Professional Documents
Culture Documents
IB
Economics
SL
Unit
3:
Interna4onal
Economics
Mr.
R.S.
Pyszczek,
Jr.
City
Honors
School
Explain
that
gains
from
trade
include
lower
prices
for
consumers,
greater
choice
for
consumers,
the
ability
of
producers
to
benet
from
economies
of
scale,
the
ability
to
acquire
needed
resources,
a
more
ecient
alloca4on
of
resources,
increased
compe44on,
and
a
source
of
foreign
exchange.
Interna+onal Trade
Free
Trade
The
Benets
of
Trade
l Increased
Variety/Choice:
We
are
an
interdependent
wordl
economy.
Interna+onal Trade
Free
Trade
The
Benets
of
Trade
l Compe44on
can
improve
eciency:
When
a
company
controls
a
Interna+onal Trade
Free
Trade
The
Benets
of
Trade
l Eciency
and
Exports
=
growth
and
development:
Development
Interna+onal Trade
Free
Trade
Aims
of
the
World
Trade
Organiza4on
(WTO)
l Predictability
through
binding
and
transparency
l Promo4ng
fair
compe44on
l Encourage
development
Interna+onal Trade
Free
Trade
Func4ons
of
the
World
Trade
Organiza4on
(WTO)
l Provide
a
forum
for
trade
nego4a4on
l Execute
WTO
agreements
l Evaluate
and
rule
on
trade
complaints
by
member
countries
trade issues
Interna+onal Trade
Free
Trade
Supporters
View
of
the
World
Trade
Organiza4on
(WTO)
l The
WTO
Promotes
peace.
l The
WTO
provides
a
place
to
handle
disputes
construc4vely
l The
WTO
is
based
on
rules
rather
than
power
Interna+onal Trade
Free
Trade
Supporters
View
of
the
World
Trade
Organiza4on
(WTO)
l Free
Trade
cuts
the
cost
of
living
l Trade
provides
greater
consumer
choice
and
variety
l Trade
boost
incomes
Interna+onal Trade
Free
Trade
Supporters
View
of
the
World
Trade
Organiza4on
(WTO)
l Trade
increases
economic
growth.
l The
WTO
system
encourages
eciency
and
simplicity
l WTO
agreements
shield
countries
from
narrow
interests
Interna+onal Trade
Free
Trade
Cri4cs
View
of
the
World
Trade
Organiza4on
(WTO)
l Poor
countries
some4mes
cannot
aord
trade
representa4ves.
l Rich
countries
and
individuals
are
ge^ng
richer
faster
than
everyone else
Interna+onal Trade
Free
Trade
Cri4cs
View
of
the
World
Trade
Organiza4on
(WTO)
l Agricultural
subsidies
in
rich
countries
hav
not
been
reduced.
l The
protec4on
of
intellectual
property
rights.
(lack
of
protec4on)
Interna+onal Trade
Free
Trade
Cri4cs
View
of
the
World
Trade
Organiza4on
(WTO)
l Despite
claims
to
equalize
the
trade
environment,
WTO
Interna+onal Trade
Explain,
using
a
tari
diagram,
the
eects
of
imposing
a
tari
on
imported
goods
on
dierent
stakeholders,
including
domes4c
producers,
foreign
producers,
consumers
and
the
government.
Explain,
using
a
diagram,
the
eects
of
se^ng
a
quota
on
foreign
producers
on
dierent
stakeholders,
including
domes4c
producers,
foreign
producers,
consumers
and
the
government.
Interna+onal Trade
Interna+onal Trade
Taris
Quotas
Subsidies
Interna+onal Trade
Interna+onal Trade
Interna+onal Trade
Interna+onal Trade
Misalloca4on of resources
Interna+onal Trade
Exchange rates
Exchange rates
Exchange rates
varying
needs
and
interests
that
trade
directly
with
each
other.
These
par4cipants
can
be
divided
in
two
groups:
the
interbank
market
and
the
retail
market.
Exchange rates
Central
Banks
-
Na4onal
central
banks
(such
as
the
US
Fed
and
the
ECB)
play
an
important
role
in
the
Forex
market.
As
principal
monetary
authority,
their
role
consists
in
achieving
price
stability
and
economic
growth.
To
do
so,
they
regulate
the
en4re
money
supply
in
the
economy
by
se^ng
interest
rates
and
reserve
requirements.
They
also
manage
the
country's
foreign
exchange
reserves
that
they
can
use
in
order
to
inuence
market
condi4ons
and
exchange
rates.
Commercial
Banks
-
Commercial
banks
(such
as
Deutsche
Bank
and
Barclays)
provide
liquidity
to
the
Forex
market
due
to
the
trading
volume
they
handle
every
day.
Some
of
this
trading
represents
foreign
currency
conversions
on
behalf
of
customers'
needs
while
some
is
carried
out
by
the
banks'
proprietary
trading
desk
for
specula4ve
purpose.
Exchange rates
Exchange rates
Exchange rates
Specula+on/Hedge
Funds
-
Hedge
funds
are
private
investment
funds
that
speculate
in
various
assets
classes
using
leverage.
Macro
Hedge
Funds
pursue
trading
opportuni4es
in
the
Forex
Market.
They
design
and
execute
trades
ager
conduc4ng
a
macroeconomic
analysis
that
reviews
the
challenges
aec4ng
a
country
and
its
currency.
Due
to
their
large
amounts
of
liquidity
and
their
aggressive
strategies,
they
are
a
major
contributor
to
the
dynamic
of
Forex
Market.
(Remember
George
Soros?)
Exchange rates
Exchange rates
Exchange rates
Exchange rates
Exchange rates
Exchange rates
l Draw diagrams to show changes in the demand for, and supply of, a
currency.
Exchange rates
If
prices
in
both
countries
remain
the
same,
an
apprecia4on
will
make
foreign
goods
rela4vely
cheaper
to
you,
leading
to
an
increase
in
imports.
It
also
means
that,
even
if
prices
remain
the
same,
your
goods
will
be
more
expensive
to
foreigners.
They
will
buy
less
of
your
goods
and
exports
will
fall.
As
a
result,
your
country's
net
exports
will
fall.
This change to net exports causes a legward shig of the aggregate demand curve.
Exchange rates
If
prices
in
both
countries
remain
the
same,
deprecia4on
will
make
foreign
goods
rela4vely
more
expensive
to
you,
leading
to
a
fall
in
imports.
It
also
means
that,
even
if
prices
remain
the
same,
your
goods
will
be
cheaper
to
foreigners.
They
will
buy
more
of
your
goods
and
exports
will
rise.
As
a
result,
your
country's
net
exports
will
increase.
This change to net exports causes a rightward shig of the aggregate demand curve.
Exchange rates
Numerous
factors
determine
exchange
rates,
and
all
are
related
to
the
trading
rela4onship
between
two
countries.
Remember,
exchange
rates
are
rela4ve,
and
are
expressed
as
a
comparison
of
the
currencies
of
two
countries.
The
following
are
some
of
the
principal
determinants
of
the
exchange
rate
between
two
countries.
Note
that
these
factors
are
in
no
par4cular
order;
like
many
aspects
of
economics,
the
rela4ve
importance
of
these
factors
is
subject
to
much
debate.:
Exchange rates
of
currencies,
and
so
alter
the
exchange
rate.
When
the
demand
for
a
countrys
exports
increases
it
increases
demand
for
the
currency
itself.
To
buy
the
exports,
the
importers
rst
need
to
buy
the
expor4ng
countrys
currency
to
pay
for
them.
Exchange rates
Exchange rates
Exchange rates
Exchange rates
Exchange rates
Exchange rates
Exchange rates
Exchange rates
Exchange rates
Describe a xed exchange rate system involving commitment to a single xed rate.
In
a
xed
exchange
rate
system,
most
of
the
transac4ons
of
one
currency
for
another
will
take
place
in
the
private
market
among
individuals,
businesses,
and
interna4onal
banks.
However,
by
xing
the
exchange
rate
the
government
would
have
declared
illegal
any
transac4ons
that
do
not
occur
at
the
announced
rate.
However,
it
is
very
unlikely
that
the
announced
xed
exchange
rate
will
at
all
4mes
equalize
private
demand
for
foreign
currency
with
private
supply.
For
example,
the
United
States
xes
its
currency
to
the
Bri4sh
pound
(the
reserve),
when
there
is
excess
demand
for
pounds
in
exchange
for
U.S.
dollars
on
the
private
Forex,
the
U.S.
central
bank
would
immediately
sa4sfy
the
excess
demand
by
supplying
addi4onal
pounds
to
the
Forex
market.
By
doing
so,
it
can
maintain
a
credible
xed
exchange
rate.
For
example,
the
United
States
xes
its
currency
to
the
Bri4sh
pound
(the
reserve),
when
there
is
excess
demand
for
dollars
in
exchange
for
Bri4sh
pounds
on
the
private
Forex,
the
U.S.
central
bank
would
immediately
sa4sfy
the
excess
demand
by
supplying
dollars
to
the
Forex
market.
By
doing
so,
it
can
maintain
a
credible
xed
exchange
rate.
Exchange rates
currencies.
Exchange rates
Exchange rates
The
managed
oat
anempts
to
combine
the
advantages
of
both
the
xed
and
exible
exchange
rate
systems,
depending
on
the
degree
of
instability.
The
less
instability,
the
less
interven4on
is
necessary
by
central
banks
and
they
can
pursue
quasi-independent
domes4c
monetary
policies
to
stabilize
their
own
economies.
The
greater
the
instability,
the
more
interven4on
is
necessary
by
central
banks
and
the
less
free
they
are
to
pursue
independent
domes4c
monetary
policies
because
they
are
frequently
required
to
use
their
money
supplies
to
calm
disturbances
in
the
foreign
exchange
markets.
Exchange rates
The
big
problem
with
a
managed
oat
comes
in
determining
the
4ming
and
magnitude
of
the
instability
and
the
necessary
interven4on.
Does
a
one
day
drop
(rise)
in
a
currency
warrant
interven4on?
A
week?
A
month?
A
year?
Five
years?
Is
a
1%
drop
(rise)
in
a
currency's
exchange
rate
destabilizing?
A
2%
change?
A
5%
change?
A
10%
change?
If
the
central
banks
are
too
quick
to
respond
or
if
the
amount
of
interven4on
is
inappropriate,
their
ac4ons
may
be
further
destabilizing.
This
increased
instability
has
a
tendency
to
dampen
interna4onal
ows
and
contract
world
trade.
If
they
wait
too
long,
permanent
damage
may
be
done
to
some
countries'
trade
and
investment
balances.
Exchange rates
of payments.
The
current
account
is
used
to
mark
the
inow
and
ouflow
of
goods
and
services
into
a
country.
Earnings
on
investments,
both
public
and
private,
are
also
put
into
the
current
account.
Within
the
current
account
are
credits
and
debits
on
the
trade
of
merchandise,
which
includes
goods
such
as
raw
materials
and
manufactured
goods
that
are
bought,
sold
or
given
away
(possibly
in
the
form
of
aid).
Services
refer
to
receipts
from
tourism,
transporta4on
(like
the
levy
that
must
be
paid
in
Egypt
when
a
ship
passes
through
the
Suez
Canal),
engineering,
business
service
fees
(from
lawyers
or
management
consul4ng,
for
example)
and
royal4es
from
patents
and
copyrights.
When
combined,
goods
and
services
together
make
up
a
country's
balance
of
trade
(BOT).
The
capital
account
is
where
all
interna4onal
capital
transfers
are
recorded.
This
refers
to
the
acquisi4on
or
disposal
of
non-nancial
assets
(for
example,
a
physical
asset
such
as
land)
and
non-produced
assets,
which
are
needed
for
produc4on
but
have
not
been
produced,
like
a
mine
used
for
the
extrac4on
of
diamonds.
The
capital
account
is
broken
down
into
the
monetary
ows
branching
from
debt
forgiveness,
the
transfer
of
goods,
and
nancial
assets
by
migrants
leaving
or
entering
a
country,
the
transfer
of
ownership
on
xed
assets
(assets
such
as
equipment
used
in
the
produc4on
process
to
generate
income),
the
transfer
of
funds
received
to
the
sale
or
acquisi4on
of
xed
assets,
gig
and
inheritance
taxes,
death
levies
and,
nally,
uninsured
damage
to
xed
assets.
surplus.
The
balance
of
the
current
account
tells
us
if
a
country
has
a
decit
or
a
surplus.
If
there
is
a
decit,
does
that
mean
the
economy
is
weak?
Does
a
surplus
automa4cally
mean
that
the
economy
is
strong?
Not
necessarily.
But
to
understand
the
signicance
of
this
part
of
the
BOP,
we
should
start
by
looking
at
the
components
of
the
current
account:
goods,
services,
income
and
current
transfers.
The
Flow
of
Goods
-
These
are
movable
and
physical
in
nature,
and
in
order
for
a
transac4on
to
be
recorded
under
"goods",
a
change
of
ownership
from/to
a
resident
(of
the
local
country)
to/from
a
non-resident
(in
a
foreign
country)
has
to
take
place.
Movable
goods
include
general
merchandise,
goods
used
for
processing
other
goods,
and
non-monetary
gold.
An
export
is
marked
as
a
credit
(money
coming
in)
and
an
import
is
noted
as
a
debit
(money
going
out).
The
Flow
of
Services
-
These
transac4ons
result
from
an
intangible
ac4on
such
as
transporta4on,
business
services,
tourism,
royal4es
or
licensing.
If
money
is
being
paid
for
a
service
it
is
recorded
like
an
import
(a
debit),
and
if
money
is
received
it
is
recorded
like
an
export
(credit).
The
Flow
of
Income
-
Income
is
money
going
in
(credit)
or
out
(debit)
of
a
country
from
salaries,
porfolio
investments
(in
the
form
of
dividends,
for
example),
direct
investments
or
any
other
type
of
investment.
Together,
goods,
services
and
income
provide
an
economy
with
fuel
to
func4on.
This
means
that
items
under
these
categories
are
actual
resources
that
are
transferred
to
and
from
a
country
for
economic
produc4on.
The
Flow
of
Transfers
-
Current
transfers
are
unilateral
transfers
with
nothing
received
in
return.
These
include
workers'
reminances,
dona4ons,
aids
and
grants,
ocial
assistance
and
pensions.
Due
to
their
nature,
current
transfers
are
not
considered
real
resources
that
aect
economic
produc4on.
Explain
that
the
current
account
balance
is
equal
to
the
sum
of
the
capital
account
and
nancial
account
balances
(see
the
appendix,
The
balance
of
payments).
Examine
how
the
current
account
and
the
nancial
account
are
interdependent.
If
a
country
has
a
xed
asset
abroad,
this
borrowed
amount
is
marked
as
a
capital
account
ouflow.
However,
the
sale
of
that
xed
asset
would
be
considered
a
current
account
inow
(earnings
from
investments).
The
current
account
decit
would
thus
be
funded.
When
a
country
has
a
current
account
decit
that
is
nanced
by
the
capital
account,
the
country
is
actually
foregoing
capital
assets
for
more
goods
and
services.
If
a
country
is
borrowing
money
to
fund
its
current
account
decit,
this
would
appear
as
an
inow
of
foreign
capital
in
the
BOP.
Explain
that
the
current
account
balance
is
equal
to
the
sum
of
the
capital
account
and
nancial
account
balances
(see
the
appendix,
The
balance
of
payments).
Examine
how
the
current
account
and
the
nancial
account
are
interdependent.
Economic Integra+on
agreements.
Economic Integra+on