The world bank officially known as the international

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Unformatted text preview: nown as the International Bank for Reconstruction and Development (IBRD), is the biggest development bank in the world. Its primary function is to lend money to the world’s poor and less-developed countries. The money for lending comes from rich member countries, such as the United States, and from selling bonds and lending the money raised through bond sales. The World Bank usually makes loans for economic development projects that are expected to produce a return sufficient to pay back the loan. The IMF is an international organization that, among other things, provides eco- Defining Terms 1. Define: a. tariff b. dumping Reviewing Facts and Concepts 2. What effect does a tariff have on the price of imported goods? 3. First state, and then evaluate, the infant-industry argument for trade restrictions. 414 Chapter 15 International Trade and Economic Development nomic advice and temporary funds to nations with economic difficulties. It has been referred to as a “doctor called in at the last minute.” When a country is in economic difficulty, the IMF might submit a list of economic reforms for it to follow, such as cutting excessive government spending to reduce budget deficits or decreasing the growth rate of the money supply. The IMF often lends funds to a country in economic trouble on the condition that its economic advice is followed. A country’s acceptance of IMF reforms is usually a signal to other international organizations, such as the World Bank, that the country is serious about getting its economic house in order. The World Bank may then provide long-term funding. 4. First state, and then evaluate, the tit-for-tat argument for trade restrictions. Critical Thinking 5. Consider a policy that effectively transfers $100 million from group A to group B. Suppose that group A is made up of 50 million people. Is the policy more likely to be passed and implemented if the number of people that make up group B is 50 million or 500,000? Explain your answer. Applying Economic Concepts 6. How might domestic producers of a good abuse the antidumping argument for restricted trade? 15 (390-427) EMC Chap 15 11/18/05 9:13 AM Page 415 Focus Questions The Exchange Rate What is an exchange rate? What does it mean to say that a currency appreciates in value? What does it mean to say that a currency depreciates in value? Key Terms exchange rate flexible exchange rate system fixed exchange rate system depreciation appreciation What Is an Exchange Rate? The exchange rate is the price of one nation’s currency in terms of another nation’s currency. Suppose you take a trip to Italy. To buy goods and services, you will need to have the currency used in Italy, the basic unit of which is the euro. (The monetary symbol for the euro, €, simply looks like a C with two lines through the middle.) Therefore, you will need to exchange your dollars for euros. Suppose you want to exchange $200 for euros. How many euros you will get depends on the exchange rate, which may be determined in two ways: by the forces of supply and demand under a flexible exchange rate system or by government under a fixed exchange rate system. Suppose the exchange rate is currently $1 for €0.80. For every $1 you have, you will get €0.80 in exchange, so you will receive €80 in exchange for $100. (Exhibit 15-5 on the next page shows the value of the U.S. dollar in terms of eight foreign currencies on October 28, 2005.) Just as people buy goods (like a chair or a TV set), people can buy forEXAMPLE: eign money too. Americans can buy euros, pesos, yen, and so on. When Americans buy, say, euros, they have to pay some price. The dollar price they have to pay for a euro is called the exchange rate. Suppose an American is in Italy and sees an item for sale. Its price: €100 (100 euros). The American asks himself how much this is in dollars. If the exchange rate is, say, $1 €0.80, he knows that for every $1 he has he will get €0.80 in exchange. To get 100 euros, then, the American will have to pay $125. QUESTION: How did €100 turn out to be $125? Will you go over the calculation? ANSWER: Keep in mind that any exchange rate can be expressed two ways, not just one. For example, here is one way to express the dollar-euro exchange rate: $1 €0.80. This expresses the exchange rate between dollars and euros in terms of one dollar. Instead, suppose we want to express the exchange rate between dollars and euros in terms of one euro: we exchange rate The price of one country’s currency in terms of another country’s currency. flexible exchange rate system The system whereby currency exchange rates are determined by the forces of supply and demand. fixed exchange rate system The system whereby currency exchange rates are fixed, or pegged, by countries’ governments. Section 3 The Exchange Rate 415 15 (390-427) EMC Chap 15 5/25/06 3:46 PM EXH I BIT 15- 5 Page 416 Exchange Exchange Rates Currency Currency Currency Currency units per U.S. U.S. dollar China China yuan yuan 8.08 8.08 E...
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