• Unit 7: 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:

      • identify the main arguments in support of free trade;
      • explain the determinants of net exports and their effects on aggregate demand;
      • identify the components of the U.S. balance of payments;
      • explain the connection between trade balances and financial capital flows (and the savings and investment identity);
      • analyze the pros and cons of a country having a large trade deficit with a corresponding capital account surplus; and
      • define and compare various types of exchange rate systems.


    • Net Exports and International Finance Book
      Read this chapter to examine the reasons nations trade and the way net exports determinants influence aggregate demand and the equilibrium GDP and price level in a country. Also, learn about the balance of payments components and the way financial capital flows mirror the trade balance. The chaper also defines and compares various types of exchnage rate systems.
    • Trade Barriers Page

      The principle of "comparative advantage" points to gains from trade when countries specialize in the goods and services in which they have lower opportunity costs. Countries sometimes impose "trade barriers" which prevents them from reaping the full benefits of specialization and trade. Read this article, which provides information on the main barriers to trade.

    • Balance of Payments: Current Account Page
      The following video intoduces the components of the balance of payments and explores the connection between international capital flows and the trade balance.
    • International Capital Flows and Trade Balance Page
      The following videos show the connection between international capital flows and the trade balance. Learn about the savings and investment identity and how saving and investment relate to capital flows.
    • Twin Deficits Page
      The twin deficits concept refers to a country having both a trade deficit and a budget deficit at the same time. These videos explore the connection between the two deficits and the consequences on the nation's economy. The analysis uses the savings and investment identity introduced before.