Part II: Unit 6 - International Trade

Exchange Rates:

Is the price of the domestic currency in terms if another country currency 

Net Exports

Goods + Services

Net Transfer

Direct sending of money overseas

Net Foreign Income

Passive money earned off foreign assets

Net Transfer :  Positive

Money into Economy

Net Transfer :  Negative

Money leaving economy

Components : Current account

• Net Exports

• Net Transfer

• Net Foreign Income

Capital/Financial account

The purchase and sale of assets [ ACTIVE ]

Financial assets

Stock and Bonds

Physical assets

Real Assets

Components of Capital/Financial account

• Financial Assets

• Physical Assets

Trade Surplus [ Define ]

Refers to the situation in which a country is selling more goods to other countries than other

countries sells to them

Trade Surplus

Imports < Exports

Trade Deficit [ Define ]

Refers to the situation in which a country is buying more goods from other countries than othe countries buy from them

Trade Deficit

Imports > Exports

Free Trade [ Define ]

International trade left to its “natural course” without tariffs, quotas, or other restrictions

Free Trade [ Example ]

• North American Free Trade Agreement ( NAFTA )

• The World Trade Organization ( WTO )

Protectionism

The theory or practice of shielding a country’s domestic industries from foreign competition by taxing imports

Appreciation

The increase in value of a country’s currency relative to another in the foreign exchange  ( FOREX ) market

Depreciation

The decrease in a country’s currency value relative to foreign currencies in a floating exchange rate system

Net exports

Exports - Imports

Exports

Represent an inflow of funds

Imports

 Represent an outflow of funds

Capital flow

Refers to the movement of financial capital (money) between economies

Capital inflows

 foreign flows moving into an economy from another country

Capital outflows

domestic funds moving outside the country

What are 5 reasons for limiting trade?

• Protecting Domestic Employment 

• Protecting Consumers 

• Infant Industries 

• National Security 

• Retaliation

If there is a surplus of 500 million in the financial account, what must be happening in the current account ?

There is a current account with a deficit of 500 million

 Balance of payments MUST ALWAYS…

 sum to zero

Increasing Interest Rates reduces consumer spending so people…

 buy less imports

Higher interest rates help make exports more competitive…

 improving current account

Lower interest rates means more people spending and borrowing and more imports being sold…

 decreasing current account

Real Income

 Income adjusted for inflation

If real income increases people will buy more…

more imports means decreasing the current account 

If real income decreases people will buy fewer…

less imports means increasing the current account