More International Ideas

1. More International Ideas

2. Currencies You probably know this, but not ever country uses the same currency, or money. In the US we use the dollar, in Japan they have then yen, and in Mexico they have the peso. There are other currencies, as well. Inside each country one currency is mainly used. In the US, when you go to the store you use dollars. In Japan, when they go to the store they use yen. What happens when we want to trade with them? Well, there is a market where dollars and yen can be traded. This market is called the foreign exchange market.

3. Exchange rates Just as one dollar will not always buy the same amount of gas at a gas station, one dollar will not always buy the same amount of another country’s currency. At any point in time, though, we talk about the exchange rate. The exchange rate can be stated 1 of two ways: 1) The number of dollars (which could include fractions) you need for 1 unit of the foreign currency, or 2) The number of units of the foreign currency needed for 1dollar. Using the gas analogy again, we might say gas prices change because of some change in supply or demand. We also see exchange rates change and we have a supply and demand theory in this case as well.

4. Changes in exchange rates The US dollar appreciates in value when the dollar exchanges for more units of foreign currency than it used to. For example, if last year you needed a penny to buy 1 Japanese yen and today you needed one-half a penny, you would appreciate the increased power of the dollar and the dollar would be said to have appreciated. 1 dollar would have exchanged for 100 yen but now change for 200 yen. Note when the dollar appreciates against the yen, the yen is said to depreciate against the dollar. Similarly, the dollar depreciates against the yen when the dollar buys fewer yen than it used to in the past. Next let’s see why the dollar value might change over time.

5. Supply and demand for yen Note the demand for yen is downward sloping and supply of yen is upward sloping from left to right similar to what we saw before in a market. Here the price in the market is dollars per yen (similar to the market for gas where we would talk of the dollar price per gallon). Dollars per yen S D Quantity of yen

6. Yen market -demand Every now and yen people in the US get a hankerin for a Japanese product. The people in the US have a demand for importing Japanese goods and therefore they have a demand for yen because US folks need the yen to pay the Japanese sellers. Note the demand for yen is downward sloping meaning at a lower price a greater quantity is demanded. The demand for yen would shift right if people in US have increased income (and therefore want more imports, as well as domestic goods) or if their taste and preference for Japanese goods would grow. The demand for yen would shift left if the opposite would happen.

7. Yen market - Supply Japanese folks want US goods and services and with this they supply yen in the currency market. Note the supply of yen is upward sloping from left to right indicating at higher dollar prices for yen they would supply a greater quantity of yen. The supply would shift to the right if the Japanese earn more income or if their taste and preference for US goods and services grow. The supply would shift left if the opposite things happen.

8. Changes in the exchange rate If the demand for yen should grow (a reason is listed on a previous slide, right?), or if the supply of yen should fall the dollar price of yen will rise. This means the dollar depreciates or the yen appreciates. In other words, if our desire for their goods rises or their desire for our goods falls, then their currency appreciates while our depreciates. The reverse happens if we do not like their goods as much as in the past or if they have a greater desire for ours.

9. Government Intervention You and I saw with comparative advantage that countries can consume more than they are able to produce on their own if they specialize and then trade with others. GOOD THING – trade means we get more stuff as a nation. BAD THING – when we specialize, those that used to make the good we no longer make at home have to do something else. They may not be able to, or want to. Let’s explore trade barriers next. Trade barriers restrict the free flow of goods and services.

10. Trade Impediments or barriers Tariffs – tariffs are what are called duties, or excise taxes, on imported goods. In plain terms they are taxes on imported goods. The idea behind a tariff is that with the tax the foreign good is too expensive and we thus buy US goods. Quotas – A quota is a limit on the number of units that can be imported into the country. The idea here is that after the limit has been reached consumers will have to buy the domestically made product. Nontariff barriers – these are barriers such as licensing requirements or quality standards for that product that make it more difficult for products to come into the country.

11. Trade Impediments or barriers Export subsidies – these are payments made to domestic producers for goods that get exported. The idea here is to make the domestic good more attract to foreigners by having the domestic government pay part of the cost for production and thus lower prices can be charged for the good internationally.

12. Cost of barriers Some common costs of trade barriers are 1) Domestic consumers pay more for the good, 2) If the good is an input to other domestic production that production occurs at a higher cost, 3) The protected industry may be slow to design and implement better methods of production or introduce new or better products. 4) Other countries may try to get revenge, or retaliate, and erect barriers as well, setting of trade wars. Did ever hear of Smoot-Hawley? Check it out!

13. Trade Agreements In 1934 the Reciprocal Trade Agreements Act of 1934 (what year did you expect), gave the president (and his reps) the ability to negotiate trade agreements with other nations. The idea was that trade barriers would be reduced or eliminated. Bilateral negotiations are between 2 groups. The Act of 1934 also had a clause that if a bilateral negotiation reduced barriers then countries with most favored nation status would also receive the reduced barrier even though their country was not part of the negotiation. In 1947, 23 countries, including the US, signed the GATT (General Agreement on Tariffs and Trade). GATT gave countries a mechanism to get together and try to reduce trade barriers. Through the years highly publicized meetings have taken place.

14. Trade Agreements The second to the last set of meetings was held in the country known as Uruguay. Can you say Uruguay? Try this - yoor u gway where the u is like the u in suppose. So we had the Uruguay round of negotiations and the WTO (World Trade Organization) was formed. The WTO said GATT out of here! There is no more GATT, there is the WTO. More countries are involved. The Country Qatar has a city called Doha. Say it like doe ha. The last round of negotiations was called the Doha round. The basic idea again is to have negotiations for fewer trade barriers.

15. The EU and NAFTA Many countries in Europe have gotten together to have their own trade group or block. They get together to try to make trade easier amount themselves. NAFTA is a trade bloc made up of Mexico, Canada, and the US.