Applying International Trade Concepts Paper

1429 words - 6 pages

Applying International Trade Concepts Paper
ECO/372: Macroeconomics
April 4, 2010

Applying International Trade Concepts Paper
In the University of Phoenix simulation, Applying International Trade Concepts, a situation is presented concerning international trade - “the theory of comparative advantage, the impact of tariffs, quotas, and dumping, and the rationale behind free trade agreements (FTA)” (University of Phoenix, 2010, p. 19). Throughout the simulation scenarios are presented and choices must be made to determine “what products to produce within the country and what products to import based on the Production Possibility Frontier (PPF) (University of Phoenix, 2003, para. 1) as ...view middle of the document...

U.S. consumers have more choices for products and can pay lower prices, which has improved the standard of living for many consumers. International trade has allowed businesses in the United States to expand into new markets. The expansions have increased competition, demand, employment in some sectors, and economies of scale, while reducing monopolistic pricing and inefficiency (InfoUSA, 2003). Although international trade may have some positive effects on the economy, negative effects also have taken place. Employment in some sectors has decreased because of closures of businesses that cannot compete with the imports.
Effects on Exchange Rates
According to Colander (2008), monetary and fiscal policies have affect exchange rates in three ways: through its effect on (a) the interest rate, (b) income, and (c) price levels and inflation.
Interest Rate
Monetary Policy. Through expansionary monetary policy U.S. interest rates are pushed down and the financial inflow into the United States decreases, the demand for dollars decreases, the value of the dollar is pushed down, and the U.S. exchange rate decreases. Contractionary monetary policy does the opposite.
Fiscal Policy. Through expansionary fiscal policy interest rates lead to an increase in exchange rates. Contractionary policy leads to a decrease in interest rates and a decrease in exchange rates.

Monetary Policy. Through expansionary monetary policy, when money supply increases, income expands. When income expands, imports rise; the rise in imports leads to the decrease of the U.S. exchange rate. Through contractionary monetary policy, when money supply decreases, income contracts. When income contracts, imports fall; the fall in imports leads to the increase of the U.S. exchange rate.
Fiscal Policy. In expansionary fiscal policy, government borrowing raises interest rates and attracts foreign capital. In trying to get more dollars for investment, foreigners bid up the price of the dollar, which causes the exchange rate to grow in the short-run. As the imported goods become less expensive in the United States and exports become more expensive, the merchandise trade balance will decline. In the long-run, “the accumulation of external debt that results from persistent government deficits can lead foreigners to distrust U.S. assets and can cause a deprecation of the exchange rate” (Weil, 2008, para. 6). Contractionary fiscal policy decreases income, which decreases imports, and increases the exchange rate.
Price Levels and Inflation
Monetary Policy. Through expansionary monetary policy U.S. price levels go up, exports become more expensive, imports become less expensive, U.S. competitiveness decreases, foreign currency demand increases, dollar demand decreases, which decreases the exchange rate. Contractionary monetary policy does the opposite.
Fiscal Policy. Expansionary fiscal policy increases price levels, decreases competitiveness, and reduces the exchange rate....

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