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International Trade - Lecture 12

• This lecture explains the benefits of international trade, the impact of trade protectionism, and free trade agreements on businesses
• Emphasis on comparative advantage, trade barriers, benefits, and costs to businesses.

International Trade Basics

• Buying and selling activities across national borders
• Countries exchange goods and services in which they specialize
• Examples: Thailand specializes in rice, Germany in machineries, and Australia in minerals

Comparative Advantage & Specialization

• The ability to produce a good at a lower opportunity cost than another country
• Specialization involves countries producing goods they have a comparative advantage in
• International trade enables countries to consume goods and services beyond their production possibilities frontier, exceeding domestic capacity.
• Example: Instead of producing at point X, a country specializes production at point Y, trades with other countries, and consumes at point Z

Trade Example: Singapore and Malaysia

• Opportunity cost of producing 1 unit of food in Malaysia is 0.5 units of pharmaceuticals
• Opportunity cost of producing 1 unit of Singapore is 5 units of pharmaceuticals

Trade Effects

• Malaysia benefits by producing only food at Point C and trading for pharmaceuticals
• Singapore benefits by producing only pharmaceuticals at Point X and trading for food

Gains from Trade

• More choices of goods & services are available
• Alleviates domestic shortages by supplementing domestic supply through imports
• Lower unit costs due to increased global production, leading to economies of scale
• Competition increases, preventing monopolies and price fixing
• Social, cultural, and political understanding and cooperation promotes world peace and prosperity
• Development is encouraged by domestic companies becoming more competitive and transferring technology to developing countries

Effects of Importing and Exporting

• Domestic market price is at Pd, and the world price is at Pw
• If Pw < Pd, imports are cheaper than producing domestically
• If Pw > Pd, exports are cheaper than foreign competitors
• Imports enable consumers to see costs reduce
• Exports enable a business to benefit
• Domestic sectors lose out and need to adapt

Trade Protectionism

• Trade barriers are imposed on foreign goods and services to shield domestic industries from competition
• Governments use trade barriers: embargoes, tariffs, quotas, other restrictions.

Trade Embargoes

• Embargoes are laws banning trade with another country
• Example: UN sanctions on North Korea due to its nuclear weapons program

Trade Tariffs

• Taxes are imposed on imports to raise the price of imported goods
• Domestic businesses benefit, however consumers lose out

Import Quotas

• Limits on the quantity of a good that can be imported within a specific time frame
• Domestic businesses benefit, consumers lose out

Other Trade Restrictions

• Trade restrictions can be imposed due to health, safety, and other regulatory controls
• Example: EU ban on genetically modified food, China's import restrictions on Australian food products

Arguments In Favor of Trade Protectionism

• Infant industry: New domestic industries need short-term protections to develop and compete globally
• Dumping: Protection against foreign firms that sell exports at prices below their production cost
• National security: Reliance on foreign imports may threaten goods essential to survival like steel food and water
• Employment: Protectionism creates domestic Jobs
• Cheap foreign labor: Protection against cheaper foreign goods that could decrease domestic prices and wages

Arguments Against Trade Protectionism

• Adverse repercussions on world trade; Trade barriers retaliate
• Market inefficiency: Lack of competition creates inefficiency and high production costs
• Loses consumer wealth; Fewer choices and higher prices for imports

Free Trade Agreements (FTAs)

• Agreements between two countries or groups of countries to eliminate trade barriers between participating economies
• This includes minimizing tariff restrictions, quotas, restrictions on foreign investments, and impediments to goods mobility
• FTAs increase trade and boost economic progress

Exchange Rates

• The price at which one currency can be exchanged for another in the foreign exchange market
• For example, one US dollar may equal 150 Japanese Yen
• Exchange rates are determined by the demand and supply of the relevant currency pair

Exchange Rates - Yen per USD

• Driven by world Demand for U.S. exports
• Driven by U.S import demand
• Driven by interest rates in the U.S and other countries
• Driven by expected future exchange rate

World Demand For U.S. Exports

• Example: if if world demand for U.S exports increase
• It increases Demand for USD
• The Exchange rate (Yen per USD) also Increase

U.S IMPORT Demand

• Example: if U.S import demand increase
• It increases supply of USD
• Exchange rate decreases

U.S Interest Rates

• Example: if U.S Interest Rate were to increase
• Demand for USD would increase
• Supply for USD would decrease
• Exchange rate increases

U.S Expected Future Exchange Rate

• Example: if future exchange rate were to increase
• Demand for USD increases
• Supply for USD decreases
• Exchange rate increases

Monetary Policy-Lecture 11

• Analyse the impact on the growth of business sales and profits with reference to the types of monetary policy adopted by a central bank in an economy

Money

• Any commodity or token that is generally acceptable as a means of payment
• Large enough to meet ordinary transaction needs but not so plentiful it becomes worthless

Functions of Money

• Money serves the economy as a medium of exchange
• Money serves the economy as a unit of account; common measurement of goods & services
• Money serves the economy as a store of value; the ability to retain value over time

Opportunity Cost Of Money

• Money itself does not yield any return
• Convert money into assets like deposit bonds to increase returns
• Why hold money? To pay predictable predictable or unpredictable expenses, and/or speculate by taking advantage of changes

Demand for Money

• Transactionary Demand - for everyday predictable expenses
• Precautionary Demand: - To pay unpredictable expenses,
• Speculative Demand: - To take advantage of future asset price changes

Central Bank

• Every country has a central bank
• It Conducts the monetary monetary policy.
• Manages currency, money supply, interest rates
• Oversees the commercial banking system

Role of Central Banks

• Conduct monetary policy to manage currency, money supply, and interest rates
• Supervise and regulate financial institutions
• Act as banker and financial agent for the government
• Manage foreign reserves + Lender of last resort

Money Creation

• Fraction Reserve Banking - Banks retain deposits as reserves
• Banks need retain a portion of the deposits as reserves (10%)
• Remainder can be loaned out which creates more loans (90%)
• The central bank manages the money supply through reserve ratio and monetary base

Money Multiplier

• Central bank affects the economy to manage the money supply
• Increase in the monetary base will lead to an initial increase in excess reserves held by banks
• Leads to a increase in the supply, due to fractional banking 1
• Money Multiplier = Required Reserve Ratio (RRR) Change in Money Supply = ∆ Excess Reserves X Money Multiplier
• Example in text shows a $5b increase

Monetary Policy

• Monetary policy changes affect the supply which affects interest rates.
• Interest rates affect Consumption and Investment
• Think of the interest rate as the price of money

Monetary Policy Tools

• Affect money supply + interest rates
• Open Market Operations - buying and selling government securities - affects supply/interest
• Discount rate - interest rate for banks to borrow - lowers cost of credit
• Required Reserve Ratio - banks must hold regulation - sets minimum reserves each bank must hold

Monetary Policy Open Market Operations

• Expansionary Market Policy- buy securities
• Contractionary Policy- sell securities

Monetary Policy discount rates

• Expansionary Market Policy- lowers discount rates
• Contractionary Policy- raises discount rates

Required Reserve Ratio

• Expansionary low RRR
• Contractionary high RRR

Recessionary/Inflationary Gap

• Recessionary Gap - buy securities, lower discount rate or lower RRR to increase money supply + investments
• Inflationary Gap - sell securities, raise discount rate or raise RRR to decrease money supply + investments

Volcker Shock

• 1979-1987 federal reserve chair, the late Paul Volcker

2008 Financial crisis

• During the 2008 financial crisis, the excess bank reserves have soared
• The St Louis adjusted base monetary base during the same period also saw a increase

Fiscal Policy Lecture 10

• Explain how to analyse the impact a recessionary and inflationary gap in an economy, and to explain the taxes/spending relationship

Keynesian Economics

• GDP = C + I + G + (X – M)
• can explain national income

AE Function

• Aggregate expenditure to all aspects of real GDP AE Graph y ↑ = C ↑
• Income output

MPC

AE Function + Next

• Export imports autonomous -Real aggregate expenditure to all real GDP expenditure

AE Function +lastly

• Export imports are autonomous
• Real aggregate expenditure to all real GDP expenditure
• AE Graph

Real Aggregate Expenditure ($ per year)

• Spending for these products AE level happens equal to the totals of these

Spending multipier

• increase multiple in spending to multiple increase to GDP any intiat

Tax Multiplier

=∆Tax x Multiplier = (-$500 mil) x (-1)

• Real expenditure goes to $250 m
• AE only 500 mil

Full employment output

• Government plays the role of lender resorts + optimizes at full output level

Recessionary Gap

• Less then full employment output in GDP + creates deflation pressure wage/prices

Inflationary Gap

• Greater then full output from employment

Fiscal Policy

• Employment/price level = tax/expenditure + transfer payments

Fiscal policy examples

• From COVID19, support by driving growth