instead of barley.

  31. IV. Trade Barriers • subsidies: gov’t payments to domestic producers

  32. Protectionism independent our producers of protected products are helped infant industries Free Trade lower P’s most efficient no retaliation minimal gov’t involvement foreign relations IV. Trade Barriers

  33. IV. Trade Barriers • Arguments for Protectionism • The Preserve-Jobs Argument • The Infant Industry Argument • The Protect Against Dumping Argument • The National Defense Argument • AKA The Diversity of Production Argument • Harmful Effects of Protectionism • Retaliation • Higher Prices

  34. IV. Trade Barriers • Q: Who is hurt by import barriers? • A: • foreign producers • domestic consumers who must pay higher prices • domestic producers that produce complementary goods to the import goods

  35. IV. Trade Barriers • Q: Who gains and who loses when subsidies are paid to our export industries? • A: • export producers gain • taxpayers lose by paying more in taxes

  36. IV. Trade Barriers • Trade barriers protect domestic industries, but… • keep them from becoming more efficient. • Many countries have benefited from trading blocks: • EU-27 countries in Europe (France, Germany, Italy, UK) • NAFTA-U.S., Mexico, Canada • ASEAN-10 countries in Asia (Philippines, Indonesia, Thailand)

  37. V. Balance of Payments • Current Account = Balance of Trade • + Net factor & investmentincome • Capital (or Financial) Account = Net Investment. includes: • real estate • stock purchases/sales • bank accounts

  38. V. Balance of Payments • The Balance of Payments = • Current Acct Balance + • Capital Acct Balance • The Balance of Payments must equal zero!

  39. V. Balance of Payments • If a US citizen buys stock in Toyota how would this be entered into the Balance of Payments? • If this person receives dividends on this stock, how would they be entered?

  40. V. Balance of Payments • Balance of Payments in the U.S. • For the last three decades, the U.S. has run a current account deficit. • Of the components of the current account, which do you think contributed the most towards this deficit? • What do you think our capital account has looked like over this period? • What are some implications of this? • Persistent trade deficits are often the result of a national savings rate that is too low. • Trade deficits often lead to foreign ownership of domestic capital. If Nx is negative, capital is flowing out of the country, & vice versa.***

  41. VI. Reading Exchange Rate Charts • “Per” means “per 1” • Most countries have a flexible exchange rate system- • -supply/demand determine value.

  42. VII. Conversion • If 1 dollar is worth 0.5 pesos… • $2 = __ peso • $10 = __ pesos • $100 = __ pesos

  43. VIII. Rise and Fall • If dollar rises, it gains value. • If dollar rises against yen, • it takes more yen to buy a dollar. • one dollar buys more yen.

  44. Year 1 Yen for sale! Year 2 Yen for sale! VIII. Rise and Fall What appreciated? Depreciated?

  45. Year 1 Dollars for sale! Year 2 Dollars for sale! VIII. Rise and Fall What appreciated? Depreciated?

  46. VIII. Rise and Fall • What happens to value of Pound if: • there is an increase in UK interest rates? Dollars Pound

  47. VIII. Rise and Fall • What happens to value of Pound if: • US interest rates rise? Dollars Pound

  48. VIII. Rise and Fall • What happens to value of Pound if: • UK speculators predict that the value of gold is about to fall? Dollars Pound

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