1. CHAPTER 13: INTERNATIONAL TRADE AND EXCHANGE RATE

2. CHAPTER OUTLINE 13.1 Absolute Advantage & Comparative Advantage 13.2 The Trade Barriers 13.3 Balance of Payment (BOP) 13.4 Exchange Rate

7. Comparative Advantage Opportunity Cost??? Car (units) Rice (units) Country A 600 300 Country B Total production 300 900 600 900

9. Production after Specialization Car (units) Rice (units) Country A Country B Total production

13. Tariffs Tariff revenue 2.00 2.50 Domestic supply Domestic demand Price (RM) Quantity World price = 2 World price with tariff = 2.50 t = .50 Initial imports 3.00 100 125 175 200

15. Quotas Price (RM) Quantity 2.50 Domestic supply Domestic demand World price=RM2= World supply 2.00 Quota 3.00 100 125 175 200 World supply with quota

31. THE BALANCE OF PAYMENTS – 1.5 (11) Net capital account transactions 0 (12) Balance of payments (5 + 10 + 11) 51.9 (11) Statistical discrepancy 615.5 (10) Balance on capital account (6 + 7 + 8 + 9) 355.3 (9) Change in foreign government assets in the United States 4.1 (8) Change in U.S. government assets abroad (increase is –) 1077.9 (7) Change in foreign private assets in the United States – 821.8 (6) Change in private U.S. assets abroad (increase is –) CAPITAL ACCOUNT ?????? (5) Balance on current account (1 + 2 + 3 + 4) – 72.9 (4) Net transfer payments ????? (3) Net investment income – 344.9 Income payments on investments 369.0 Income received on investments ????? (2) Net export of services – 291.2 Import of services 339.6 Export of services ?????? (1) Net export of goods – 1,473.1 Goods imports 807.6 Goods exports CURRENT ACCOUNT TABLE 21.1 United States Balance of Payments, 2004

32. Multiplier Effect & Aggregate Expenditure (extension from Chapter 11): Planned aggregate expenditure ( AE ) in an open economy: In equilibrium: m = marginal propensity to import (or MPM) multiplier

48. Changes in a Country’s Income Income increases in the Malaysia Imports increase Demand for foreign currency to buy imports increase which means the supply of the RM increases The increase in supply of the RM causes the price of the RM to decrease

49. Changes in a Country’s Income

50. Changes in a Country’s Prices Inflation in the Malaysia increases Imports increase because foreign goods are cheaper Demand for foreign currency to buy imports increases which means the supply of the RM increases The increase in supply of RM causes the price of RM to decrease

51. Changes in a Country’s Prices

52. Changes in Interest Rates Interest rates in the Malaysia increase Demand for Malaysia interest-bearing assets increases Demand for RM to buy Malaysia assets increases The increase in the demand for RM causes the price of RM to increase

53. Changes in Interest Rates

54. Changes in Trade Policy Malaysia trade restrictions on imports increase Demand for imports to the Malaysia decreases The demand for foreign currencies decreases, which means the supply of RM decreases If foreign countries retaliate with restrictions on Malaysia exports, the demand for RM decreases

55. Changes in Trade Policy

58. Monetary Policy with Flexible Exchange Rate Increase in M Interest rate fall Investor earning lower IR Seek better investment abroad Sell local currency Buy foreign currency Exchange rate fall (depreciate) Local (foreign) product cheaper (more expensive) Net export increase

59. THANK YOU