IX. International Trade and Finance

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IX. International Trade and Finance

• The International Flow of Goods and Capital
• Gross Exports and Imports
• The Trade Balance (Net Exports)
• Net Exports May Be Positive or Negative
• The Increased Openness of the U.S. and World
  Economies

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IXb. Factors that Influence Exports and Imports.

• Tastes and Preferences for Foreign and Domestic
  Goods
  
• Domestic and Foreign Prices
• The Exchange Rate
• Transportation Costs
• Government Trade Policies

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IXc. The Flow of Capital Net Foreign Investment

• Foreign Direct Investment
• Foreign Portfolio Investment
• Net Capital Flow May Be Positive or Negative.

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IXd. Factors that Influence Net Foreign Investment

• The Real Interest Rate on Foreign Assets
• The Real Interest Rate on Domestic Assets
• The Perceived Economic and Political Risks of
  Holding Assets Abroad
  
• Government Policies Affecting Foreign Ownership
  of Domestic Assets

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IXe. Saving, Investment, and International Trade
and Capital Flows

• Net Exports Net Foreign Investment (By
  Definition)
  
• Recall that Y C I G NX
• Rearranging, Y - C - G I NX
• Renaming S I NX or, since NX NFI, S
  I NFI
  
• The U.S. Experience in the 1980s

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IXf. Exchange Rate Determination

• Exchange Rates
• Nominal Exchange Rates
• Real Exchange Rates (the terms of trade)
• e (e Pd) / Pf
• (nominal exchange rate domestic
  price ) / foreign price
  
• rearranging, e e (Pf / Pd) or,
  De De DPf - DPd

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IXg. Purchasing Power Parity Theory

• Value
• Limitations

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X. Exchange Rate Determination

• Supply of Dollars
• Gross Capital Outflow plus Imports
• Demand for Dollars
• Gross Exports plus Gross Capital Inflow

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The Market for Foreign-Currency Exchange
Supply of Dollars (NFI)
Real Exchange Rate
Equilibrium Real Exchange Rate
Demand for Dollars (NX)
Quantity
Equilibrium Quantity
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Xb. The Equilibrium Exchange Rate

• Net Exports Net Foreign Investment
• Simultaneous Equilibrium in the Market for
  Loanable Funds and the Market for Foreign
  Exchange
  
• The Connection between Budget Deficits and Trade
  Deficits
  
• The effects of Tariffs and Import Quotas

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Xc. Political Instability and Capital Flight

• The Mexican Peso Crisis
• The Case of Southeast Asia and Japan
• Federal Reserve Intervention in the Market for
  Foreign Exchange

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Xd. How Businesses Can Protect Themselves From
Foreign Exchange Risk Types of Transactions

• Spot Transactions 49
• Forward Transactions 51

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Xe. Types of Forward Transactions

• Futures 1
• Standard Sizes and Maturities, Resaleable
• Outright Forward 6
• Individualized Contracts
• Swaps 40
• Options 4
• Call--Option to Buy
• Put--Option to Sell
• Both are Resaleable

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Option Problem Facts

• Uncle Ben packages rice
• Rice sells for 45 per ton in U.S., Y4000 in
  Japan
  
• Current Exchange Rate Y100/
• Uncle Ben needs 1,000,000 bushels of rice

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Questions

• Question 1 At current prices exchange
  rate, buy imported or domestic rice?
  
• Answer Buy imported rice.
• Question 2 How many dollars will it cost
  Uncle Ben at the current exchange rate
  
• Answer 40,000,000 , the cost of
  buying 4,000,000,000 Yen

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More Facts

• Uncle Ben contracts to import 1,000,000 tons
• Payment must be in Yen in 180 days
• Uncle Ben is worried that the value of the dollar
  will fall

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Another Question

• Question 3 To protect against exchange
  rate risk, should Uncle Ben place a put or
  call?
  
• Answer Place a call--an option to by yen at
  100 per within 180 days.

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More Questions

• Question 4 If falls by 20, and the
  transaction is uncovered, what does fall in
  value cost the firm?
  
• Answer 10,000,000
• Question 5 What would the fall in the
  have cost Uncle Ben if it purchased a call
  option?
  
• Answer The cost of the call

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XIb. The Aggregate Demand Curve

• Pigou Wealth Effect
• Keynes Interest Rate Effect
• Mundell-Fleming Exchange Rate Effect
• Why the Aggregate Demand Curve Might Shift

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XIc. The Aggregate Supply Curve

• Why the Aggregate Supply Curve is Vertical in the
  Long Run
  
• Why the Long Run Aggregate Supply Curve Might
  Shift
  
• Why the Short Run Aggregate Supply Curve Slopes
  Upward
  
• The New Classical Misperceptions Theory
• The Keynesian Sticky Wage Theory
• The New Keynesian Sticky Price Theory
• Why the Short Run Aggregate Supply Curve Might
  Shift

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XI. Aggregate Demand and Aggregate Supply

• Recession and Depression
• Short Run Deviations from Long Run Equilibrium
• Short Run Facts of life
• Economic Fluctuations are Irregular
• Most Quantities Fluctuate Together
• As output Falls, Unemployment Rises

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XId. General Equilibrium

• Recessions Shifts in Aggregate Demand or
  Supply
  
• Reconciliation of the Short Run and Long Run
  Effects
  
• The Role of Expectations
• Business Cycles and the Cash Flows of Businesses
• Forecasting and Business Planning

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XII. Monetary and Fiscal Policy

• Money Demand and Supply, and Equilibrium in the
  Money Market
  
• Changes in the Money Supply
• Interest Rate Targets and Federal Reserve Policy

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XIIb. Fiscal Policy and Aggregate Demand

• Changes in Government Purchases (G)
• The Multiplier vs. Crowding Out
• Changes in Taxes
• Fiscal Policy Effects on Aggregate Supply
• Fiscal Policy and Economic Stabilization
• The Case for Active Intervention
• The Case Against Active Intervention
• The U.S. Record

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XIII. The Inflation-Unemployment Tradeoff

• Origins of the Phillips Curve
• Aggregate Demand and the Short Run Phillips
  Curve
  
• The Long Run Phillips curve and the Role of
  Expectations
  
• When Economists Do Harm Samuelson, Solow and
  Deliberate Inflation

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XIIIb. The Historical Record

• Martin, Miller and Stagflation
• The Volker Disinflation and the Sacrifice
  Ratio
  
• The Greenspan Era and the End of Keynesian
  Fiscal Policy
  
• The Cases For and Against Active Policy
  Revisited