handout10

# handout10 - How would you know? Need to get the price in...

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Lecture 10 Outline Trade Equilibrium USA Canada Suppose USA and Canada don’t trade. What is the equilibrium price and quantity? The question is, what will the price be? We want to find the import/export equilibrium -> The price at which imports=exports Minimum Price: Maximum price: \$ We could keep guessing numbers, but there is a short cut: Graph! Need two points to make a line. Price of Nickel Nickel (Oz.) 90 80 70 \$70 \$60 \$80 Nickel 80 60 100 \$80 \$100 \$110

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Export/Import Equilibrium (NX) Net Exports= Value of Exports – Value of Imports (Also called Trade Balance ) Trade Surplus: Trade Deficit: Balanced Trade International Flows of Goods and Capital (NCO) Net Capital Outflow = NX = NCO Why? Y=C+I+G+NX Remember the definition for national savings? S=Y-C-G We combine these to find that S=I+NX S=I+NCO I=S-NCO USA \$100 \$80 \$70 Price of Aluminum Tons of Aluminum 40 20 10 30 \$90
If NCO<0 Show receipt. 1.2 Billion dollars, 1243 million Zimbabwe dollars So, is this an “expensive” meal?

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Unformatted text preview: How would you know? Need to get the price in USA dollars? How do we do this? We use exchange rates. Nominal Exchange Rate (e): . Price of Good in Foreign Currency: Exchange rates: Lets start with the mineral water: About Z\$95 million In 2008, exchange rate is: 100billion Z1\$ for \$1 100 million Z2\$ for \$1 So, the mineral water: cent. Depreciation: Appreciation: Real Exchange Rate: Formula: RER = RER&lt;1 =&gt; RER&gt;1 =&gt; Purchasing Power Parity: Equation (Purchasing Power Parity): Determinants of Exchange Rates How does the price of a currency get determined? This happens in the Foreign Exchange Markets. Fixed Exchange Rates: Fixed Exchange Rate controls 1. 2. 3. 4. Flexible Exchange Rates: Disadvantages 1. 2. 3. Managed Exchange Rate Float: Support of: Concerns: Real Exchange Rate \$2 \$1 10 20 D Supply of Dollars, from NCO Quantity of US\$ exchanged into foreign currency Demand for dollars (for net exports)...
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## This note was uploaded on 01/28/2012 for the course ECON 1102 taught by Professor Someguy during the Spring '07 term at Minnesota.

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handout10 - How would you know? Need to get the price in...

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