econ chapter 28

econ chapter 28 - Chapter 28 International Trade and...

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1 Chapter 28 Chapter 28 International Trade and International Trade and Capital Flows Capital Flows The Principle of Comparative The Principle of Comparative Advantage Advantage Everyone does best when each concentrates on the activity with the lowest opportunity cost. This principle can be applied to international trade: Every country can benefit when trading with each other. International trade is important even to a large economy such as the US.
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2 The Controversy of International The Controversy of International Trade Trade Why is international trade so controversial? 1. Emotional and Strategic reasons 2. Benefits the society broadly but costs are concentrated. Trade Balance Trade Balance Trade Balance is also called net exports (NX) Value of a country's exports minus the value of its imports. Exports: goods produced domestically and sold abroad; Imports: goods produced abroad and sold domestically. Trade Surplus : a positive trade balance Trade Deficit : a negative trade balance
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3 US Trade Balance, 1960 US Trade Balance, 1960 - 2007 2007 Capital Flows Capital Flows International capital flows : transactions of real estate and financial assets across international borders Capital inflows : purchases of domestic assets by foreign households and firms Capital outflows : purchases of foreign assets by domestic households and firms Net capital inflows (KI) are capital inflows minus capital outflows
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4 Trade Balance (NX) and Net Capital Trade Balance (NX) and Net Capital Inflows (KI) Inflows (KI) Trade balance and net capital inflows always add up to 0 . A country with a trade imbalance must have a compensating capital flow The US Case The US Case US has had a trade deficit since late 1970s. Capital flows into US 25% of US Treasury debt is owned by foreigners, up from 13% in 1993. Foreign investment in US businesses, real estate, and other assets increased.
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5 Why NX+KI=0? Why NX+KI=0?
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econ chapter 28 - Chapter 28 International Trade and...

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