Free Trade:

What is it?
 NAFTA
 No import / export restrictions
 Opposite: protectionism

Why good?
 Companies (cars) understand comparative advantage -> whole world gain
 Economic growth is encouraged
 Lower taxes & barriers -> increase business opportunities
 FDI opportunities
 More expertise through global companies
 Decrease gov. expenditures

Why bad?
 Danger: concentration of market power
 Jobs are outsourcing (to higher skilled/ cheaper ones)
 Encourages urbanization (family vs. Factory farm!)
 Reduce tax revenue (revenue lost vs. Import tariffs)

Trade deficit:
How much you buy compared to how much you sell to another country (china, Germany,
USA)

Protectionism:
What is it?
1. tariffs that tax imports -> product less competitive due to higher price
2. subsidizes local industries
3. impose quotas
4. lower currency -> products become cheaper

Dead weight loss

Deadweight loss = Produzenten könnten noch produzieren, Käufer würden noch kaufen…
VERLUST!

Excess burden / allocative efficiency

Why good?
 Strenghten domestic market
 Avoid involvement of foreign firms& countries
 Protects new industries
 Reduce national deficit (no import but high local buys -> higher gov. Revenue)

Why bad?
 Lowers GDP & employment
 Higher inflation rate
 Increase prices – export decreases
 Lower ppp of Americans
 Limits customer choice
 Only short-term gains
For EU : strengthen EU single market, strengthen service sector, decrease In GDP will harm us

Twin deficit!
 Trade deficit: Country buys more then it sells (imports higher than exports)
 Budget deficit: country spends more on goods and Services than it makes through
taces and others.

 Example: gov. taxes reduced -> Spendings remain high (budget deficit)
Government lends money from foreign country -> trade deficit!

Exchange rates – stability vs. flexibility

Fixed exchange rate

Fix your currency to gold or other currency
Advantages:
 Currency stability – encourage investment
 Avoid inflammation by fixing to strong country (hedging)
 Disadvantages:
 Speculation encouraged

Nominal exchange rate

 The published rate (10%) 1 Dollar = 0,5 British pounds

Real exchange rate

Nominal - adjusted to inflation (10%-5%)
 When high: the price for goods and services is higher -> import!!
 When low: price is lower -> export!
 Measures purchasing power of domestic currency to buy foreign currency
 directly detrmined on movem. Of goods/ fin market

Floating exchange rate

Advantage:
 Autonomous monetary policy
 Reduce impact of economic shocks
 Difference between Nominal Rate & Real Exchange rate

Differnece between Floating and Fixed rate

Fixed: Government sets it itself
Floating: price set up by forex market (demand & supply)

Difference between F & R

 If Export increases: Nominal Exchange rate increases

Ricardo trade theory

-based on comparative advantage

 opportunity cost / comparative advantage / absolute advantage

Absolute Advantage:
- When one country can produce goods cheaper than other countries

Comparative Advantage:
- When a country specializes in production of a good for which it has lowest
opportunity costs
- CA determines why nations trade
Opportunity costs
- A Value, which must be given up to acquire something else

Inter-Industry theory Heckscher – Ohlin

Countries import goods of one product category

At the same time: export goods of another poduct category
Driven by: comparative advantage : everyone does what he can do best
Germany i.e.: Car exporteur Nr.1
Austria: Wine
… Germany sells car to Austria and Austria sells wine to Germany
Basis for trade: comparative advantage

Intra-Industry Trade theory (Helpman and Krugman)

Explains how inter- & intra- industry trade can co-exist
 Countries export AND import products from same category
 labour / capital intensive can intratrage
 Specialization in within one industry
 Example:
 Germany sells cars to France
 And France sells Buldozer (heavy machinery) to Germany

Basis for trade: internal economies of scale

Heckscher& Ohlin + Helpman and Krugmann lead to Single market:

Single market :

 no boarders
 Better exploitations of comparative advantage
 Better exploitation of scale economies

Concentrate on producing what you are best in, then economies of scale can create extra
comparative advantage

Aggregate demand! = all spending’s carried out by economic actors

3 ways macros can be interrelated:

 Goods and services are moving from one to another
 Capital is moving from one to another
 People are moving from one to another