International Markets

1
International Markets

• EFL Lesson 10

2
Countries dont trade
People Trade !
3
Voluntary Trade Creates Wealth -
International trade
always
always always always always
National trade
Regional trade
Local trade
4
Domestic or International purchases
Fundamentally the same decision
Do the anticipated benefits outweigh the costs?
5
Opening Markets Is Creating Wealth
6
Specialization division of labor creates wealth
but the hard question is Who
should produce what?
What is your lowest opportunity cost alternative?

• Because of the Law of Comparative Advantage, both
  parties can gain from lower costs and greater
  output, through specialization and exchange.

7
Zeke and Zac

• Who Should
• Drive the truck ?
• Load the garbage?

What if Zac doesnt have a drivers license?
8
Comparative advantage depends on different
opportunity costs even when one trading
partner can do both things better

• Ben Franklin
• 1 econ lesson
• 2 history lessons

• Adam Smith
• 12 econ lessons
• 3 history lessons

Who should prepare the lessons for each course?
9
Comparative advantage depends on differing
opportunity costs

• Ben Franklin
• 1 econ lesson costs 2 history lessons
• 1 history lesson costs 1/2 econ lesson

• Adam Smith
• 1 econ lesson costs 1/4 history lesson
• 1 history lesson costs 4 econ lessons

Ben should teach history
Adam should teach economics
10
Domestic International Trade BOTH thrive on
specialization according to comparative advantage

• Goods are Produced at least cost when people
  specialize according to the principle of
  Comparative Advantage
• Lesson - Dont try to do everything its Not
  efficient
• Trade between people in different countries
  creates wealth even if people in one country
  are better at doing everything.

11
What stands in the way of trade?
12
Transaction costs are real!

• BUT they can be reduced by
• Transportation technology
• Storage technology
• Communication technology
• Monetary union
• Cutting the red tape

13
Travel Time from New York City1800
Maps adapted from Charles O. Paullin, Atlas of
Historical Geography, Carnegie Foundation, 1932
14
Travel Time from New York City 1830
15
Travel Time from New York City 1857
16
Travel Time from New York City 1930 (by Rail)
17
Trade policies affect economic growth

• Policies that restrict international trade
  inhibit the ability of markets to create wealth.
• Tariffs, quotas, regulations on content and
  production processes hurt both buyers and sellers
• All participating countries benefit from
  international trade agreements and associations
  that reduce barriers to trade

18
NAFTA
Evidence
19
(No Transcript)
20
WTO (formerly GATT)
21
European Monetary Union
22
What else restricts trade?
23
What is seen and what is not seen

• What is seen
• Sun is an unfair competition
• Protect the candlemakers!
• It will help agriculture
• It will encourage shipping
• Whaling will flourish
• What is not seen
• Light was for free, now it costs
• Resources are used up
• Overall, the result is impoverishment

24
Exchange rates the prices of currencies in
international currency markets
(Government manipulation of currency markets can
adversely affect the flow of trade.)
25
Changes in international exchange rates affect
the relative purchasing power of a nations
currency
Weak (or falling) dollar
Which is better?

• Strong Dollar

26
Trade Balance
Imports
Exports
27
Pierre Sells (Exports) Bread . . . Then What?
28
What Can Pierre Do with US?
Take his Cheri to his favorite bistro at the
Eiffel Tower?
Mais NON!
Buy U.S goods services OR U.S. assets ?
Oui! Oui!
29
Balance of Payments
Current Account
Goods Services
30
The Big Ideas from Lesson 10

• International trade is similar to domestic trade
  people choose to trade and voluntary trade
  creates wealth.
• Trade allows people to specialize in their lowest
  opportunity cost production.
• Comparative advantage encourages specialization
  and trade, both domestically and internationally.
• Specialization, based on comparative advantage,
  increases productivity and economic growth.

31
The Big Ideas from Lesson 10

• Exchange rates reflect the supply and demand for
  nations currencies. Changes in currency values
  affect the flow of trade.
• Trade in goods, services, capital, and financial
  assets always balances.