Archive for the 'Trade' Category

Aug 14 2015

Marketplace explains: floating versus managed exchange rate systems

For years China has kept the value of its currency, the yuan, artificially low in order to help exporters, much to the annoyance of the countries trading partners. European and American trade authorities have called for China to abandon its managed exchange rate system, hoping that a stronger yuan would help their own manufacturers as consumers would demand less of the undervalued Chinese goods.

We’ll, this week China has begun to relax its exchange rate controls, but to the frustration of Western trade promoters, the currency has moved in the wrong direction, actually weakening against the dollar and euro.

Marketplace explains the differences between floating and managed exchange rates in the podcast below.

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Nov 07 2014

The dollar’s recent rise and determinants of exchange rates – October to November 2014

In the last couple of months the exchange rate of the US dollar against the currencies of many of its trading partners has been rising steadily. The charts below show the value of the dollar in terms of Japanese Yen and Euro in the last month.

Euro per dollar Yen per dollar

 

The reasons for the rise in the dollar are simple and illustrate some of the determinants of exchange rates that we learn about in our IB Economics classes. Listen to a recent story from APM’s Marketplace radio show about the dollar’s recent rise, then answer the questions that follow.

Discussion Questions: 

  1. Discuss with your class how each of the factors mentioned in the podcast help explain the recent rise in the value of the US dollar against other major currencies:
    • “Recovery”
    • “Yields”
    • Interest rates”
  2. Why might the rising dollar…
    • help developing countries?
    • help American consumers?
    • hurt American producers?
  3. Using your knowledge of macroeconomics, discuss and explain the following claim: “the impact of more expensive exports and cheaper imports may be to stifle inflation just enough to make the Fed slow down any rate increases, which would in turn slow down the dollar’s rise.”
  4. Using diagrams for the market for US dollar in Europe and for the Euro in the United States, and referring to one of the determinants of exchange rates mentioned in the story, illustrate the rise in the dollar’s value against the Euro over the last month and the corresponding fall in the Euro’s value against the dollar. Use values from the chart above on to determine the appropriate exchange rate values for your graphs.
  5. Explain how each of the following interventions could be used to devalue the dollar, assuming the US government or Federal Reserve Bank decided the dollar’s appreciation posed a threat to the US recovery:

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Feb 21 2013

Obama’s proposed trade deal – Good for America, Good for Europe – so who are the losers?

In his state of the Union address last week, US president Obama shared his plan for a “transatlantic trade and investment partnership”. The proposed agreement would eliminate tariffs and take other steps to promote free trade of goods and services traded between the United States and the 27 European Union nations.

While tariffs on most goods are already very low (rarely higher than 3% according to the Economist)there still exist several non-tariff barriers to trade between world’s two largest economies.  These barriers to trade include policies such as:

  • The “buy American” provision that many US congressmen support for government spending
  • Subsidies to farmers in both the US and the EU
  • Subsidies to the world’s two largest airplane manufacturers, Boeing and Airbuss
  • Protection of “geographically unique brands” such as Champagne and Roquefort cheese (which reduces competition in the US market for these European products)
  • Different standards and regulations in the two economies over health and safety requirements for foreign produced products such as pharmaceuticals and food, vehicles, information flows, and so on.

Truly free trade between nations requires not only the removal of protective tariffs, but also the dismantling of subsidies for domestic producers as well as non-tariff barriers to trade such as strict rules and regulations of imported products.

If the US and Europe succeed in forming a new free trade agreement, the benefits could be substantial for both economies:

Trade in goods and services between the two economic giants amounts to nearly $1 trillion each year, and total bilateral investment between them to nearly $4 trillion. Getting rid of remaining tariffs could raise Europe’s GDP by around 0.4% and America’s by a percentage point. Ditching even half of today’s non-tariff barriers could boost GDP in both places by 3%.

A single TTIP test for new drugs would be a massive boon for pharmaceutical firms. Agreed standards for electric cars would create a vast market, as well as huge demand for accompanying infrastructure. Think how Amazon and Google could gain from looser rules on cross-border flows of information in Europe. And think how Europe’s austerity-blighted economies could gain from more demand from abroad.

The gains from trade are many. However, the arguments against free trade often prevent these benefits for many from being enjoyed to protect the interests of a few. One question to consider when looking at the likely outcome of any new free trade agreement is whether it will lead to trade creation or trade diversion. One nation that may have reason to be concerned about a new trade agreement between the US and the EU is Switzerland, which is not part of the EU. If a new agreement creates new trade and increases the flow of goods and services between the US and the EU, it may be the case that this comes at the cost of of reduced trade between the US, the EU and Switzerland.

The Swiss, not being part of either major economy, would maintain its own rules, regulations tariffs and subsidies that affect trade with the other two economies. It may, therefore, be the victim of increased trade between the other two economies, while trade is diverted away from the Swiss economy as Americans buy more EU-produced goods and Europe buys more American produced goods. If this results, it may put pressure on the Swiss to reduce or remove many of their own trade barriers so as to prevent losing demand from the US and EU.

Discussion Questions:

  1. How do non-tariff barriers to trade such as subsidies and health and safety regulations reduce the flow of goods between nations?
  2. The article mentions that “Europe’s austerity-blighted economies could gain from more demand from abroad.” Interpret this statement. Do you think free trade could provide relief to the debt-ridden countries in the Eurozone?
  3. Why should Switzerland be worried about a new free trade agreement between the US and the Eurozone.

 

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Feb 10 2012

The source of America’s trade deficit with China

I’m showing the PBS documentary, “Is Walmart Good for America?” to my AP Macroeconomics students today as we introduce the topic of trade balances.

Discussion questions will be posted soon.

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Jan 26 2012

Fair versus Free Trade as means to promote Economic Development

Fair trade schemes aim to get more of the money we spend on our stuff into the hands of the workers in less developed countries where they originate. Some examples of goods produces in fair trade cooperatives in poor countries include fruits, tea, coffee and cocoa. Some handicrafts and textiles are also available from Fair trade programs as well.

It is estimated that approximately 7.5 million producers in the developing world participate in fair trade programs, producing $5 billion worth of output.

According to the European Fair Trade Association, fair trade is

a trading partnership, based on dialogue, transparency and respect, that seeks greater equity in international trade. It contributes to sustainable development by offering better trading conditions to, and securing the rights of, marginalized producers and workers – especially in the South.

Fair Trade organisations (backed by consumers) are engaged actively in supporting producers, awareness raising and in campaigning for changes in the rules and practice of conventional international trade”.

Fair trade as a strategy for economic development is controversial, as many argue that either fails at raising the incomes of the farmers it is supposed to serave or that it incentivizes farmers to remain in the low-productivity agricultural sector rather than seeking higher productivity jobs in manufacturing, thereby contributing to poverty in poor countries.

Below are two videos that proclaim the benefits of free trade. After watching the videos, discuss the benefits of fair trade with your class.

On the other side of the issue are several economic arguments against the use of fair trade as a strategy for economic development. First listen to this 19 minute discussion between EconTalk’s Russ Robert’s and Duke University’s Mike Munger over the role that Fair Trade coffee plays in promoting economic development.

Next, read the two articles below a

Discussion Questions:

  1. Discuss the strengths and weaknesses of Fair Trade programs at promoting economic development.
  2. Outline the possible advantages of a country specializing in manufactured goods instead of primary products.
  3. What factors explain the growth in importance of multinational corporations over recent decades? Illustrate your answer where possible by making reference to your own or other countries. Do multinational corporations work in favor of or against the interests of Less Developed Countries?
  4. To what extent has the international trading system contributed to economic growth and development in less developed countries?
  5. Discuss the view that increased trade is more important than increased aid for less developed economies.

6 responses so far

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