Introduction to Economics. MACROECONOMICS Chapter 6 International Economics

Transcription

1 Introduction to Economics MACROECONOMICS Chapter 6 International Economics

2 contents Theory of Comparative Advantage Gains from International Trade Trade Barriers Balance of Payments Exchange Rate Floating Exchange Rate and Fixed Exchange Rate

3 6.1 Theory of Comparative Advantage gains from trade - the consumption possibilities of a country get bigger as this country begins to trade with other countries gains from trade come mostly from specialization - free trade provides a country with a chance to specialize in commodities which this country can produce more efficiently than other countries - this specialization plays the role of enhancing the overall efficiency of the economy and this is the main source of the gains from trade

4 6.1 Theory of Comparative Advantage Comparative Advantage What is comparative advantage? - if a country is relatively more efficient in producing a certain commodity, we say that this country has a comparative advantage in the commodity - even a country which is very inefficient generally can have a comparative advantage in at least one commodity - a system of international division of labor where each country specialize in commodities in which it has comparative advantage gives benefits to all participating countries

5 6.1 Theory of Comparative Advantage Example of Comparative Advantage suppose Korea trades with Indonesia with 1 week of labor, - Korea can produce 5 units of rice or 5 units of clothes - Indonesia can produce 4 units of rice or 2 units of clothes in absolute sense, Korea is more efficient in the production of both rice and clothes opportunity cost of 1 unit of clothes is 1 unit of rice in Korea and 2 units of rice in Indonesia Korea has a comparative advantage in the production of clothes opportunity cost of 1 unit of rice is 1 unit of clothes in Korea and 1/2 unit of clothes in Indonesia Indonesia has a comparative advantage in the production of rice according to the theory of comparative advantage, Korea specializes in the production of clothes while Indonesia specializes in the production of rice

6 6.1 Theory of Comparative Advantage Determinants of Comparative Advantage (1) different endowments of resources in many cases, differences in resource endowments are major determinants of comparative advantage ex) Brazil exports coffee and Malaysia exports rubber, Vietnam or Bangladesh are rich in labor power, so they specialize in products which are produced labor intensively

7 6.1 Theory of Comparative Advantage Determinants of Comparative Advantage (2) different levels of technology accumulation of technology over a long period of time is an important factor Why is the U. S. dominant in the areas of computer software and entertainment? Why some poor countries cannot escape from the state of dependence?

8 6.1 Theory of Comparative Advantage Determinants of Comparative Advantage (3) history of specialization learning by doing : with the accumulation of experiences, they learn how to produce efficiently and, as a result, production cost gets lower and lower ex) watch industry in Switzerland, fashion industry in France and Italy

9 6.2 Gains from International Trade assumption about labor endowments - Korea : 60 thousand weeks - Indonesia : 80 thousand weeks terms of trade - terms of trade refer to the price ratio between an export good and an import good - we cannot predict the terms of trade exactly, but it is somewhere between domestic prices ratios of the two countries - Korea : price of rice : price of clothes = 1 : 1 - Indonesia : price of rice : price of clothes = 1 : 2

10 6.2 Gains from International Trade Production and Consumption with Trade for these two countries to get gains from trade, the terms of trade should be somewhere between the two domestic price ratios - suppose the terms of trade is determined like the following price of rice : price of clothes = 3 : 4 - Korea specializes in the production of clothes and produces 300 thousand units of clothes by using all 60 thousand weeks of labor - Indonesia specializes in the production of rice and produces 320 thousand units of rice - Korea export 84 thousand units of clothes and import 112 thousand units of rice

11 6.2 Gains from International Trade Consumption of Rice and Clothes before and after Trade after trade, people of each country can consume more rice and clothes gains from trade

12 6.2 Gains from International Trade Additional Gains from Trade the major source of the gains from trade is specialization we can expect additional gains from trade like the following (1) economies of scale - average cost decreases as the level of production increases - advantages of the division of labor (2) learning by doing - cost saving possible with the accumulation of experiences

13 6.3 Trade Barriers Why Should We Protect Domestic Industries? (1) prevention of unemployment - some argues that free trade is the cause of an increase of unemployment - this logic has a flavor of favoring specific industries - in some sense, it is not desirable that the same level of employment is maintained in inefficient sectors - but those who lose jobs in the declining industries have a hard time in getting new jobs

14 6.3 Trade Barriers Why Should We Protect Domestic Industries? (2) advantage of diversification - some argues that balanced development of various industries is desirable - specialization in a very few industries could be a dangerous strategy - it may be desirable for a country to produce a variety of products even though some of the advantages of specialization is lost

15 6.3 Trade Barriers Why Should We Protect Domestic Industries? (3) reasons of national defense - recently the issue of food as a weapon is much discussed - if food exporting countries suddenly stop exporting, food importing countries might suffer from the shortage of food - some argues that the development of heavy industries is necessary for national defense purposes even in the absence of comparative advantage - but the sacrifice of economic welfare to some degree inevitable

16 6.3 Trade Barriers Why Should We Protect Domestic Industries? (4) response to unfair trade policies of trading partners - argument that some kind of countermeasure is necessary for foreign governments provision of supports to their exporting industries - but, in fact, people of the country which accuses unfair practices of foreign governments enjoy the benefit of cheap imports - problem if foreign firms drive out domestic firms with low prices and begin to charge high prices - not so much convincing as a justification for intervention in free trade

17 6.3 Trade Barriers Why Should We Protect Domestic Industries? (5) infant industry argument - argument that domestic industries in their infancy should be protected from foreign competition until they achieve competitiveness - learning by doing and economies of scale - temporary protection necessary to earn time until large-scale production is possible - it does not mean that all domestic industries should be protected

18 6.3 Trade Barriers Types of Trade Barriers (1) tariff - most frequently used trade barrier - the idea is to make imports more expensive (2) import quota (3) voluntary export restriction (4) non-tariff trade barrier

19 6.3 Trade Barriers Specific Types of Tariffs antidumping duties - when foreign firms are suspected that they are exporting goods at unreasonably low prices, antidumping duties are levied to prevent harms to domestic firms countervailing duties - countervailing duties are levied to offset the effects of subsidies that foreign governments give to their exporting firms

20 6.4 Balance of Payments balance of payment accounts : a table which summarizes all the international transactions of a country for a certain period of time (1) current accounts - transactions of goods and services (2) capital accounts - free transfers of capital and transactions of intangible nonproductive, non-financial assets (3) financial accounts - transactions of financial assets

21 6.4 Balance of Payments Balance of Payment Accounts derivatives

22 6.4 Balance of Payments Meaning of the Balance of Payments balance of payments - a concept to measure the balance of foreign currencies which flow in and out as a result of international transactions - if the receipt of foreign currencies is larger than the payment of foreign currencies, we say the balance of payments is in surplus - since balance of payment accounts are recorded by double entry bookkeeping, the sums of payments and receipts are always the same to each other ex post - usually the term balance of payments refers to the current account balance which includes only the trade of goods and services

23 6.4 Balance of Payments Saving, Investment and the Current Account Balance current account balance - a major criterion by which we evaluate the soundness of international transactions of a country - in some case, a deficit in the current account may be a signal that a country is growing healthily - note that a surplus or deficit occurs depending on the relationship between saving(s) and investment(i) S > I surplus in the current account S < I deficit in the current account

24 6.4 Balance of Payments Saving, Investment and the Current Account Balance deficit in the current account - a decrease in private saving due to too much consumption and a decrease in government saving due to too much expenditure are the major causes of a deficit - an increase in investment expenditure is also the cause of a deficit if a deficit occurs because of this reason, such a deficit could be a sign of healthy growth of the economy - the reason why a deficit occur is important - but chronic deficits can lead to a serious debt crisis

25 6.4 Balance of Payments Changes in the Current Account Balance of Korea deficits were the norm before the 1980s, but surpluses occurred more frequently since then Data: The Bank of Korea

26 6.5 Exchange Rate exchange rate exchange rate refers to the ratio of exchange between currencies of two countries - since U. S. dollar plays the role of the vehicle currency, exchange rates are usually expressed in terms of how much of a certain country s money is exchanged for 1 U.S dollar ex) 1,000 : 1 exchange rate can be interpreted as the price of a foreign currency - therefore exchange rate is determined by the interaction of supply and demand for a foreign currency, just like ordinary commodities

27 6.5 Exchange Rate Foreign Currency Market supply curve of foreign exchange (U.S. Dollar) - supply of foreign exchange is linked with the export of goods or financial assets - a rise in exchange rate a fall in the prices of domestic goods and financial assets denominated in dollar an increase in the export of goods and financial assets the amount of dollar supplied will increase - upward sloping supply curve

28 6.5 Exchange Rate Foreign Currency Market demand curve of foreign exchange (U.S. Dollar) - demand for foreign exchange is linked with the import of goods or financial assets - a rise in exchange rate a rise in the prices of foreign goods and financial assets denominated in domestic currency a decrease in the import of goods and financial assets the amount of dollar demanded will decrease - downward sloping demand curve

29 6.5 Exchange Rate Equilibrium of Foreign Exchange Market

30 6.5 Exchange Rate Changes in Exchange Rate effect of an increase in (domestic) national income - an increase in national income an increase in the import of goods an increase in the demand for foreign exchange a rightward shift of demand curve a rise in exchange rate effect of a rise in (domestic) interest rate - a rise in interest rate foreigners purchase more domestic financial assets an increase in the supply of foreign exchange a rightward shift of supply curve a fall in exchange rate changes in tastes, price levels, political atmosphere can also affect the level of exchange rate

31 6.5 Exchange Rate Shifts of Supply and Demand Curves

32 6.5 Exchange Rate Exchange Rate and the Current Account Balance Marshall- Lerner condition a rise in exchange rate (= depreciation of domestic currency) the quantity of exports increases and the quantity of imports decreases - even though the quantity of exports increases, the mount of exports in terms of dollar could decrease - but the amount of imports in terms of dollar will always decrease a rise in exchange rate does not necessarily result in an increase in net export Marshall-Lerner condition : for a rise in exchange rate to result in an increase in net export, the sum of the price elasticity of foreigners demand for domestic goods and the price elasticity of domestic people s demand for foreign goods should be greater than 1

33 6.5 Exchange Rate J-Curve Effect typical movements of net export after a rise in exchange rate(= depreciation of domestic currency) occurs are like the following - immediately after a rise in exchange rate, net export tends to decrease - and after a while, net export begins to increase because it takes some time for exports and imports to adjust to the changes in exchange rate changes in exchange rate are not reflected in domestic prices of imports immediately the changes in net export follow the path shaped like the letter J J- Curve Effect

34 6.5 Exchange Rate J-Curve Effect

35 6.6 Floating Exchange Rate and Fixed Exchange Rate floating exchange rate system - exchange rates are determined by the interaction of demand and supply of foreign currencies fixed exchange rate system - government fixes exchange rate at a certain level and maintains that level through intervention in foreign currency markets

36 6.6 Floating Exchange Rate and Fixed Exchange Rate Gold Standard and Bretton Woods System gold standard - the value of a currency is pegged to the weight of gold - exchange rates between currencies are automatically fixed Bretton Woods system - this international monetary regime appeared in 1944 and works as a backbone of international monetary order until the early 1970s - U.S. dollar pegged to gold ($35 per 1 oz) - other currencies are pegged to U.S. dollar - as a result, exchange rates between currencies are automatically fixed

37 6.6 Floating Exchange Rate and Fixed Exchange Rate Gold Standard and Bretton Woods System the end of Bretton Woods system - as speculators who anticipated the depreciation of U.S. dollar began to sell dollars massively, U.S. government s reserve of gold quickly diminishes - in August 1971, President Nixon devalued U.S. dollar and declared the end of gold convertibility - in 1973, U.S. dollar was devalued again and the international monetary regime moved to the system of flexible exchange rate

38 6.6 Floating Exchange Rate and Fixed Exchange Rate Floating Exchange Rate System and Fixed Exchange Rate System fixed exchange rate system - international trade can be made more vigorous due to a decrease in uncertainty over exchange rates - but exchange rates do not remain fixed all the time under this system If there are serious imbalances in foreign exchange markets, large scale adjustments of exchange rates inevitable it could be said that uncertainty is bigger than the case of floating exchange rate system - economic fluctuations in foreign economies could ignite economic fluctuations in domestic economy

39 6.6 Floating Exchange Rate and Fixed Exchange Rate Floating Exchange Rate System and Fixed Exchange Rate System floating exchange rate system - imbalances in foreign currency markets are automatically adjusted by the changes in exchange rates domestic economy is insulated from economic fluctuations in foreign economies - autonomy of monetary and fiscal policy allowed but too lax monetary policy may result in inflation recent trend : floating exchange rate system

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