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International Economics

Therese, Mya, Dannyelle

Therese Todd

on 30 January 2013

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Transcript of International Economics

Economic Integration Advantages Disadvantages International Economics By: Mya Havard, Dannyelle Hwang, & Therese Todd International Trade Involves the exchange, or buying and selling of goods and services across international boundaries. Sell goods and services produced domestically to buyers abroad=EXPORTS

Others buy goods and services from countries to use domestically=IMPORTS Benefits of Trade 1. Specialization: when an individual firm or country concentrates production on one or few goods and services
Greater volume of output and consumption
Theory of Comparative Advantage
Quality and Quantity

2. Factor Endowments: Factors of Production that a country possesses
Difference in factor endowments
Basis of Comparative Advantage Theory
Take advantage of differences

3. Economies of Scale: the average costs of production that occur as a firm

its output by all its inputs Downward slope of LR total cost curve
Output , firm , average cost . Increase Variety

Increases competition

Ideas & Technology


Growth & Development The World Trade Organization "An international organization responsible for the institutional and legal framework for the trading system between members worldwide...In 1995 The WTO replaced GATT, and had 124 members." Liberalizing trade
Operating a system of trade rules
Providing a forum for trade negotiations
Settling trade disputes Helps keep the peace
Free trade cuts the cost of living
More choices
incomes because of trade
Promotes “good government” Offers 10 Benefits to the Global Trading System: Cons:
Agreements were ineffective
Supported developed countries over developing ones
Tariff escalation: tariffs are higher on processed vs. raw items Doha Development Round: '01-'08
Goal: address issues in light of the MDGs
Huge defeat for free trade
Left many unresolved issues Free Trade & Protectionism •Free Trade: The absence of govt. intervention of any kind in international trade Leads to... Efficient global resource allocation
Maximization of global output
All share benefits Protectionism: Involves govt. intervention in international trade through trade restrictions
Protects domestic economies

Tariffs: taxes on imported goods
Protection Import Quota: legal limit of a good that can be imported

Production and Export Subsidies: granted by the government to domestic firms to help lower their prices Whether goods should be imported or exported is determined by the domestic price of the goods/services Arguments FOR and AGAINST Protectionism Limited stake holder benefits

quality/quantity and prices

Income distribution worsens

Foreign producers suffer

Global resource misallocation

Potential Trade Wars
Real World Ex. Protection of infant industries
Which industries have potential to succeed

Strategic Trade Policy
Economies of scale
Comparative Advantage

Diversification: opposite specialization
Real World Exs.

Tariffs for govt. revenue


Protects employment Exchange Rates Free Foating Exchange Rates Managed Exchange Rates Fixed Exchange Rates The Rate at which national currencies can be exchanged for one another Floating Exchange Rates:
(1) no government intervention
(2) determined completely by supply and demand Free Floating Exchange Rate System Ex: The Gold Standard 1879-1934 and the Bretton Woods System 1944-73 Managed Float Exchange Rate:
(1) Middle Ground
(2) Part Free Floating
(3) Periodical intervention from the Central Bank Pegged Exchange Rates
(1) Form of Managed float exchange rate
(2) only allowed to fluctuate within a narrow range above and below Example: Ecuador, El Salvador, and the British Virgin Islands’ currencies are all pegged to the dollar Appreciation and Depreciation Graphs Causes of Change in Exchange Rates:
-Relative rate of inflation
-Changes in income
-Changes in taste
-Speculation How Fixed Exchange Rates are maintained:
-Using official reserves to maintain the exchange rate
-Efforts to limit imports
-Increase Interest Rates
-Imposing exchange controls Bibliography Current Account Deficits Current Account Surplus the economic and cultural integration on a global scale, involving interconnectedness through areas such as trade, finance, investment, people, technology, ideas, knowledge, communication and culture. Globalization Advantages and Disadvantages of Trading Blocs Free Trade Area
NAFTA (North America Free Trade Agreement)
Customs union
CEFTA (Central European Free Trade Agreement)
Common market
European Economic Community (EEC, the foundation of the present European Union, 1957)
Economic union

Monetary union
‘eurozone countries’ (European Monetary Union countries) Preferential Trade Agreements (PTA) a group of countries that have agreed to reduce tariff barriers to encourage free trade
Free trade area
Customs union
Common market
Economic union
Monetary union Trading blocs the economic interdependence of countries in which they reduce or eliminate trading barriers through agreement Economic Integration Globalization is the pathway to increased growth and prosperity around the world
Globalization is the reason for many ills:
Unemployment in developed countries
Exploitation of workers in poor countries
Environmental destruction Different Perspectives Economic Integration Stages Around the World The Levels of Trading Blocs Real World Examples Purpose: PTAs want to become FTAs (Free Trade Areas) through gradual elimination of tariff barriers between them Multilateral : more than two countries
Bilateral : two countries Preferential Trade Agreements (PTA) Words from Nobel Prize winning economist, Joseph Stiglitz “They have not sought to create a fair set of rules that would promote the well-being of those in the poorest countries of the world.” “they have shaped globalization to further their own interests” “the problem is not with globalization itself but in the way globalization is managed” “failed to live up to [its] potential” Words from Nobel Prize winning economist, Joseph Stiglitz “They have not sought to create a fair set of rules that would promote the well-being of those in the poorest countries of the world.” “they have shaped globalization to further their own interests” “the problem is not with globalization itself but in the way globalization is managed” “failed to live up to [its] potential” Advantages and Disadvantages NAFTA Additional Benefits: Non-discrimination
Free trade
Promoting fair competition
Encouraging Economic development and reform WTO Objectives: Based on the Principles of: Uruguay Round: '86-'94 Pros:
Helped free trade
Promoted liberalizing trade DISCUSSION QUESTIONS: 1) Describe and explain three benefits of trade, and provide examples of each.
2)To what extent has the WTO proven to be effective in accomplishing its objectives?
3) Evaluate the arguments for and against protectionism. Balance of Payment Why? To keep track of foreign exchange Sum of all credits = sum of all debits a country’s records for all transactions including all credits (payments received from other countries) and debits (payments made to other countries). Balance of Payments Demand for domestic currency supply of foreign currency

Demand for foreign currency supply of domestic currency Credits  foreign demand for currency
Debits  supply of domestic currency Demand and Supply Deficit = balance is a negative value
debits > credit

Surplus = balance is a positive value
credit > debit Deficit and Surpluses Three accounts Current account = sum of the balance of trade + balance on services/invisible balance + net income + net transfers exports - imports exports of services – imports of services Capital account = inflows of funds from foreign purchase of resources – outflow of funds from domestic to foreign countries Financial account = inflows of funds into country from portfolio investment - foreign investments and loans to other countries + changes in official reserves Graph Globalization Lectures on Youtube Discussion Questions Compare the advantages and disadvantages of Globalization.

Compare the different levels of economic integration. Discussion question: Explain why Europe would want to set a monetary union. Discussion Question Real World Examples Discussion Questions:
Why do you think pegged currencies are so important?
Why do you think the world does not use floating exchange rates?
How does the government intervene and what is the goal of all exchange rate systems? -excess of imports over exports

-become persistent current account deficits

-Corrected by Loans -Consume less than produce
-May lead to
-low domestic consumption
-insufficient domestic investment
-risks related to foreign investments
Are countries more likely to have a deficit or surplus? Fixed Exchange Rates:
(1) controlled by the central bank
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