exports/imports – now triple the amount half a century ago
- 1940s trade surpluses – due to post WWII reconstruction
- current trade deficits – due to cheaper goods from other countries
- Smoot-Hawley Act of 1930 – increased tariffs on foreign goods >> foreign countries raised own tariffs on US goods >> sharp decrease in overall trade
- tradable goods – goods that compete w/ foreign goods in domestic/foreign markets
- keep prices low enough >> stay competitive >> domestic markets can keep imports out
- smaller country >> more important to specialize in few products
- can’t produce as big a range of goods as larger countries
- consumer decision – determines domestic demand/output
nominal exchange rate (E) – price of foreign currency in terms of domestic currency
- nominal appreciations/depreciations – changes in exchange rates (occurs constantly)
- dollar appreciation >> dollar price goes up in terms of foreign currency >> foreign price goes down in terms of dollar >> decrease in exchange rate
- dollar depreciation >> dollar price goes down in terms of foreign currency >> foreign price goes up in terms of dollar >> increase in exchange rate
- fixed exchange rate – system where countries keep exchange rate constant
- revaluation – exchange rate decreases
- devaluation – exchange rate increases
real exchange rate (e) – domestic goods in terms of foreign goods
- uses GDP deflators as price indexes in order to compare all goods
- e = EP/P*
- E = exchange rate
- P* = price of foreign goods in terms of foreign currency
- P = price of domestic goods in terms of domestic currency
- real appreciation – increase in relative price of domestic goods in terms of foreign goods
- increase in real exchange rate
- real depreciation – decrease in relative price of domestic goods in terms of foreign goods
- decrease in real exchange rate
multilateral exchange rate – average value of domestic goods in terms of average foreign goods
- uses share of trade w/ each foreign country as weight for that country
- US multilateral real exchange rate – takes average of export and import shares
Subject:
Subject X2:
