International Trade and Finance

1. International Trade and Finance PPTs series 2 Econ 455

2. List of Contents • Part II Finance • The Balance of Payments • a) Concept and Structure of BoP • b) BoP and GDP • c) BoP goals • 2. Foreign exchange • a) Exchange rates and Markets • b) Exchange rate Mechanics • c) Exchange Rate Policies • 3: Exchange Regimes • a) Gold Standard • b) The Bretton Woods System • c) Extansions • d) Controversies • 4. Agents and their Activities • 5. Selected Exchange Rate Theories Introduction Part I Trade 1. Theories of Trade a) Motives for Trade b) Absolute Ádvantage c) Comparative Advantage d) Extensions 2. Barriers to Trade a) Non.tariffary Barriers b)Tariffs c) Quotas d) Subsidies Econ 455

3. Part I Trade 1. Theories of Trade a) Motives for international trade or: why do people buy foreign goods and services? Price advantange Same goods available at home, but cheaper abroad Availability Goods wanted or needed not available at home must be acquired elsewhere (Raw materials, certain agricultural products ) Taste Similar goods available at home, but foreign made goods more highly appeciated. (Related to ) Status Foreign-made goods enjoy higher esteem (perfumes, clothing, wine, cars ) Econ 455

4. Part I Trade 1. Theories of Trade • a) Absolute Advantage • Assumptions: • Two coutries • One good „q“ • Perfect competition • Different factor endowments in both countries • leading to cost differentials • In combination with different prefences in autarkism prices will • differ in both countries. • One currency • No transportation cost Econ 455

5. Autarkism in A and B Country B Country A S p p S p1 B p1 A D D q q q1 A q1 B Econ 455

6. Price difference between A and B Country B Country A S p p S p1 B d p1 A D D q q q1 A q1 B Econ 455

7. Trade: Shifts of Supply and Demand Export market for A = Import market for B Country B Country A S p p p A‘s Export Supply S p1 B pw p1 A B‘s Import Demand D D q x q x q1 A q1 B Econ 455

8. Part I Trade 1. Theories of Trade b) Comparative advantage • Contents • Production possibility boundaries • Opportunity costs • Choice and optimum • Choice before trade: two countries • Comparison between countries • Advantages • Arbitrage and trade • Optimum with trade Econ 455

9. A-Land Food Production possibility Boundary demonstrates the maximum of PC and food A-Land can produce with given resources of land, labor, capital and technology in various combinations. PC Econ 455

10. A-Land Food Opportunity cost Producing one extra PC „costs“ reduction of the production of food, or, producing one extra unit of food „costs“ the reduction of the production of PCs • The slope shows the relative cost of food measured in PC or PC measured in units of food PC Econ 455

11. A-Land Food If production = income, then the PPB demonstrates the income of A-Land Income determines budget Social preference determines choice PC Econ 455

12. A-Land Food Point of tangency of PPB to indifference Curve discloses choice PC Econ 455

13. B-Land A-Land Food Food PC PC Econ 455

14. Comparing A-Land and B-Land A Land has an advantage in producing both goods compared to B-Land, but. ......... A-Lands curve ..measured in food, PCs are cheaper in B-Land than in A-Land and Measured in PCs, food is cheaper in A-Land than in B-Land B-Lands curve Econ 455

15. Comparing A-Land and B-Land Magnifying Lens A-Lands curve B-Lands curve Econ 455

16. Comparing A-Land and B-Land – through a lens A-Lands curve B-Lands curve 15 Food In order to produce 10 PC, A has to sacrifice 15, whereas B only sacrifices 12 units of food PC are – measured in food – cheaper in B than in A 12 Food 10 PC Econ 455

17. Comparing A-Land and B-Land – through a lens B-Lands curve A-Lands curve 10 Food In order to produce 10 units of food, A has to sacrifice 6,6 PC, whereas B sacrifices 8,3 units of food Food is– measured in PC – cheaper in A than in B 8,3 PC 6,6 PC Econ 455

18. Arbitrage Trade: B will shift ressources from food to produce PCs and sell PCs to A in exchange for food, whereas A will shift ressources from PCs to produce food and sell to B in exchange for PCs Arbitrage (unification of locally seperate markets trough shifts in supply and demand) will create a uniform ratio of prices on the world market. Econ 455

19. Specialization and Trade: B-Land will specialize in the production of PC, Export the surplus to A-Land and Import the deficit in food from A-Land in exchange A-Land will specialize in the production of food, Export the surplus to B-Land and Import the deficit in PCs from B-Land Pink trangles – congruent for both countries – show trade Econ 455

20. B-Land A-Land Food Food Uniform Price Ratio Price ratio PC PC Econ 455

21. Trade Triangle A-Land’s Food Export to B-Land B-Land’s Food Import from A-Land A-Land’s Import of PCs from B-Land B-Land’s Export of PCs to A-Land Econ 455

22. Benefit from Trade: Both A-land and B-Land enjoy higher consumption of both goods, as shown by the indifference curve reached, which lies north-east of the original Summary: Even though B-Land has only a comparative advantage, both countries benefit from specialization and trade Econ 455