Transcript Chapter 37 - International Trade

[“S&D” determine currency strengths]
[What if the U.S. wants more Mazdas from Japan?]
United States
Japan
[“S&D” determine currency strengths]
[What if the Europeans want more American cars?]
United States
Europe
[Percent change from 8/11/97 to 8/11/98]
So – currency
prices can be
very volatile.
Canada’s Dollar [“Loonie”] -8.5%
Japanese Yen
-21.2%
Mexico’s Peso
-15.2%
Indonesia’s Rupiah -80.6%
Thailand’s Baht -26.3%
South Korean Won
-33.3%
[Now it is $1,171 Dinars = $1]
The New Iraqi Dinar – No Saddam
Seven Euro Bank Notes
On January 1, 2002, 300 million Europeans in 12
countries woke up to a new currency, the euro.
1. Windows and gateways dominate the front side of each
note as symbols of EU spirit of openness and cooperation.
On the back side is a bridge from a particular age, a
metaphor for communication among the people of Europe
and between Europe and the rest of the world.
2. Sign – was inspired by the Greek letter epsilon,
in reference to the cradle of European civilization
and the first letter of the word “Europe”. The
parallel lines represent the stability of the euro.
3. Eight denominations of euro coins, each
having a common side and a national side.
1 cent
2 cents
10 cents
20 cents
1 Euro
5 cents
50 cents
2 Euro coin
Foreign Currency per U.S. Dollar (2/5/13)
$1 will buy
EXCHANGE RATES:
53.59 Indian rupee
.63 British pounds
1.00 Canadian dollars
12.91 Mexican pesos
1.36 Swiss francs
.75 European euros
92.71 Japanese yen
.0009 South Korean won
6.44 Swedish krona
6. 23 Chinese Yuan
Reason for: Downward Sloping “D” Curve
[As Euro price decreases, QD for $’s increase]
s
D
Euro Price of $
[Dollars looking for Euros]
150
100
50
QD$
QD$
QD$
Quantity of Dollars
Reason for: Upward Sloping “S” Curve
[As Euro price increases, QS of dollars increase]
D
s
Euro Price of $
[Euros looking for $’s]
150
100
50
QS$
QS$
QS$
Quantity of Dollars
D1
APPRECIATION
Or
DEPRECIATION
Euro Price of $
[Euros looking for $’s]
€150
€100
€50
D
D3
A
D2
s
[Dollars looking for Euros]
E2
M will increase
E1
E3
X will increase
D # of Dollars A
Dollar Price of Euro
Europeans decide to buy
more American cars.
$1.50
D1
Europeans decide to buy
fewer American cars.
S
[Euros looking for Dollars]
[Dollars looking for Euros]
$1.00
$ .50
D # of Euros A
Increase in U.S. Growth Rate (Y)
[We buy more from Japan appreciating
the yen and depreciating the dollar]
The country who initiates the action (buying foreign goods, investing based on higher
interest rates in foreign country, etc.) is the country whose supply of currency moves.
Price of
$1.50
$1.00
D1
“We want more Japanese cars,
computers, DVD players, digital
cameras, and camcorders.”
D2 S
D
“Booming” Economy
AS
AD2
AD1
# of
YR
Y*
A
Decrease in U.S. Growth Rate (Y)
Recessionary Economy [We buy less from Japan
AS
AD1
depreciating the yen and
AD2
PL
appreciating the dollar]
YR Y*
Price of
$1.00
D1
50¢ A
S
D2
D Quantity of
“Seven million of us
have lost our jobs.
We can’t buy as many
American or Japanese
products.”
1. Cheaper goods (lower prices)
2. High interest rates
3. Popular items (Taste)
This is because money is good for:
I’m
a. Stuff now so cheaper prices are more beneficial.
“supplying”
b. Popular items are also stuff wanted now as they are
blows.
also perceived to be more beneficial.
c. Stuff later (in which case you need more money),
and the way you get more money is to loan it, hence
benefiting from a higher interest rate.
Again, remember, the country who initiates the action:
a. buying more foreign goods [because of taste, lower PL, or more income],
b. invests more based on higher interest rates overseas, etc.
c. is the country whose supply of currency moves.
I
(The country being acted upon, is the country
“demand”
whose demand for their currency moves.)
that you stop.
Therefore, it takes fewer
pennies, so the dollar is
stronger [$ price decreases]
Therefore, it takes more
pennies, so the dollar is
weaker. [$ price increases]
Remember this: “Both the demand and
the supply curves for the different
currencies must shift in the same
direction"
S
D2
1. Show how an “ increase in taste” $1.50
$1
for Japanese cars would affect the
market for the Yen and the Dollar.
e2
Appreciate
e1
Yen Price of $
$ Price of Yen
D
D
¥100
¥50
2. How would an increase in Mexico’s
real interest rate affect the value of
the Peso and the value of the Euro?
€150
S
e2
€100
e1
Appreciate
D2
e1 Depreciate
$1
$.50
e2
# of Won
D
¥100
¥50
S S2
e1
e2
S S2
e1
e2 Depreciate
P16
P12
# of Euros
S2
S
D
e2
W1,070
W1,030
Depreciate
# of Dollars
D
Won Price of $
S
$ Price of Yen
4. How would a U.S. economic
expansion affect the value of the
Dollar and the value of the Yen?
Yen Price of $
3. How would high inflation in South
Korea affect the market for the Won
and the Dollar?
$ Price of Won
# of Pesos
D
e1 Depreciate
e2
# of Dollars
Peso Price of Euro
Euro Price of Peso
# of Yen
D D2
S S2
e1 Appreciate
# of Dollars
D D2
$1.50
$1.00
S
e2 Appreciate
e1
# of Yen
More Fun with the Foreign
Exchange Market
What shifts the demand and
supply curves in the FOREX
Market for Dollars
¥ price of $ D$1 D$2
¥150
¥100
Market for Yen
S$1 $ price of ¥ D¥1
S¥1
S¥2
D
$1.00
$.50
Q$1 Q$2
Quantity of Dollars
A
The Fed
“Now we have more Yen!”
A
Q¥1 Q¥2
D Quantity of Yen
Japan
Market for Dollars
¥ price of $
D$2
D$1
S$1
Market for Yen
$ price of ¥
¥150
D
¥100
D¥1
S¥1
S¥2
$1.00
$.50
Q$1 Q$2
Quantity of Dollars
A
Q¥1 Q¥2
A
Japan
D Quantity of Yen
The Fed
“Again we have more Yen!”
6. Interest Rates in the U.S. INCREASE relative to Japan’s I.R.
This impacts demand for interest rate sensitive financial investments
in the two countries like bonds and CDs.
Market for Dollars
¥ price of $
D$1
Market for Yen
S$1
S$2
¥100
¥50 A
$ price of ¥
$1.50
$1.00
Q$1 Q$2
Quantity of Dollars
D
D¥1
D¥2
S¥1
D
Japan
Q¥1 Q¥2
Quantity of Yen
A
Bank of Japan
“Japanese banks have more dollars!”
7. There is a change in consumer preferences [Taste] for Japanese
cars, computers and airplanes by Americans.
Japanese Goods become more desirable because of uniqueness or
increased quality.
Market for Dollars
¥ price of $
D$1
¥100
¥50 A
Market for Yen
$ price of ¥
S$1
S$2
D$2
D$1
S¥1
$1.50
$1.00 D
Japan
Q$1 Q$2
D Quantity of Dollars
Q¥1 Q¥2
Quantity of Yen
A
Bank of Japan
“Japanese banks have more dollars!”
8. The U.S. economy is in a strong recovery after the GREAT
RECESSION. GDP, or National Income, in the U.S. is now HIGHER
and Americans on average have more disposable income.
Market for Dollars
P price of $
D$1
D$2
S$1
Market for Pesos
$ price of P
P150
P100 D
$1.00
$.50
Q$1 Q$2
Quantity of Dollars
A
The Fed
“We now have more Pesos”
DP1
SP1
SP2
A
QP1 QP2
D Quantity of Pesos
Mexico
Market for Dollars
D$2
¥ price of $
D$1
¥150
¥100
S$1
Market for Yen
$ price of ¥
D
D¥1
S¥1
S¥2
$1.00
$.50 A
Q$1 Q$2
Quantity of Dollars
A
Q¥1 Q¥2
Japan
DQuantity of Yen
The Fed
“We now have more Yen”
10. The Japanese economy is in recovery. GDP, or National
Income, in Japan is now HIGHER and the Japanese on average
have more disposable income.
Market for Yen
Market for Dollars
¥ price of $
D$1
S$1
S$2
¥100
¥50 A
$ price of ¥
D¥2
D¥1
S¥1
¥1.50
D
¥1.00
Japan
Q$1 Q$2
DQuantity of Dollars
Q¥1 Q¥2
Quantity of Yen
A
Bank of Japan
“Japanese banks have more dollars!”
11. Due to a serious recession in Japan, the Price Level in the U.S.
is now HIGHER relative to the Price Level in Japan six months ago.
Therefore, it takes fewer
pennies, so the dollar is
stronger [$ price decreases]
Therefore, it takes more
pennies, so the dollar is
weaker. [$ price increases]
The Market for Dollars
Yen Price of Dollar
Exchange Rate: $1 = ¥100
P
Appreciation of the Dollar
Increase in taste for U.S. goods
Increase in U.S. Interest Rates
Decrease in U.S. Price Level
Decrease in U.S. Growth Rate
Decrease in U.S. Currency Price
D1$
D2
Y looking for $’s
¥150
¥100
S$
$’s looking for Y
E2
D
A
Yen
depreciates
Yen
E1
appreciates
¥50
E3
Depreciation of Dollar
Decrease in Taste 0
Decrease in In. Rates
Increase Price Level
Increase Growth Rate
Increase in Currency Price
D
D3
Qe
Quantity of Dollars
A
Appreciation/Depreciation
[Exchange Rate:
P
rice
D
1
S
Japan will supply
D2
$
$
less yen for dollars. ¥/$
S2¥
$/¥ D¥
$1.50
$1
.50
D
A
¥ looking for $’s
¥150
S1¥
S2¥
¥100
E2
E2
D
A
$’s looking for ¥
U.S. will supply more $s for ¥.
E2
S$ S$
¥/$ D$
¥150
E2
S
E1
Yen
¥100
appreciates
D # of ¥ A ¥50
Japan will supply
E3
more yen for dollars.
X M D
+
+
+
+
+
Yen
depreciates
-
$1 = Y100]
¥50
U.S. will supply fewer $s for ¥.
A M X
Taste [products/assets]
Interest Rates
Price Level
Growth Rate
Currency Price
E2
D # of Dollars A
D3
Quantity of Dollars
D
A
+
+
+
+
+
-
$
Rupee Price of Dollar
Price
R100
R50
D1 $
S1$
R’s looking for $’s
$’s looking for R’s
Rupee
A
S2$
E1
appreciates
R25
D
E2
Quantity of Dollars
(c) Using a correctly labeled graph of the foreign exchange market for the U.S.
dollar, show how an increase in U.S. firms’ direct investment in India will
affect the value of the U.S. dollar relative to the Indian currency (the rupee).
Answer to 2. (c):
The increase in investment in India will increase demand for the rupee & appreciate that
currency. This would result in an increase in supply of the U.S. dollar for more rupees,
depreciating the dollar.
Price
D1 $
Peso Price of Dollar
P
P100
P50
looking for
S2$
$’s
$’s
S1$
looking for
P
E2
D
Peso
depreciates
E1
Quantity of Dollars
Answer to 3. (c) (i): If
the U.S. decrease
financial investment in
Argentina, the U.S. would
decrease their supply of
dollars to Argentina,
resulting in a decrease in
demand for the peso.
(c) (ii) As shown on the
graph, the dollar would
appreciate.
(d) The cheaper prices
in the U.S. will result in
more demand for U.S.
goods and therefore the
dollar, appreciating the
dollar and depreciating
the peso.
A
3. (c) [2pt] Using a correctly labeled graph of the foreign exchange market for the U.S.
dollar, show how a decrease in the U.S. financial investment in Argentina affects each.
(i) The supply of United States dollars
(ii) The value of the United States dollar relative to the peso
(d) [2 pt] Suppose that the inflation rate is 3% in the U.S. and 5% in Argentina.
What will happen to the value of the peso relative to the United States dollar as
a result of the difference in inflation rates?
Explain.
Currency Appreciation and Depreciation
D D2
$1.50
$1.00
.50
S
D
A
Dollar price
of another
currency
[yen]
International
value of dollar
falls (dollar
depreciates)
Equals
increases
Exports
increase
Imports decrease
[$1 to $1.50]
D3
# of Yen
Dollar
price
of another
Currency
[yen]
decreases
[$1 to .50]
Equals
International
value of dollar
rises (dollar
appreciates)
Imports increase
Exports decrease
Balance of Trade in Goods [“R” is Recession]
D1
$1.50
D
$1.00
.50
D2 S
A
D3
D # of YenA
“Direct” relationship between “Y” & “M”
As Interest Rates Rose . . .
[all the way to 13%]
“Strong Dollar”
The dollar
got stronger
and stronger
81
82
83
84
85
“Exports decreased. Agricultural exports
dropped from $44 billion to $28 billion as
foreign agricultural goods became cheaper.”
Exports
[Decreased]
81
82
83
84
85
Imports
Imports increased as
they became cheaper.
[Increased]
81
82
83
84
85
Appreciation/Depreciation
NS [14-19]
14. If the dollar depreciates relative to the peso, the
peso will (appreciate/depreciate) relative to the dollar.
15. Appreciation of the dollar will tend to (increase/decrease)
American imports & (increase/decrease) American exports.
16. The yen price of the dollar has decreased from
¥150=$1 to ¥100=$1, which means the dollar
(apprec/deprec), which (incr/decr) our imports from Japan.
17. Depreciation of the euro will (increase/decrease)
European exports & (increase/decrease) their imports.
18. If Mexico decides to increase their investments
in the U.S., the peso will (appreciate/depreciate) which
would (increase/decrease) [Mexico’s imports]
U.S. exports to Mexico.
19. If the exchange rate changes so that more Japanese
yen are required to buy a dollar then the yen will
(appreciate/depreciate) and Americans will
purchase (more/less) Japanese goods.
20. If Americans increase their investments in Europe, then the supply of
dollars in European banks will (incr/decr) & the dollar will (apprec/deprec).
21. If Europeans quadrupled their investments in the U.S. stock market, the
supply of Euros in U.S. banks would (incr/decr) & the dollar would (appr/depr).
22. Under a system of freely floating exchange rates, an increase in the international value of a nation’s currency will cause its (exports/imports) to increase.
23. If the exchange rate changes so that fewer dollars are required to buy a yen,
the dollar will (appr/depr) & (fewer/more) U.S. goods will be exported to Japan.
24. If the dollar price of yen increases, then the dollar (appreciates/depreciates)
relative to the yen and our exports to Japan (increase/decrease).
25. If Mexico’s price level is increasing faster than that of the U.S., the peso
will (appr/depr) and their exports to the U.S.[our imports] will (incr/decr).
26. If German’s growth rate[income] is increasing faster than that of Mexico,
the euro will (apprec/deprec) & Germany’s exports to Mexico will (incr/decr).
27. If interest rates are decreasing faster in Italy relative to Mexico, the euro
will (appreciate/depreciate) and Italy’s exports to Mexico will (incr/decr).
28. If the dollar price of the yen decreases, the dollar (appreciates/depreciates)
relative to the yen and American exports to Japan (increase/decrease).
29. If the dollar price of the euro decreases, our imports from Europe (incr/decr).
30. If the exchange rate changes from $1=¥200 to $1=¥100, we can say the
dollar has (apprec/deprec) in value & Japan’s exports to the U.S. (incr/decr).
31. Depreciation of the euro relative to the U.S. dollar would make a trip by
an American to Europe (more/less) expensive.
32. Suppose that yesterday $1 would buy 800 South Korean won, but today
will buy 810 won. We can conclude that the won has (depr/apprec) in value.
Winners [anyone buying with dollars]
1. American tourists to Mexico
2. People who send dollars to family or friends in Mexico
3. U.S. businesses that buy from Mexico
4. American consumers who buy Mexican imports
5. Those who primarily do business in dollars
Losers [anyone buying with pesos]
1. Mexicans who buy American products
2. Mexican businesses that buy supplies from the U.S.
3. American businesses that sell products to Mexico
4. Mexican visitors to the U.S.
5. Those who primarily do business in pesos
$1 = P3.5
$1 = P13.0
$24,000 car = 84,000 pesos
$24,000 car = 312,000 pesos
2002 AP Essay on Higher Interest Rates in the U.S.
in
2002 FRQ
[Nominal IR-Inflation = RIR]
The real interest rates [RIR] in the U.S. & Japan are equal to 7% [say 9%-2%=7%].
The real interest rate in the U.S. increases to 8% while the real interest rate in
Japan decreases to 6%.
a. How & why will financial capital flows be affected
by this change in real interest rates?
[financial capital, not real capital]
D1
S
$/¥
b. Using a correctly labeled graph for the yen
D2
market, show and explain how the value of
$1.15
E1
the yen will change relative to the value of
A
$1.00
the dollar.
E2
c. Explain how the change in the value of the
yen will affect each of the following in the U.S.
(D) # of Yen
(1.) Imports from Japan
(2.) Exports to Japan
1. Assume that the U.S. trades with Japan. Draw a correctly labeled graph
of the foreign exchange market for the U.S. dollar. Let’s say that
United States output [GDP] decreases. Show & explain how the supply
of the U.S. dollar will be affected in the foreign exchange market..
S2$
D$
S1 $
¥/$
¥120
¥100
E2
E1
Answer 1: The decrease in
real U.S. output will cause
job losses in the U.S. and
decrease the dollars supplied
for Japanese goods.
Quantity of Dollars
2. Given your answer in 1, indicate what will happen to the
value of the U.S. dollar relative to the Japanese yen.
Answer 2: Due to the decrease in supply of U.S. dollars
[as shown above], it will take more yen to purchase a dollar,
depreciating the yen and therefore appreciating the dollar.