INTL TRADE- 3 PDF Lecture Notes

11/23/2024 Misc Exchange Rates / Intl Trade Comparative Advantage, etc. Lecture 3 of 3 1 Misc Exchange Rates / Intl Trade Comparative Advantage, etc. Lecture 3 of 3 2 1 ...

11/23/2024 Misc Exchange Rates / Intl Trade Comparative Advantage, etc. Lecture 3 of 3 1 Misc Exchange Rates / Intl Trade Comparative Advantage, etc. Lecture 3 of 3 2 1  11/23/2024 Exchange Rate Question How is the market for the Mexican peso impacted by the following? a. Improvements in Mexican production technology yield superior guitars, and many musicians around the world buy these guitars. * Increased demand for pesos --- the peso appreciates. 3 b. Perceptions of political instability surrounding regular elections in Mexico make international investors nervous about future business prospects in Mexico. Decreased demand for pesos = depreciation of the peso. As financial capital is pulled out of the country, investors unload their pesos which increases the supply. Same result, Depreciation of the currency. 4 2  11/23/2024 On Wednesday, the exchange rate between the Japanese yen and the U.S. dollar was $0.014. On Thursday, it was $0.011. Did the dollar appreciate or depreciate against the yen? Appreciate It took LESS $$ to purchase the yen --- $$ got stronger 5 Exchange Rate Question Louisville Slugger manufactures baseball bats in Louisville, KY. The local government in London, England opts to purchase 12,000 bats for their police officers. What do we need to know? – What’s the cost of the bat? – What’s the exchange rate between the $ and the British Pound? 6 3  11/23/2024 Cost of the bat = $49 each Exchange Rate $1.43 = £ 1.00 7 How many Pounds do they need for the purchase? CALCULATE YOUR ANSWER… 12,000 x $49 = $588,000 / 1.43 = £ 411,189 Another Question What is the cost of the Pound per Dollar? 1 / 1.43 =.70 8 4  11/23/2024 What was the result? Increased demand for $ (Louisville Slugger wants $$ --- not Pounds) Increased supply of Pounds 9 International Trade - Comments Free – Trade Thoughts (from the “purists”) Real source of opposition to trade is a dislike of competition. However, this attitude is not evil, immoral or unethical --- it is simply self-interest. Competition creates better products, ideas, and services. (This is True) But, we also need to consider the Arguments that we presented earlier --- Military self-sufficiency, etc. It’s complicated… 10 5  11/23/2024 End-goal of economic activity is Consumption. – This goal is NOT Negative or Greedy… – Consume Better – Consume Safer – Consume good things – health, education, etc… – TV for $200 rather than $300 --- what does it mean? $$$ Freed up to acquire other things Adam Smith --- another quote which is not to be lost… defense is more important than opulence --- this is an important thought. 11 Comparative Advantage How does one country compare to another in terms of production. We practice this (generally) in our day-to-day lives. We buy from others who have “comparative advantage” to produce or provide services which we choose to purchase. For Intl. Trade, this is Country vs. Country and product to product comparison as it relates to specific goods and trade- offs. (See Chapter 32, Question 32-7) Example: Costa Rica has comparative advantage over the U.S. to produce Bananas. Example: The U.S. has comparative advantage over Japan to produce Corn. Another term --- Absolute Advantage – a country can produce a product with less resources than another country. These are similar but different concepts. 12 6  11/23/2024 More from Adam Smith “Individual Ambition Serves the Common Good.” “Every man lives by exchanging.” “Man is an animal that makes bargains: no other animal does this - no dog exchanges bones with another.” ― Adam Smith, The Wealth of Nations – https://www.goodreads.com/author/quotes/14424.Adam_Smith 13 The Growth of World Trade, Panel (a) Sources: World Trade Organization; Bureau of Economic Analysis; author’s estimates. Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved 14 7