Unit 6: International Trade and Finance
This unit examines the macroeconomic effects of international flows of financial capital and goods and services. The determinants of exchange rates are identified, and the connection is made between financial capital flows and the trade balance. The unit explores the effects of exchange rates on a country's economy and the economies of its trading partners. The welfare effects of trade are also studied.
Completing this unit should take you approximately 4 hours.
Upon successful completion of this unit, you will be able to:
- explain trade balances and their connection with financial capital flows (and the savings and investment identity);
- discuss how we use economic indicators to compare global income levels and standard of living;
- explain the effects of net exports on aggregate demand;
- identify the components of the U.S. balance of payments;
- analyze the pros and cons of having a large trade deficit and financial account surplus;
- define and compare the main types of exchange rate systems; and
- identify the main arguments in support of international trade link this with comparative advantage.
6.1: International Trade and Capital Flows
The balance of trade (or trade balance) equals the gap between a nation's exports (what domestic producers sell to foreign nations) and imports (the products and services households and businesses buy from foreign nations). To analyze international trade and finance, we must consider exchange rates and money flows between countries. We also explore the concept of free trade, trade disputes, immigration, and migration between countries.
Read this text to learn about the merchandise trade balance, the components of the current account balance, and unilateral transfers, which are payments governments, charities, and individuals make to foreign countries without receiving goods or services in return.
These videos show the connection between international capital flows and the trade balance. Pay attention to the discussion on savings and investment identity and how saving and investment are related to capital flows.
Read this text for a brief overview of the U.S. current account and merchandise trade balance and to compare U.S. trade surpluses and deficits with other countries.
Read this text to explore the concept of comparative advantage and the connection between trade balances and financial capital flows.
Read this text to learn how to calculate supply and demand for financial capital. What determines the trade and current account balance? How do domestic savings and investment determine the balance of trade? How can we use this information to predict rising and falling trade deficits?
Read this text for examples of how borrowing money and running a trade deficit can affect the economy's health.
A high trade level means a country exports a significant portion of the items it produces as a percentage of GDP. Three factors influence a country's trade level: the size of its economy, geographic location, and trade history. Read this text for some final thoughts on trade balances.
This video introduces components of the balance of payments and explores the connection between international capital flows and the trade balance.
6.2: Macroeconomic Policy around the World
International macroeconomics, or international finance, studies monetary interactions between two or more countries, focusing on foreign direct investment and currency exchange rates. The economics of the international economy can be divided into two broad categories: the study of international trade and the study of international money. International economics studies international trade and open economy macroeconomics. The field is in equal parts theoretical and empirical and increasingly seeks a close synthesis of theory and data.
Geography, demographic, industry structure, and economic institutions impact the standard of living countries enjoy. What do we mean when we classify countries as low-income, lower-middle, upper-middle, and high-income? This reading also explains how we measure international living standards using GDP and gross national income (GNI).
Economic growth works best in a stable and market-oriented economic climate. Countries use fiscal and monetary policies to encourage economic growth. Fiscal policies include government investments in human capital (such as education and universal healthcare), technology, physical plant, and equipment. Monetary policies include keeping inflation low and stable, minimizing fluctuations in the exchange rate, and encouraging domestic and international competition. Political instability, high poverty rates, and inadequate infrastructure make this process challenging for many countries.
Read this text on the nature and causes of unemployment from a global perspective.
Read this text on the causes and crippling effects of high inflation. What is a converging economy?
This text explores how the trade balance affects foreign exchange markets and the international flow of goods, services, and capital.
6.3: International Trade
International trade exchanges capital, goods, and services across borders due to the need or desire for foreign goods and services. International trade is vital for many countries – their exporting and importing patterns represent a significant share of their gross domestic product. This section examines real-world examples that show why countries cannot simply avoid foreign trade by producing everything themselves. Given their climate, geography, available natural resources, and other conditions, countries determine their comparative advantage or what they can sell or export to other countries rather than trying to do it all.
Read this text, which compares the economies of the United States and Saudi Arabia to illustrate absolute and comparative advantage, mutually-beneficial trade, and opportunity costs.
This text illustrates the relationship between production costs and comparative advantage. It shows how opportunity costs establish the boundaries for international trade.
Read this text on the advantages of intra-industry trading – the international trade of goods within the same industry. Economists call this recent trend in international trade "splitting up the value chain" due to economies of scale, competition, and variety.
This text explains why many economists view tariffs as trade barriers countries should try to eliminate.
6.4: Globalization and Protectionism
Globalization refers to how trade and communication technologies make the world more interdependent and connected. Five key factors have promoted recent globalization: free trade, outsourcing, the communications revolution, liberalization, and legal harmonization. The resources in this section examine how trade impacts jobs, wages, and working conditions. What are some arguments for and against protectionism?
Read this text to learn about and compare the effects of three main forms of protectionism: tariffs, import quotas, and nontariff barriers.
Read this text on how international trade affects the job market, labor standards, and working conditions. What is the opportunity cost of protectionism?
This text explores arguments supporting protectionist policies, such as protecting infant industries from foreign competition and supporting countries that promote anti-dumping legislation, environmental laws, and product safety standards. Lawmakers warn it is dangerous to become dependent on imports that could damage U.S. businesses and national security interests when restricted, such as foreign oil or other necessary raw materials. Others say Americans should protect trade secrets and avoid exporting high-technology goods (such as advanced weapons systems) that may compromise U.S. interests and our allies.
Read this text on the history and goals of several key international trade agreements and organizations, such as the General Agreement on Tariffs and Trade (GATT) signed in 1947, the World Bank (1946), the International Monetary Fund (1946), and the World Trade Organization (1995). It also discusses free trade agreements, common markets, and economic unions.
Unit 6 Assessment
- Receive a grade
Take this assessment to see how well you understood this unit.
- This assessment does not count towards your grade. It is just for practice!
- You will see the correct answers when you submit your answers. Use this to help you study for the final exam!
- You can take this assessment as many times as you want, whenever you want.