Transcript Macro AP unit 5

1
Why do people trade?
More access to trade means more choices,
cheaper prices and a higher standard of
living.
Video clip: trading up
2

2 types of problems:
◦ Output problems - look at total items
being produced
◦ Input problems - look at resources that
go into making a product
Input or Output Question?
Number caught per day
Deer
Antelope
Henry
4
6
John
24
12
5
Input or Output Question?
Months to produce one
Car
Plane
Canada
8 months
10 months
Japan
15 months
12 months
6
1. Absolute advantage
 Output problem: person/country can
make more of the item than other country
 Input problem: person/country can
make item using less resources (time,
land etc) than other country
Absolute Advantage?
Number caught per day
Deer
Antelope
Henry
4
6
John
24
12
8
Absolute Advantage?
Months to produce one
Car
Canada
Japan
8 months
15 months
Plane
10 months
12 months
9
◦ a country is able to produce a good at a
lower opportunity cost than another
country
** Comparative advantage Is gained through specialization
To figure comparative advantage….Must calculate the PER
UNIT opportunity cost
* This will be different for INPUT and OUTPUT problems
Output problem = COST/GAIN
Input Problem = GAIN/COST
The country that can produce the item at a lower opportunity cost
should specialize in that item
To figure opportunity cost - Cost/Gain
The following chart illustrates the number of CDs and pounds of beef
that Japan and Canada can produce in a day
CD ‘s
Beef
Japan
4
2
Canada
4
6
Japan
1 CD = ____ B
1 B = ______ CD
Canada
1 CD = _____ B
1 B = ______CD
Japan should produce __________
Canada should produce _________
Japan, 1 CD = 1/2 B, 1 B = 2 CD
Canada 1CD = 3/2 B, 1 B = 2/3 CD
Japan should produce CDs
Canada should produce Beef
The following chart illustrates the number of hours it takes the U.S. and France
to make one loaf of bred and one bushel of corn
Bread
Corn
U.S.
4 hours
2 hours
France
4 hours
6 hours
U.S. 1 B = _________ C,
1C = __________ B
France 1 B = ________C,
1 C = __________B
The U.S. should produce ________________
France should produce __________________
In the U.S. 1 B = 2 C,
1C = 1/2 B
In France 1 B = 2/3 C 1 C = 3/2 B
The U.S. should produce Corn
France should produce Bread
Practice: Who has the
Comparative Advantage?
Number caught per day
Deer
Henry
John
4
24
Antelope
6
12
Henry 1 D = _____ A
1A = ______D
John
1D = ______A
1A = ______D
16
Comparative Advantage?
Number caught per day
Deer
Antelope
Henry
4
6
John
24
12
Henry 1D = 3/2 A
1 A = 2/3 D
John 1 D = ½ A
1A = 2 D
17
Comparative Advantage?
Number caught per day
Deer
Antelope
Henry
4
6
John
24
12
Henry 1D = 3/2 A
1 A = 2/3 D
John 1 D = ½ A
1A = 2 D
18
Practice: Who has the
Comparative Advantage?
Months to produce one
Car
Plane
Canada
8 months
10 months
Japan
15 months
12 moths
Canada 1C = _____ P
1 P = _____C
Japan
1C = ______P
1P = _____C
19
Comparative Advantage?
Months to produce one
Car
Canada
Japan
8
15
Plane
10
12
Canada 1 C = 4/5 P
1 P = 5/4 C
Japan
1 C = 5/4 P
1P = 4/5 C
20
Comparative Advantage?
Months to produce one
Car
Canada
Japan
8
15
Plane
10
12
Canada 1 C = 4/5 P
1 P = 5/4 C
Japan
1 C = 5/4 P
1P = 4/5 C
21
1. The following table gives the number of hours it takes in the
United States and Scotland, using the same amount of resource, to
produce a ton of oats or one bagpipe.

Oats
Bagpipes
U.S.
2 hours
3 hours
Scotland
5 hours
4 hours
a. Output or input problem??
b. Who has the absolute advantage in oats? Bagpipes?
c. Who has the comparative advantage in Oats? Bagpipes?
Input problem; looks at TIME making
Absolute advantage:
Oats = U.S. (takes less time to make)
Bagpipes = U.S. (takes less time to make)
Comparative Advantage:
U.S.
Scotland
1 O = 2/3 BP
1 O = 5/4 BP
1 BP = 3/2 O
1BP = 4/5 O
U.S = OATS
Scotland = BAGPIPES
The table below gives the total number of pens and paper that
country X and country Y can produce.
Country X
A B C D E
Pens 0 4 8 12 16
Paper 40 32 24 16 8
F
20
0
PENS 4 PAPER 8
a. Output or input problem?
Pens
paper
Country Y
A B C D
0 3 6 9
60 48 36 24
PENS 3
E
F
12 15
12 0
PAPER 12
b. Who has the absolute advantage in producing pens? paper ?
c. Who has the comparative advantage in producing pens? paper?
Output problem
Absolute advantage:
 Pens = X
 Paper = Y
Comparative Advantage:
Country X
Country Y
1 Pen = 2 paper
1 pen =4 paper
1 paper = 1/2 pen
1 paper = ¼ pen
 Free
Trade = trade without restrictions
 Protectionism
= trade with restrictions
(ex. Tariffs and quotas)

Supply decreases, causing prices to increase
G’s
revenue
from tariff?
Q
demanded
at Pw + t?
Q supplied
at Pw + t ?
Topic 3: Foreign Exchange
(aka. FOREX)
US sells cars to Mexico
Mexico buys tractors from Canada
Canada sells syrup to the U.S.
Japan buys Fireworks from Mexico
For all these transactions, there are different
national currencies - each country must be
paid in their own currency
The buyer (importer) must exchange their
currency for that of the sellers (exporter).

Looks at relationship between exports and imports

Trade surplus = Exports > imports
◦ Causes AD to increase

Trade Deficit = Imports > exports
◦ Causes AD to decrease
Foreign Exchange Market:
FOREX
Examines the price of one currency in
terms of the other currency.
FOREX simplified
Imagine a shack in the middle of the pacific ocean
- on the shelves in the stock room is every
country’s currency
“Fred” is the operator of this shack
If a person wants (demands) one currency, they
have to pay for it using their currency
People will bring their Pesos to Fred who
will go into the stock room and place the
pesos on the shelf. The SUPPLY of pesos in
the “shack” just increased
Fred then goes and gets the dollars off the
shelf to give to the customer. The SUPPLY
of dollars in the stock room just decreased
More Canadians are traveling to the United States:
Demand for dollars increases
Demand for Canadian dollars decrease
Supply of Dollars decreases
Supply of Canadian dollars increases
Things that impact the
Supply and demand of a
currency
Example:
More Japanese teenagers want American clothing
In order for Japanese teenagers to buy American
clothing, they will need to convert Japanese currency to
American currency
2. Changes in Relative Price Level
If prices are lower in one country, more people will
want to buy products from this country
Example:
Prices in the United States rise relative to prices in
Germany.
People in the U.S. will want to buy the cheaper
German made products and will need German
currency to do so
If interest rates are higher in one country relative
to those in another country, countries will want to
put their $ into the banks with the higher interest
rates
Example: Interest rates in the U.S. rise
relative to those in Canada. Canadians will want
to save their money in U.S. banks but they will
need to convert their currency to dollars to do so
If income goes up in a country, they will buy more foreign
products; if income goes down in a country, they will buy
less foreign products
Example: Income for Americans has decreased; Americans
will buy less products from all foreign countries

Expansionary = causes value of currency to go down

Contractionary = causes the value of currency to go up
Foreign Exchange
Price of
____
Equilibrium:
$1 = £1
Supply
Demand
Quantity of ____________
Q

Numbers 1 and 2 on practice WS
Appreciation: currency is more valuable than the other
country’s currency
Depreciation: currency is less valuable than the other
country’s currency




What happens to the Demand for the dollar?
What happens to the demand for the euro?
What happens to the supply of the euro?
What happens to the supply of the dollar?
Draw a graph that shows the
Change in the demand for
Dollars.
The U.S. dollar _____________________________




As a result of the changing value of the dollar,
Exports from the U.S. will _______
Imports from the U.S. will _________
U.S. will have a trade ____________
The demand for yen will______
The demand for the dollar will ______
The supply of the yen will _______
The supply of the dollar will _______
Show on a graph the change in the supply of dollars.
The dollar will _____________ in comparison to the yen. As a
result of the change in value,
U.S. exports will _______
U.S. imports will ____
U.S will have a trade _______.

Numbers 3 and 4 practice WS
Balance of Payments (BOP)
Database that records monetary transactions
between countries
The balance of payments is made up of two
accounts.
1. current account
2. financial account.
* Balance of trade : relationship between exports
and imports only
Current Account
Includes:
1.
2.
Merchandise and service Trade
Income receipts – income received from stocks
and dividends
3. Transfers of money (includes foreign aid)
Surplus = more $ comes into country
Than is leaving


Deficit = more $ leaving country than what is
coming in
Financial Account
Includes: Transactions between foreign countries of physical
and financial assets FINANCIAL ACCOUNT = THINK
ASSETS!!!!
Physical Asset:
EX: a U.S. company buys a hotel in Russia
Financial Asset : purchase of other country’s stocks, bonds,
treasury bills
EX: A German student buys stock in an American
company
Credit vs debit – think about who OWNS the assets

Capital account surplus: if a nation's investments
abroad are greater than foreign investments at
home. $ is flowing into a country (capital inflow)
Capital account deficit: foreign investments at
home are greater than investments abroad; $
flowing out of the (capital outflow)
Example:
 U.S is buying up more assets in Mexico, Brazil, and
Hungry, than Japanese, Germany, and Canada
investors are buying up of U. S. assets, then we
have a surplus. A deficit is the reverse.

Transaction
Harley Davidson USA purchases $25
million in production machinery from a
Japanese company
Bank of America pays $5 million in
interest to French depositors
A London record store spends $10,000
on CD’s by an American singing group
Senor Ramos from Spain buys a
shopping center in Florida
Current or
FINANCIAL
account
Debit or credit for
U.S.
CURRECT
DEBIT
CURRENT
DEBIT
CURRENT
CREDIT
FINANCIAL
DEBIT