MacroIV - Macroeconomics Dr. Safarzadeh Chapters 18 - 19...

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Macroeconomics Dr. Safarzadeh Chapters 18 - 19
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Chapter 18 Trading with the World Trade: Goods we buy from other countries are called imports. Goods we sell to other countries are called exports. If imports > exports , we have trade deficit. If imports < exports we have trade surplus. Goods We Trade Imports Exports Manufactured Goods 60% 50% Industrial Materials 20% 17% Agricultural Products 3% 7% Services 17% 26% Trading Partners Imports Exports Canada 18% 21% Japan 14% 10% European Union 32% 36% Latin America 22% 28%
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Chapter 18 Trading with the World Trends in Trade: Net Export = Export – Import 1960 .5% 5% 4.5% 2001 -4% 11% 15% Increase in imports has been due to oil price increases and purchase of machinery. Trade and Transfer of Assets: If NX < 0, we are borrowing from foreigners or selling some of our assets to them. If NX > 0, we are lending to foreigners or buying some of their assets. PPF and Trade: Production possibilities frontier (PPF) shows the maximum amount of goods and services that an economy can produce by using all of its available economic resources efficiently. Given a two-good PPF, the slope of the PPF shows the opportunity cost one good in terms of the other good.
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Chapter 18 Trading with the World Take two countries, USA and Japan and two goods, food and fun. Assume that a certain amount of economic resources can produce food or fun in USA and Japan as given by the following table ( assume that the quality and productivity of resources are the same in both countries ). Country Food Fun USA 10 5 Japan 5 10
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Chapter 18 Trading with the World Comparative Advantage and Trade: Fun is cheaper in Japan than in USA, food is cheaper in USA than Japan. Japan has comparative advantage in fun and USA has comparative advantage in food. A country has comparative advantage in producing a good if it can produce the good at a lower opportunity cost than the other country. Gains from the Trade: If Japan makes fun and trades it with the USA and if USA makes food and trades it with Japan, both countries will benefit from the trade. Terms of Trade: The quantity of food that USA must pay Japan for a unit of fun is USA’s term of trade with Japan. Since countries trade in many goods, terms of trades are calculated as an index number that averages the terms of trades over all items traded. Terms of trade are decided by the international forces of supply and demand.
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Chapter 18 Trading with the World Terms of Trade: USA’s import demand for fun is downward sloping. The lower the price of fun in terms of food, the more fun US will import from Japan. Japan’s export supply of fun is upward sloping. International demand and supply decides the terms of trade and US import quantity of fun from Japan.
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Chapter 18 Trading with the World Production Possibilities/Consumption Possibilities: PPF shows the limits of what a country can produce, not the limits of what it can consume. A country that doesn’t trade has identical production and consumption possibilities (CP). With trade, a country can have a
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This note was uploaded on 05/04/2009 for the course MACRO 205 taught by Professor Safarzedeh during the Fall '09 term at USC.

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MacroIV - Macroeconomics Dr. Safarzadeh Chapters 18 - 19...

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