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The questions on the AP Macroeconomics Exam that students often find the most difficult are those on international economics.
The supply-and-demand framework is a versatile framework for many international economic examples. The supply-and-demand curves for the dollar are affected by a number of economic variables. Another example that uses the supply-and-demand concept is the market for imports in the U.S. Further examples include the effect of an increase or decrease in the cost to foreigners of producing goods exported to the U.S.
To give students a chance to think the ideas through, I often use examples like those above as homework problems, along with standard supply-and-demand examples, such as the market for gasoline or for MP3 players.
Although the earlier introduction of international economics into the Principles of Macroeconomics course is not a perfect substitute for the in-depth treatment we hope to provide at the end of our courses, it can nicely complement that in-depth treatment with little loss of time.
The debt crisis in the rest of Europe, most notably in Greece and Italy, reduces certainty among investors in these European governments’ ability to repay their debt, creating further demand for investment in Switzerland, causing the franc to rise. Next, weaker growth prospects make investments in Indian assets (such as corporate stocks or bonds) less attractive to international investors, since they expect demand for Indian output to slow in the future, thus demand for rupees declines now.
The weaker rupee could, in the long-run, increase total demand for India’s output, which would improve employment and growth prospects on the sub-continent.
The Chinese demand for dollar denominated financial assets, including government bonds, corporate stocks and bonds, and real assets like real estate, factories, buildings and so on, has resulted in a long period of a strong dollar.
However, a falling dollar is the last thing China wants to see happen, for two reasons: One, it would make Chinese imports more expensive thus less attractive to American households, thus harming Chinese manufacturers and slowing growth in China.
The SNB said it would enforce the minimum rate by buying foreign currency in unlimited quantities.
The SNB’s decision to peg the franc to the euro will assure that foreign consumers of Swiss goods will not see their prices continue to rise, and Swiss consumers of foreign goods will not see them get any cheaper in coming months, hopefully bringing Swiss households who have recently enjoyed cheap imports back to the Swiss market to buy more Swiss-made goods and services. As an employee in a Swiss firm, however, my continued employment depends on the continued demand for the service my school is providing, which is education to the children of multi-national corporations operating out of Switzerland.
I have a question about graphs that illustrate how trade preferences (specifically Supply and Demand shifts), affect P, Q and Pe on Supply-Demand GRAPHS of Currency Exchange. In teaching my AP Macro students about this concept, I have reached a gap in our full understanding how to graph the Supply and Demand of Yen, or Euro (Price in USD). As you can foresee, the floating value of the Yen should lead to relatively balanced trade between Japan and the US.
It is important for a developing country like Argentina to keep large reserves of US dollar-denominated assets (i.e. When an American consumer wants to buy an iPod that was made in China she will have to pay for it in US dollars, since that’s what she earns her wages in from selling her labor in the resource market. The M-L condition examines the price elasticities of demand for exports and imports of a particular country. An increase in exports of 12% in response to a 6% weakening of the dollar indicates a price elasticity of demand coefficient for America’s exports of 2, meaning foreigners are highly responsive to cheaper US goods.
A weak economy in Great Britain leads foreign investors to believe that the Bank of England may lower interest rates in the near future. I thought it might be useful to some of our graduating seniors planning their summer vacations or gap years.
I recently received an email from Sean Stoner, who writes a great blog, Maslow Forgot About Beer.
Of course I’ll give you full credit in the post for educating me more on this subject.
I think something you’ve forgotten to mention in your email is the role that the mortgage crisis has had on the dollar.
Although the AP Macroeconomics course introduces international ideas relatively early in the course (when the principles of national income accounting and aggregate demand are introduced), instructors often leave the formal analysis of international transactions for the end of the course. The relationship between the world's supply of shoes and the demand for them shown in figure 1 demonstrates comparative advantage.
A former member of the Development Committee, he currently serves as the Chief Reader for AP Microeconomics and AP Macroeconomics.

This means Indians are dependent on imported goods, while foreigners do not demand as many of its exports. However, the expectations of lower interest rates in the future make international investors look elsewhere for investments with relatively higher returns. Not all currency exchanges are for the purpose of purchasing a nation’s goods or its assets. Of course, for the Indian economy, a weaker rupee might be just what is needed to boost future economic growth. Furthermore, if India’s growth rate picks up due to increased net exports, the Indian central bank may be able to raise interest rates a bit, reducing the incentive for investors to flee the rupee and put their money in countries with higher returns.
But for now, I’m going to enjoy my week of guided skiing in the Himalayas, and thank the forex traders and currency speculators for allowing me to take this dream vacation for such a bargain price!
The government issues these bonds to finance its budget deficits, and the Chinese are happy to buy these bonds for a couple of reasons: They are secure investments, meaning that unless the US government collapses, the interest on US bonds is guaranteed income for China.
Foreign consumers, who actually buy about 50% of Switzerland’s output, have seen the prices of Swiss goods rise as the value of their own currencies has declined against the franc, reducing demand abroad for Swiss exports, forcing firms in the Swiss export sector to reduce their labor force and otherwise cut costs to compensate for the falling demand for their products. As you say, an increase in the price level of goods produced in United States (say, Fords), ceteris paribus, should lead to an increase in demand among American consumers for goods produced in Japan (say, Hondas), which now appear relatively cheaper. The US current account will initially move towards deficit as inflation makes American goods more expensive, however, as demand for Japanese goods increases, the value of the Yen rises making Japanese goods more expensive, which will eventually reduce their appeal to American consumers who will once again begin consuming more American goods and importing less. But the government is spending money so fast that this growth will not finance current spending on its own, says Daniel Marx, a former finance minister. While the market for a particular currency reflects many of the same characteristics as a product market (i.e. This time around, these pressures could well take the form of unilateral action against competitive currencies. Currency manipulation is a form of protectionism, which in a time of global economic slowdowns poses a larger threat than ever to both developed and developing nations’ economies alike. This status would have significant value for China by shielding it against unilateral trade actions such as anti-dumping and countervailing duties by trading partners.
An excess of spending beyond tax revenue is known as a budget deficit, and must be paid for by government borrowing. Granted, during a recession the demand for loanable funds from firms for private investment may be so low that there is no crowding out, as explained by Paul Krugman here. Demand for exports and imports may not always be so responsive to changes in exchange rates. The purpose of this essay is to offer a few suggestions for integrating international ideas into material covered earlier in the Principles of Macroeconomics course. Just as important, it can help students understand, and help us remember, that the principles of analysis underlying the distinct and complex field of international economics are the same, familiar concepts we apply in macroeconomics. This has caused demand for francs to rise, causing its value to increase against most currencies. As the rupee falls and the Swiss franc and the US dollar gain value, not only will ski vacations to India become more attractive to foreigners, but so will other exports from the South Asian nation. The threat of rising unemployment and falling demand for its output caused the Swiss National Bank and the Swiss government great concern, leading to today’s announcement.
If , following inflation in the United States and the corresponding increase in demand for Yen, the value of the Yen remained at $0.01, then the quantity demanded for Yen would exceed the quantity supplied. The problem is, these costs are all in Chinese yuan, but he’s holding the US dollars that Apple paid him for his iPod.
China’s voracious demand for US dollar denominated assets keeps the demand for (and the the value of) dollars high on foreign exchange markets, meaning the RMB remains relatively cheap for Americans and therefore Chinese manufactured goods attractive. By keeping demand for dollars high on the foreign exchange markets through its incessant demand for US treasury securities and other financial and real assets, while simultaneously hoarding vast reserves of US dollars in its central bank, thus keeping supply of dollars on foreign exchange markets low (see graph), China has prevented the RMB from appreciating, fueling the growth of the country’s export-manufacturing sector.
Below is a graphical representation of the US bond market, which is where the US government supplies bonds, which are purchased by the public, commercial banks, and foreigners. Below we can see the impact of an increase in the quantity demanded for government bonds on the market for private investment. But if the country does not begin working towards such an end immediately, it may find itself unable to raise the funds to pay for such public goods as infrastructure, education, health care, national defense, medical research, as well as the wages of the millions of government employees.

If foreigners’ demand for exports from America is relatively elastic, then a slightly weaker dollar should cause a dramatic increase in foreign demand for American output, causing export income in the US to rise dramatically. Imagine a scenario where a weaker dollar does little to change foreign demand for America’s output.
Because lower interest rates create an incentive for consumers and businesses to take out loans from banks and spend money in the economy, which should create new jobs and help prevent a recession in the UK.
Compared to my hometown of Seattle, Washington, where a pint goes for $3.25, that’s exactly double the price! By showing students where international economic ideas fit into the course's initial, most elementary analyses, the teacher can help them begin to apply global concepts to everything they learn in the course, thus laying the foundation for focused discussion later in the term. In addition to demonstrating comparative advantage by considering the productivity of, say, Bill and Beth, or Farm A and Farm B, use the same framework for Belgium and France. Thus, the vertical axis is the price of the dollar, or the number of foreign currency units per dollar. Just as important, when the analysis turns to a more formal treatment of international economics, they are more receptive, having already been exposed to the basic ideas.
The weakening of the rupee may be fueling speculation about the future value of the rupee, which acts as a self-fulfilling prophecy, as forex investors will continue to swap rupees for other currencies, including the Swiss franc. That 3% trade deficit that has contributed to the rupee’s decline may begin to move towards the positive if foreigners like me begin taking more trips to and buying more goods from Indian firms. It means that Americans consume more than they actually produce.On the micro level, the only way to consume beyond ones income is to borrow from someone else to pay for the additional consumption. Tax rates can be lower, since foreign lenders hold down the cost of financing the national debt. In order to cover his costs, the Chinese factory owner must take the $100 to a Chinese bank and swap it for RMB.
If the Obama administration does not put forth a viable plan for balancing its budget very soon, the demand for US government bonds could fall, which would further excacerbate the crowding-out effect, and eliminate the country’s ability to finance its government activities. For, say, the tenth unit, the price that a buyer is willing to pay is above the price at which a producer is willing to sell. The only benefit is that American-made goods become cheaper for foreigners, which helps create new jobs and can raise the value of export-oriented American firms (winemakers in California, producers of medical devices in New England). Since Japanese holders of Yen now receive more USD for each Yen, they will provide more Yen (this is another way of saying with an increase in demand for Yen, the quantity supplied of Yen increases). The core of Ferguson’s concerns about the future stability of the United States economy is the situation in the market for US government bonds. The basic ideas become part of how a student thinks, or at least the ideas "ferment," providing a context for more formal analysis.
In this case, where the elasticities of demand for exports and imports are highly inelastic, a depreciation of the currency will actually worsen a trade deficit. The supply of dollars in figure 2 will shift to the right, resulting in a lower exchange rate (E), meaning a depreciation of the dollar (an appreciation of foreign currency).
If foreign incomes increase, then foreign consumption will absorb some of the goods previously exported. For obvious reasons, more emerging market countries have not voiced their concerns, but it is possible that a coalition of affected countries could unite on this issue.
This exchange could occur domestically, or between a foreign buyer and a domestic seller, or between a domestic buyer and a foreign seller. As textbooks claim, a depreciation of the dollar (appreciation of foreign currency) causes a decrease in the value of U.S. The Yen price of a USD will fall as the supply of USD increase as Americans exchange their dollars for Yen to buy the relatively cheap Japanese goods.
The effect of the decreased supply and increased demand on the equilibrium amount of dollars exchanged on foreign exchange markets is indeterminate.

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30.05.2014 | Author: admin

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