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