IB Economics Unit 4 Global Economy

UNIT 4: GLOBAL ECONOMY - 4.1: BENEFITS OF INTERNATIONAL TRADE

• Do Now Activity:

  • Juniors: Research economic sanctions and financial restrictions on Russia and their effects.

  • Seniors: Research how other countries can take advantage of these sanctions and limitations.

BENEFITS OF INTERNATIONAL TRADE

• Lower Prices:

  • Consumers and manufacturers can purchase goods at cheaper rates due to:

    • Access to natural resources.

    • Differing labor standards and practices.

    • Varying levels of technology.

  • Drawback: Cheaper prices and goods may harm domestic industries.

• Greater Choice:

  • Wider selection of products, including those from other countries.

• Differences in Resources:

  • Countries possess different resources, leading to trade.

  • Example: The United States trades materials it has for needed materials it lacks.

• Economics of Scale:

  • Increased market demand leads to greater production efficiency.

  • Production scale increases, allowing workers to focus on single tasks and become more efficient.

  • Increases competition and can reduce average costs.

• Increased Competition:

  • Domestic markets compete with international markets.

  • Benefits:

    • Increased product quality.

    • Cheaper products from more efficient systems.

• More Efficient Allocation of Resources:

  • Countries specialize in producing goods at the lowest cost to maximize profit margins.

  • Requires no government intervention in the economic process.

  • Free trade leads to efficient resource use, better transport, and reduced waste.

• Source of Foreign Exchange:

  • Trading with foreign entities results in receiving foreign currency.

  • Important for smaller and poorer nations that cannot use their currency internationally. They trade to acquire foreign currency and then use it to purchase other products or materials.

COMPARATIVE ADVANTAGE

• Definition:

  • A country has a comparative advantage in producing a good if it can produce the good at a lower Opportunity Cost than another country.

• Opportunity Cost:

  • The benefits an investor, producer, or country misses out on when choosing one path/product over another.

• The Question:

  • What resources and products should a country import, and which should they export?

• Reciprocal Absolute Advantage:

  • Each country should focus on what they are most efficient/specialized in producing.

  • Output will increase with fewer losses in production.

• Example (Attorney and Secretary):

  • Attorney produces $175$/hour in legal services, $25$/hour in secretarial duties.

  • Secretary produces $0$ in legal services, $20$/hour in secretarial duties.

  • Attorney has an absolute advantage in both.

  • Opportunity cost is crucial: Attorney loses $175$ in legal income to make $25$ in secretary work. The secretary is better off typing and organizing for the attorney; their comparative advantage lies.

• Personal Example (Teacher and Veterinarian Wife):

  • Wife (vet) can make $500$/hour as a vet or $100$/hour teaching history.

  • Teacher (husband) makes $50$/hour teaching history.

  • If wife teaches history for 2 hours for $200$, she loses $1000$ from vet work ($-800 overall).

  • Benefits both if she focuses on vet medicine and he teaches history.

• Criticism:

  • If an American industry feels threatened by cheaper labor overseas, they can ask the government to implement import tariffs to protect it.

• Comparative Advantage Factor:

  • An abundance of a particular factor.

  • Steel industry example: river systems and labor system.

  • Tech advancements may make steel production more efficient in other regions.

• More Criticisms:

  • Assumes producers have complete and accurate information (industries may be disinclined to share).

  • Transportation costs (shipping can erode cost benefits).

  • More than two trade partners complicates advantage identification without formulas.

  • Changing costs and economies may alter opportunity costs.

  • Trade tariffs.

• Assignment:

  • Select a country with an advantage in a particular product but trades for another product to focus on their specialty (Reciprocal Advantage).

  • Explain one pro and con of this trade deal.

FREE TRADE AND PROTECTIONISM

• Objectives:

  • Define free trade.

  • Explain, give examples, and evaluate arguments for and against protectionism.

  • Explain and illustrate free trade.

  • Explain and illustrate when a country can export.

  • Define, explain, illustrate, and give examples of types of protectionism.

  • Evaluate the effect of different types of trade protections.

  • Discuss the merits of free trade versus protectionism.

  • Calculate the effects of imposing a tariff, setting a quota, or giving a subsidy, on different stakeholders.

• What is Free Trade?

  • Trade between countries without barriers put in place by governments or international organizations.

  • Examples: European Economic Community, NAFTA, Canada-U.S. Free Trade Agreement.

ARGUMENTS IN FAVOR OF PROTECTIONISM

• Protecting Domestic Employment:

  • A declining industry seeks government protection to prevent being sent overseas.

  • Government goal: keep unemployment low.

  • Drawback: Protection may only delay the industry's end. Consider workforce repurposing.

• Protecting the Economy from Low-Cost Labor:

  • Some overseas markets produce at a lower cost.

  • Government and unions need to protect workers.

  • Counter Argument: Against comparative advantage. Consumers pay more for cheaper products, leading to inefficiency. Government should help unemployed workers.

• Protecting an Infant (Sunrise) Industry:

  • Emerging industries need protection against larger, established industries overseas until they are large enough to protect themselves.

  • Counterargument: Advanced capital systems should provide financial capital to support it, while working in the proper scale to survive. Smaller or poorer countries may not though.

• To Avoid the Risk of Over-Specialization:

  • If a country focuses too much on 1-2 products, market changes can be devastating to the national economy.

  • Example: Swiss watches as cheaper products became available.

• Strategic Reasons:

  • Certain industries need protection in the event of war or national emergency.

  • Steel industry needed for tanks, planes, vehicles, etc.

  • One of the more valid arguments, but slightly outdated.

• To Prevent Dumping:

  • Developed countries with a product surplus may dump it into a developing country’s economy at below-production cost.

  • Destroys local businesses producing the same product.

  • Governments can implement anti-dumping rules if proof is available, but this is difficult to do.

  • Retaliation is a possibility.

• To Protect Product Standards:

  • A country may impose standards (health, safety, etc.) on a product being imported to match their own standards.

  • Example: EU standards on chicken; The United Kingdom possibly accepting US chlorine bathed Chicken

  • Counter Argument: Argument used as an excuse for protectionism since beef and poultry industries are enormous.

  • Poorer countries may have a harder time meeting standards, negating their comparative advantage.

• To Raise Government Revenue:

  • Many poorer nations impose import taxes on products consumers will purchase.

  • Examples (2012 & 2017 % of Government Revenue from Taxes on International Trade):

    • Burkina Faso: 11.6% & 12.6%

    • Lesotho: 47.5% & 41.4%

    • Nepal: 15.2% & 16.0%

    • Senegal: 11.8% & 11.2%

    • Solomon Islands: 31.7% & 19.7%

    • Togo: 19.7% & 16.7%

• To Correct a Balance of Payments Deficit:

  • Countries spend more on importing goods and services than they make from exports.

  • Governments impose protectionist measures to correct the deficit.

  • Seen as treating the symptom, not the illness, and opens the country to retaliation.

RECAP ARGUMENTS FOR TRADE PROTECTION

• Protecting domestic employment

• Protecting the economy from low-cost labor

• Protecting a sunrise industry

• To avoid the risks of over-specialization

• Strategic reasons

• To prevent dumping

• To protect product standards

• To raise government revenue

• To correct a balance of payments deficit

ARGUMENTS AGAINST TRADE PROTECTION

• Prices:

  • Protectionism may raise prices to consumers and producers of the imports that they buy.

• Choices:

  • Protectionism would lead to fewer choices for consumers.

• Competition/Innovation:

  • Without foreign firms, domestic ones would not have an incentive to reduce costs and spend money on innovation.

• Comparative Advantage:

  • Specialization gets reduced, leading to a reduction in comparative advantage, potential output and inefficient use of resources.

• Retaliation:

  • Other countries may retaliate against regulations with similar ones or harsher, leading to a trade war of tariffs or finding other options

• Economic Growth:

  • Can be slowed or halted both domestically and abroad.

TYPES OF PROTECTIONISM

• Trade Tariffs: *A tax that is charged on imported goods.

  • The tax is placed on the foreign producers of goods and not on the domestic producers. Regardless, the final consumers of the will end up paying the cost by increasing prices passed on by the importers and manufacturers.

• Trade Tariffs - Dumping:

  • Tariffs are the most common response to dumping by foreign producers onto domestic markets.

  • If a country can prove dumping has or is occurring, they can implement a tariff to increase the cost of the foreign product so there is no cost advantage.

• International Trade Subsidies:

  • The government pays a domestic producer to make them more competitive, shifting the supply curve downwards.

  • Helps lower the costs for a business or firm.

  • Problem: Domestic production may not be as efficient as foreign production.

Explanation

1. Q2$is wheat consumption before the subsidy at a price of$PW$</p></li><li><p>Domestic production was$OQ1$and imports were$Q1Q2$.</p></li><li><p>Subsidy granted –$S (DOM)$Shifts down to$S (DOM)+Subsidy$</p></li><li><p>Market price stays at$Pw$so demand stays at$OQ2$</p></li><li><p>Domestic producers increase production to$OQ3$because they are receiving$PW+Subsidy/Unit$they produce.</p></li><li><p>This means revenue increases from “a” TO “a+b+e+f+g”. Foreign producers supply the rest which is now$Q3Q2$</p></li><li><p>Foreign producers revenue thus falls from b+c+d to just c+d</p></li><li><p>The government pays the subsidy shown in e+f+g<br>More efficient foreign farmers can produce the qty for a revenue of b, But inefficient domestic farmers need b+g.<br>It doesn’t affect the consumers’ supply, only our taxes to be used as subsidies</p></li></ol><ul><li><p><strong>Quotas:</strong></p><ul><li><p>A physical limit on the numbers or value of goods that can be imported into a country.</p></li></ul></li></ul><ol><li><p>Before quota:$OQ2$of wheat is purchased at$PW$</p></li><li><p>Domestic supply is$OQ1$AND Imports are$Q1Q2$. Gov’t imposes a quota of$Q1Q3$tons of wheat</p></li><li><p>Domestic producers now supply$OQ1$at a price of$PW$and importers at$Q1Q3$</p></li><li><p>There is now an excess of demand of$Q3Q2$at the price$Pw$, driving up the price</p></li><li><p>Importers can’t send more in, so domestic farmers start to produce more because of the profit</p></li><li><p>Domestic supply curve shifts to the right from pw to$Pw+Quota$</p></li><li><p>Demand will now equal supply again as demand falls to$Q4$</p></li><li><p>Domestic producers supply 0Q1 and$Q3Q4$tons of wheat. Revenue rises from a to a+c+d+f+i+j</p></li><li><p>Foreign producers supply$Q1Q3$At$PQUOTA$, And their revenue changes from b+c+d+e TO b+g+h</p></li></ol><ul><li><p><strong>Administrative Barriers:</strong></p><ul><li><p>"Red Tape": Administrative processes that need to be completed before any task or transaction can be approved, initiated, and/or completed which causes a price increase for the importer, which raises the price for the consumers</p></li><li><p>Health/Safety/Environmental Standards: A variety of restrictions imposed on imported goods sold domestically, or on the methods used to produce the good</p></li><li><p>Embargoes: An extreme quota, essentially a complete ban of goods from a particular country or region as a punishment</p></li></ul></li><li><p><strong>Nationalistic Campaigns - "Moral Suasion":</strong></p><ul><li><p>Governments will sometimes run marketing campaigns that encourage citizens to purchase their domestic goods to preserve domestic jobs.</p></li></ul></li></ul><h4 id="a06ee686-c6c8-4877-b45d-abf2a5125714" data-toc-id="a06ee686-c6c8-4877-b45d-abf2a5125714" collapsed="false" seolevelmigrated="true">ECONOMIC INTEGRATION</h4><ul><li><p><strong>Objectives:</strong></p><ul><li><p>Distinguish between bilateral and multilateral trade agreements.</p></li><li><p>Define, explain, and give examples of different types of trading blocs.</p></li><li><p>(HL) Discuss advantages and disadvantages of a monetary union for its members.</p></li><li><p>(HL) Discuss advantages and disadvantages of membership of trading blocs.</p></li><li><p>Describe the objectives and functions of the World Trade Organization (WTO).</p></li><li><p>Discuss factors affecting the effectiveness of the WTO.</p></li></ul></li><li><p><strong>Economic Integration:</strong></p><ul><li><p>The process whereby countries coordinate and link economic policies.</p></li><li><p>Higher integration = lower trade barriers and more synchronized monetary policies.</p></li></ul></li><li><p><strong>Two Trade Agreements:</strong><br>* Bilateral Trade agreement<br>* Multilateral Trade Agreement</p></li><li><p><strong>Bilateral Trade Agreements:</strong><br>*A trade agreement between two countries (hence the “bi” as a prefix).This is done to reduce or eliminate tariffs or trade barriers between the two countries to mutually benefit both.<br>*Usually involves an agreement not to dump products.<br>*Example: Transatlantic Trade and Investment Partnership (TTIP): proposed trade agreement between the united states and the European Union (EU).</p></li><li><p><strong>Multilateral Trade Agreements:</strong><br>An agreement relating to trade between multiple countries.<br>Much like the benefits of a bilateral trade agreement, it removes/lowers tariffs and quotas for all countries involved.<br>Example: First the North American Free Trade Agreement (NAFTA), replaced by the United States/Mexico/Canada Trade Agreement (USMCA)</p></li><li><p><strong>Trading Blocs and Economic Integration:</strong></p><ul><li><p>Trading bloc: A group of countries that join in some form of agreement in order to increase trade between them and/or to gain economic benefits from cooperation on some level.</p><ul><li><p>Preferential Trading Areas (PTAs): Trade bloc that gives preferential access to specific products from certain countries.</p></li><li><p>Free-Trade Areas: An agreement made between countries, where the countries agree to trade freely among themselves, but are still able to trade with other countries outside of the FTA.<br>FREE TRADE AREA IMPOSE TARIFFS FREE TRADE COMPLETE EMBARGO COUNTRY A COUNTRY B COUNTRY C COUNTRY D</p></li><li><p>Customs unions: an agreement made between countries, where the countries agree to trade freely among themselves. These countries also agree to the same external Trade barriers against any country attempting to import goods into the customs union<br>COUNTRY A COUNTRY B COUNTRY C FREE TRADE COMMON EXTERNAL BARRIER COUNTRY D</p></li><li><p>Common markets: a customs union with common policies on product regulation, and free movement of goods, services, capital, and labor. Example: The European Union (EU) allows the free flow of these factors across borders without visas or passport control. We’ll have to wait and see what this means for the recently separated United Kingdom</p></li><li><p>Economic and monetary union: a common market with a common currency and a common central bank. Example: The European Central Bank (ECB) shares a common currency and bank for member countries. A notable was the United Kingdom before Brexit when they used the pound (£)</p></li></ul></li></ul></li></ul><h4 id="6d8ddb80-2c49-4c28-a084-e55105bb273c" data-toc-id="6d8ddb80-2c49-4c28-a084-e55105bb273c" collapsed="false" seolevelmigrated="true">ECONOMIC AND MONETARY UNION</h4><ul><li><p>A common market with a common currency and a common central bank. Example: The European Central Bank (ECB) shares a common currency and bank for member countries. <br>5 Advantages<br>1.CURRENCY INTEGRATION<br>Exchange rate fluctuations that used to exist between countries will disappear with a common currency<br>This in turn eliminates any trade/currency exchange rates that could otherwise dissuade a country from entering into an agreement</p></li></ul><ol><li><p>CURRENCY STABILIZATION<br>A currency that is widely used in a large zone has a higher degree of credibility.<br>Lesser used currencies or from smaller zones are more prone to fluctuations in the market or used as a world currency</p></li><li><p>BUSINESS CONFIDENCE<br>Business confidence will improve when there is less perceived risk involved among trading countries.<br>This will result in trade growth and internal market growth</p></li><li><p>ELIMINATION OF TRANSACTION COSTS<br>Any rates for exchanging currencies is eliminated Think about these booths at the airports, but on a larger economic scale.</p></li><li><p>OBVIOUS PRICE DIFFERENCES<br>You don’t have to do the math in your head between two currencies but know the price differences with a common currency.<br>If it’s C$7.00$in Canada, how much would that be in US dollars? It’s$5.10$(as of April 2024) Chinese Yuan: ¥36.97 New Taiwan Dollar: NT$166.51$</p></li><li><p>Complete Economic Integration: The final stage of economic integration. Individual countries no longer have control of their own economic policy There is now full monetary policy within the union and harmonization of fiscal policy EXAMPLE: THE 19 EUROZONE COUNTRIES</p></li></ol><h4 id="b85d1e35-8dc6-4ec4-84d5-f3d49fe71154" data-toc-id="b85d1e35-8dc6-4ec4-84d5-f3d49fe71154" collapsed="false" seolevelmigrated="true">TRADE UNIONS</h4><p>6 ADVANTAGES<br>*Increased markets for goods and trade <br>*Increased competition leads to more efficiency, choices, and lower prices for consumers<br>*With a larger market, greater foreign investment may happen<br>*Greater employment opportunities if free movement across borders is an option.<br>*Perhaps greater political stability from increased cooperation<br>*Fewer, larger trading blocs may make trade deals easier</p><p>2 DISADVANTAGES<br>*While trade blocs may favor member nations, they can be discriminatory towards non-member nations (we’ll cover the WTO shortly). This very thing led to a breakdown in World Trade Organization talks in 2006, leading to a rise in smaller individual trade agreements. This can harm smaller economies and increase trade barriers that blocs were trying to prevent in the first place.<br>*Countries may lose an increasing amount of political and economic sovereignty. This can harm a country’s ability to control its interest and exchange rates. Especially what works for larger countries may not work for smaller ones.</p><h4 id="6bad7c68-291b-470a-8c01-5e0e43344dbf" data-toc-id="6bad7c68-291b-470a-8c01-5e0e43344dbf" collapsed="false" seolevelmigrated="true">WORLD TRADE ORGANIZATION (WTO)</h4><ul><li><p><strong>Established:</strong> 1 JAN 1995</p></li><li><p><strong>Members:</strong> 164 Nations</p></li><li><p>Created to set the rules for global trading and to resolve disputes between member nations.<br>*Credited with reducing tariffs for manufactured goods from 40$1.00 = €0.93 (.82 last year)
   Currencies are exchanged on the open market through governments, banks, corporations, etc. Just remember, currencies don’t just move when one country buys a good from another. THERE ARE THREE SYSTEMS

   1. FLIXED

   2. FLOAT

   3. MANAGED

   EXCHANGE RATE SYSTEM
   There are three main methods that a country will use to manage its exchange rate known as its exchange-rate regime.
   1. Fixed exchange rate system
   2. Floating exchange rate system
   3. Managed exchange rate

   FIXED EXCHANGE RATE
   An exchange rate regime where the value of a currency is fixed, or pegged, to the value of another currency, to the average value of a selection of currencies, or to the value of some other commodity, such as gold.
   If the value of that variable changes, so to does the value of the currency.
   Example: until 1971 the us currency was backed by gold, or the “gold standard”
   Revaluation of the Currency: If the value of the currency is raised, then we say that this is a revaluation of the currency
   Devaluation of the Currency:
   If the value of the currency is lowered. These are both specific to a fixed exchanged rate, so you will not see it used any other time for exchange rates.
   So how does the government fix the rates? Supply and demand

   FIXED EXCHANGE RATE
   International supply of Barbadian dollars increasing
   Can be caused by purchasing imports, shifting the supply from S1 to S2
   The gov’t will need to intervene to keep the rate from dropping. It can fix this by buying up its currency on the foreign market with its reserves of foreign currency.
   Demand for Barbados dollars increasing
   Maybe people want to visit it more and need the money. This shifts the demand curve from D1 to D2. Without gov’t intervention the exchange rate will rise.
   It’ll then need to sell its currency on the open foreign market shifting the supply curve from s1 to s2. This will increase their reserves of foreign currency

   FLOATING EXCHANGE RATE
   The exchange rate of a currency is determined solely by the demand for, and supply of, the currency on the open market with no gov’t intervention
   $1 = €0.82 $1 = €0.89
   Depreciation : The value of the currency in this system, falls.
   Appreciation: You can buy more European stuff with $1
   ** Do not confuse with revaluation and devaluation **
   Changes In Currency Value: Considering the factors that shift the demand and supply curves, and as a result the value, for a currency. Demand for US$ by Europeans if they want to:
   Buy US exported goods or visit the US
   Invest in US firms
   Save their money in US banks. Why?
   Make money by speculating on the US$

   CHANGES IN CURRENCY VALUE
   As a result, the demand for the US$ will rise if:
   An increase in demand for US goods and services (maybe they’re cheaper, fashionable, or better quality/specialized)
   Strong economic growth leads to greater investment
   US interest rates rise, so firms and people want to invest there.
   Buy now! Speculators think the value is going to increase and want to get rich

   CHANGES IN CURRENCY VALUE
   The supply curve of this section will be the same as the demand curve in many ways.
   Buy EU goods and services and travel to Europe
   Invest in EU firms
   Save their money in EU banks or other financial institutions
   Make money by speculating on the euro

   MANAGED EXCHANGE SYSTEM
   There is no such thing as a completely free-floating currency system. There is some form of fluctuations the gov’t will need to respond to, especially to stabilize and instill confidence.
   *Some will have a central bank manage the system by letting the currency rise and fall naturally, if it stays in a preset high and low parameter.
   *Your choice of one 1-page essay
   *What were the short-term and long-term affects of removing the United States from the gold standard in 1971?
   *Or
   In what ways could market integration and these market systems relate to one another, or in what ways are they separate from one another? Provide relevant examples to both

   +/- OF HIGH/LOW EXCHANGE RATES
   The level of exchange rates will have differing economic effects on a country. Because of the effect on the country’s economy, there will be a focus on government intervention and influence in the value of the exchange rate

   HIGH EXCHANGE RATES POSSIBLE ADVANTAGES
   Downward Pressure Of Inflation: if the value of the exchange rate is high, prices of finished imported goods will be low. Pressures domestic producers to keep their prices low and competitive
   More Imports Can Be Bought: if the value of the exchange rate is high the currency can buy more foreign currency, and in response foreign goods
   A High Value of a Currency Forces Domestic Producers to Improve Their Efficiency:
   high exchange rates threaten int’l competitiveness so the country will need to lower costs or be more efficient

   HIGH EXCHANGE RATES POSSIBLE DISADVANTAGES
   Damage to Export Industries: If the value of the exchange rate is high, then export industries may struggle to sell the goods and services overseas. Unemployment is a possibility.
   Damage to Domestic Industries:
   If foreign goods are cheaper and imported in greater numbers, domestic producers may see a fall in demand for their products. Again, unemployment is a possibility.

   LOW EXCHANGE RATES POSSIBLE ADVANTAGES
   Greater Employment in Export Industries: If the value of the exchange rate is low, exports from the country will be relatively less expensive and so more competitive.
   Greater Employment in Domestic Industries: The low exchange rate will make imports more expensive than they were. If domestic consumers buy domestic products, employment rises

   LOW EXCHANGE RATES POSSIBLE DISADVANTAGES
   Inflation: A low value of the currency will make imported final good and services, imported raw materials and imported components more expensive. May lead to higher prices on the market

   GOVERNMENT INTERVENTION WHY AND HOW DO THEY INTERVENE
   Lower the exchange rate to increase employment
   Raise the exchange rate to fight inflation
   Maintain a fixed exchange rate
   Avoid large fluctuations in a floating exchange rate
   Achieve relative exchange rate stability to improve business confidence
   Improve a current account deficit
   How do gov’ts do this, and manipulate the exchange rate?

   GOVERNMENT INTERVENTION WHY AND HOW DO THEY INTERVENE
   Using Their Reserves of Foreign Currencies to Buy, Sell, Foreign Currencies: Gov’ts can use their reserves of foreign currency to buy back their currency that is on the foreign market (increasing demand). It can do the opposite as well.
   By Changing Interest Rates: If it wants to increase the value of the currency, they can raise the level of interest rates in their country, so if it is higher than those around them foreign markets will want to invest.

   FIXED EXCHANGE RATE ADVANTAGES
   Reduce uncertainty for all economic agents in the country. There is more predictability in investments and production due to this
   Makes sure the gov’t is instituting sensible policies to prevent inflation on imported and exported goods
   “In theory” fixed exchange rates should reduce speculation in the foreign exchange market

   FIXED EXCHANGE RATE DISADVANTAGES
   Govt’s and their central banks must buy up foreign currency for their reserves to instill foreign confidence
   Setting a fixed rate is not very easy. Variables change, new ones happen. Finding the exact rate is difficult without causing inflation or devalued currency

   FLOATING EXCHANGE RATE ADVANTAGES
   Without being fixed at a certain level, and can help control inflation or be employed in monetary policy
   Allows exchange rates to fall because it can adjust itself
   Because reserves are not used to control the value of currency, a gov’t doesn’t need to keep foreign currency in reserve.

   FLOATING EXCHANGE RATE DISADVANTAGES
   There is too much uncertainty. Businesses that plan find this unattractive for investment
   These exchange rates tend not to self-adjust to eliminate deficits and are affected by more factors than other market systems
   May make countries with high inflation less competitive than its neighbors.

   OBJECTIVES
   Define and explain the Balance of Payments Account
   Define and explain the Current Account
   Define and explain the elements that make up the Current Account
   Define and explain the Capital Account
   Define and explain the elements that make up the Capital Account
   Understand that the Current account balance is equal to the sum of the capital account and Financial account balances
   Calculate elements of the Balance Of Payments from a set of data
   BALANCE OF PAYMENTS ACCOUNT
   A record of the value of all the transactions between the residents of one country and the residents of all other countries in the world over a given period
   Think of this like a personal bank account Credit: A deposit into one country’s account from another country and given a positive value.
   Debit: Money leaving the country’s account to go to another country’s account and given a negative value.
   THERE ARE 3 PARTS
   CURRENT,CAPITAL,FINANCIAL

   3 PARTS TO BALANCE OF PAYMENTS
   CURRENT ACCOUNT,CAPITAL ACCOUNT, FINANCIAL ACCOUNT

   CURRENT ACCOUNT
   A measure of the flow of funds from trade in goods and services, plus other income flows
   Divided into four elements:

   1. The balance of trade in goods

   2. The balance of trade in services

   3. Income

   4. Current transfers

   CURRENT ACCOUNT
   THE BALANCE OF TRADE IN GOODS
   A measure of revenue received from the exports of tangible (physical) goods minus the expenditure on the imports of tangible goods over a given period.
   Surplus on the balance When export revenue is greater than import expenditure
   Deficit on the balance of trade in goods Import expenditures is greater than export revenue

   CURRENT ACCOUNT
   THE BALANCE OF TRADE IN SERVICES
   A measure of revenue received from the exports of services minus the expenditure on the imports of services over a given period.
   Example:
   Richard takes a spiritual journey to Tibet. He spends money there to buy us all postcards. That involves money being imported to Tibet (money coming in) and exported from the United States (money going out)

   CURRENT ACCOUNT
   INCOME Also known as net investment
   A measure of the net monetary movement of profit, interest and dividends moving into/out of the country over a given period, because of financial investment abroad
   Example: Macro: international firms with offices in foreign countries sending money out of/into another country Micro: having a bank account with a foreign country with interest that moves the same as at the macro level

   CURRENT ACCOUNT
   CURRENT TRANSFERS
   Measurement of the net transfers of money, often known as net unilateral transfers from abroad
   These are payments made between countries when no goods or services change hands.
   Example: The United States sending foreign aid to another country

   CAPITAL ACCOUNT
   A relatively small part of the balance of payments accounts and does not have significant effect on the balance Divided into two elements:
   Capital Transfers
   Transactions in non-produced, non-financial assets

   CAPITAL ACCOUNT
   CAPITAL TRANSFERS
   A measure of the net monetary movements gained or lost through actions such as the transfers of goods and financial assets by migrants entering or leaving the country, debt forgiveness, transfers relating the sale of fixed assets, gift taxes, inheritance taxes and estate transfers (death tax)
   Example
   Gift tax
   if I give any of you more than 18,000$$/year (2024), the gov’t will tax you for the money you receiv
   CAPITAL ACCOUNT

   1. TRANSACTIONS IN NON-PRODUCED, NON-FINANCIAL ASSETS
      Consists of the international sale and purchases of non-produced assets, such as land or the rights to natural resources, and the net international sales and purchases of intangible assets (copyrights, patents, etc.) P.409
      WASHINGTON, D.C. –. Today, Rep. Dan Newhouse (R-WA) led his House colleagues in the introduction of the PROHIBITION of Agricultural Land for the people's Republic of China Act. This legislation would prohibit the purhase of PUBLIC OR PRIVATE agricultural land in the United states by foreign nationals associated with the government of the people's Republic of china

   FINANCIAL ACCOUNT WHAT ARE THE ELEMENTS
   Measures the net change in foreign ownership of domestic financial assets
   Foreign ownership will help the domestic market reach a surplus because of the money coming in.
   More domestic invest in foreign markets than vice versa can result in a deficit
   there are three elemnts

   1. DIRECT INVEVSTMENT

   2. PORTFOLIO INVESTMNET

   3. RESERVE ASET
      **Financial Account
      *Direct Investment: The purchase of long-term assets with the goal of gaining a lasting interest in a company in another economy With a risk involved, this can be the purchasing of stocks or shares of at least 10% or buying a company directly.*
      Portfolio Investment: A measure of stock and bond purchases but which are not direct investments because they don’t lead to a controlling share or interest in the company. There is not necessarily a belief that purchasing will lead to a return on your investment, but instead involves borrowing and lending on the int’l market.
      Reserve Assets: The reserves of gold and foreign currencies that all countries hold in their official reserves. there needs to be and is a balance to avoid a surplus or deficit LINKS : federal reserve and numbers
      DOES IT REALLY WORK?: Short answer is no, there are too many current transactions to keep any sheet updated completely. These numbers will be updated over the course of several years as more information is gathered.

   CHAPTER 28/29
   MEASURING
   ECONOMIC
   PROGRESS

   OBJECTIVES
   Explain the multidimensional nature of economic development
   Compare and contrast GDP per capita figures and GNI per capita figures for different countries
   Compare and contrast GDP per capita figures and GNI per capita figures, at Purchasing Power Parity (PPP) prices, for different countries
   Compare and contrast health and education indicators for different countries
   Explain and give examples of economic/social inequality indicators, energy indicators and environmental indicators
   Explain and give examples of composite indicators, including the human development index, the gender inequality index, the inequality adjusted human development index and the Happy Planet index
   Discuss the strengths and limitations of approaches to measuring economic development
   Discuss possible relationships between economic growth and economic development

   THE MULTIDIMENSIONAL NATURE OF ECONOMIC DEVELOPMENT
   Think the complicated ways of measuring economic development because of all the factors in play at once The multidimensional nature of economic development Think the complicated ways of measuring economic development because of all the factors in play at once

   SINGLE INDICATORS
   Solitary measures used to assess development, usually either financial