DIFFERENCE BETWEEN

freemarket freeTrade
pricesofgoodsandservices determined isthefreefloatingor exchange of

bymarketforcesandthereis no productsbetweencountrieswithoutanytrade

barrierswhethertariffsornon
governmentintervention tariffbarriers

Ara III TRADE

Toincreasecompetitionfirmsaimtobemoreefficientandinnovative firms
canachieveahighdegreeofeconomiesofscale
increase
consumer in of and
c hoices
sovereignty terms more lower
prices
of
how new
Transfer know technologies

countries tradewith
that each have
other betterpoliticalrelations
forthepeople
Betterlivingstandards

accessto markets
bigger tradeisthe
mainsourceofforeignexchange

resourcesacountry
Accessto lacks allocation the
Better
of s carceresources
worlds

PROTETIONISM
anybarrieronfreetrade whethertariffor nontariff
barriers

PROTETIONISM ADMINISTRATIVE BARRIERS

HEALTH Environment safetymeasures

NATIONALISTICCAMPAIGNS

REDTAPE
VOIUNTARY EXPORTS RESTRAINS

is tail raisiaaidthebabyformulaandplastictoysimportsfromchinaundertheclaimthatthey jeoprodize

thehealth ofsaudipeople
Example EubannedcheetosforhealthregulationsmainlyGermany

nationalisticcampaignsencouragepeopletobuylocalproducts asapatrioticduty

Example withpridemadeinEgypt campaign

 Redtaperefersto paperwork andgovernmentofficestovisittotakeapproval
Example inJapanmanylongdocumentsmustbefilled intheJapaneseLanguage

Examples in China toimportcertainAmericangoods acertainlicensemustbeissued

I ijieementwherethe restrictsitsexports toanothercountryastoavoidtariff

country

Example Chinalimitedit'sstrawberryexportstotheEU

PROTECTIONISM non administrative

tariff
s
1 Tiffs taxesonimports Before after
duty of QQ Q Q

I If as
imported Q Q QQa

tariff is ataxonimportswhichshiftstheworldsupply
carsupwardstocws.tt increasing theprice

ofimportsfromPwtocpw.tt localproducerswillsellmore Q Qs insteadof Q Q andimportsfall

fromQ Q to QsQa
focus onwhatthequestionis askingabout

if thequestionisaboutdecreasingtariffethen ws willbelabelledaswswithoriginaltariff
us us with new tariff
 STAKEHOLDERS
EFFECT OF TARIFFS ON

Pa s

p fiiiii
iii II iii sarian

Producers Boitificcoca or fÉijf

turn GOVERNMENT
unemployment
Shortrun Governmentrevenue GDP asexmirduetolowerimports
fintiff af.tnfggffgtomPwcQQi
Governmentbecomes
morepopularasitprotectedlocalproducers locallabor

fansbya multipliereffect
LONGRUN asothercountriesretaliateexportsfallandGDP

CONSUMERS areworseoffdueto localcommunity worseoff duetothetwodeadwelfarelosstriangles

lossinconsumersurplus
lossin consumers sovereignty dead
consumers welfare losswhichreferstolossinconsumerssurplusandsoverighty

Pa e Ie guy thegovernmentisprotectinginefficientlocalproducersversusmoreefficientforeignproducers

ofthewordsscarceresources
misallocation

EVALUATION OF TARIFFS

PROS CONS

Tariffisthe
onlyprotectionismthat revenue
generatesgovernment twodeadwelfareloss mustbethoroughexplained

protectslocalemployment protectlocalproducers

exis intheshortrun
improvesc urrenta ccount an Butinthelongrunexmdeterioratesfansascountriesretaliate

Tooclear provocativeoncesettoohardtobelifted or

decreased
 2 QUOTA is aphysicallimit on thevalue or volume of imports
e
ua
n Beforequotalocal usedtoproduce Q
producers a atpw
man
go thequotatheywillsell
after ca a
more inadditiontoCasa
rice
jqfffaff.gg of from
drop
imports a a t.ca on
notesupplyshiftsright asproducershaveexcessinsupplyand
wanttosell
them

inpaper2mightbeaskedtoshowtheaffectoftheremovalofquotaonacertain
market

EFFECT OF QUOTA IMPOSITION ON DIFFERENT STAKEHOLDERS

ff ssiaete.at tofindoutwhetherornotthereisa consumersdeadwelfarelossaskyourselvesthefollowingquestion

Q Areconsumersconsuminglessthanbefore ifyesthereis a welfareloss

fff
fh
asforproducers
fft Qof cars QAreproducersproducingmore Ilookatthemostrecentquantity andI draw
produced

thetriangle

PRODUCERSIT

offastheysellmoreatCaQsandQ QinsteadofonlyQ
localproducersBetter Q cocaccommunity.fm twodeadwelfarelosstriangles
consumers
offasthey
worse
foreignproducers used
Q Q PwandnowtheyonlysellQQ
tosell Pw

CONSUMERSCIlossinconsumerssovereignty lossinconsumerssurplus Deadwelfareloss

EVALUATION OF QUOTA

pro's cols

protectslocalproducers Labor e ascountriesretaliateandexports

AD asCt improve inthesnon.mn provocative andobvious

twodeadwelfarelosstriangles
3 Subsidyisa aidpaid
financial
bythegovernmenttolocalproducersactingas adeterminantoflocalsupplywhichshiftstotheright
p
s
s Subsidy
dead
producers 1
welfare
iogyy.ee 0 3 8

f
P us imports
QQ QQ
gift
f Qofwheat

Duetosubsidyimportsfall CQ a t.ca a andlocalproducersare

from uptoa insteadofaandtheywillrelievethegovernmentsubsidy
more
s elling

Evaluation
Of SUBSIDY

Pros CONS
noconsumersdeadwelfareloss ointnelongrunconsumerswinfacenignertaxesa.to paid
compensates unsidies

local
Protects producers employment deadwelfareloss
producers

asprovocativeas
not tariffs Quota budget
worseninggovernment

runabacus_rap
intheshort opportunitycost

AERPROTETIONISM

subsidy on exportsnotaprotectionism

thecountryhasacomparggygagyantage.inproducingtheproductsopwandworidsuppiywinbeab.vethemarketequilibrium

Pw is
ofsupply
determinant cetrisparioussniftstneiocaisuppiycurvetotnerigntfromstositsu.si

I i ncrease
exports t.caa

i
i i
oofbeef
 EFFECT ON STAKEHOLDERS
Pa
YY
glossis
Ss subsidy

i
y g
Iii
Q Q

saofcnicue LOCALPRODUCERSW.ae

betteroffastheyaresellingmoreCQ.toa andgettingahigher
price

pw.t consumers.LY eworseoffastneypaymorepw

arebuyingatalowerquantityQ
and
insteadofpw lossinconsumersurplusandlossinsovereignty

GOVERNMENTLMachievessomemacroobjectiveseconomicgrowth favorablebalanceofpayment anddecreaseinunemployment

cost
opportunity Government worsens
budget

LOCALCOMMUNITY.LTtwodeadwelfarelosstriangles
if
 Argument forprotectionism

1toimprovecurrentaccountbalance
Ganiwin improveinthe runabrrarer
short

atsunsetproducers
2toprotectcocaproducers
was
sunrise industries
i nfant

ca sunsetindustrieswellestablishedindustriesthathavebeenoperatingformanyyearsandemployalargenumberoflaborbutarentasefficientand
fanelosseswhichpushesthegovernmenttosupportthem exussteelindustry shipbuilding
avalidargumentitisbettertoreallocateresourcestonewindustrieswherethecountryhasabetterchanceandacomparativeadvantagein

assunriseinfantindustriesnewlyestablishedindustrieswhohaventachieved ahighdegreeofeconomiesofscaleandsocannotcompetewithmoreefficientforeignproducers
whodid

3toprotectlocaldomesticlaborfromcheapforeignlaborthisis avegpointtoavoidstructuralunemployment
4 NationalsecurityexJapanplacesnightariffsonitsriceimportsexus quota
imposes and
b ands
some teen
nigh i mports
from who
d evices china
isaccusedofspying

s togenerategovernmentrevenuetariffsisthe
only that
protectionistgeneratesg overnment almost
revenue
uhs.it
as
mint revenue tariff
from
c omes

a antidumping Dumpingisthe of inaforeignmarketatlargequantitiesandatapricelowerthanthecostoftheirproductinthat

s exing aproduct market

STOP HERE FOR STUDYING

FOR WEDNESDAY
 ECONOMIC Iftp.t.EEgeEenItEN

IMPORTANT TERMS
BIELATERALTRADE isafree twocountrieswheretheyagreetodecreasetariffandnon
tradeagreementbetween tariff
barriers Koreaune
exvietnamsouth india

multilateraltradeisafree
traaagreementbetweentwoormorecountrieswhere
they todecreasetariff
a gree and tariffbarriers
non

TRADINGBLOCKisafree ofcountrieswhereadegreeofeconomiccollaborationisestablished
tradagreementbetweenagroup

EconomicIntegrationGoesTHROUGHTHEFollowingsteps

PTApreferentialtradeagreement commonmarket

FtafreetradeArea andeconomicunion
monetary

customunion completeeconomicintergration

PTAGroupofcountriesthatagreetolower i nternal
d ecrease trade or
tariff
whether
b arriers nontarriebetween
each
other

arrier
ex.eu with
c ountries coloniesaceAfricancarabeanand butchangedtobecomeone
thatwasn'ta reciprocalagreement
pacific
Tiggy

FTAfree TradeArea agroupofcountriesagreetoremoveaninternaltradebarrierswhethertariffsornontariffsbetweeneachother

e free
Atlantic
northern trade
area

fifi exacecauitcooperationcouncil

customunion
 iiii

same triteagreementsorprotectionismagainsed
a commonmarketsisatradingblockwheremembercountriesremovedinternalbarrierswhethertariffornontariffadoptedthe

no
i nteggiyae non and
members
freemovementofcapitalandlabor
allow

ex.eu Brexit
Britainleaving theeu
exiting
wefifier

s Monetaryandeconomicunionisatradingblockwheremembercountriesagreetoremoveaninternaltradebarriersastariffandnontariff

adoptthesameexternaltradebarriers oragreementallowfreemovementofcapitaland
laborIn additiontohavingonecentralbankandadopting

asinglecurrency exEurozone EuropeanCentralbank

Evacuation of sina.ie
currency

I EE wen

ie iiiiii.isiiiiiii
Attracts
in
this
who
investors can
asasafe
c urrency naven
their
save money

completeeconomicinterarationan
members one
adoptbecome big with
country one one
g overnment educational
andsoon
system
 EXCHANGE Rate is theTaiteofa currency in terms of another
Dex Exports som imports
there are 3 exchange rate systems Exchange RATEDIAGRAM
inegfsob
floatingexchangeratesystem son
Appreciationor
Managedexchangeratesystem Depreciation
p t
fixedexchangeratesystem revaluationovervaluation
ordevaluation
i Ee DataofJoe
Chocoland A

constructthefollowingdiagrampotmaincountry
intermsor
currency
omer
currency
1 Gummy 1 choco son
onewillshiftdemandor
Decidewhich

3 Gummy I Choco readequtifium

gym supply

É aofmaincountrycurrency

Example 1 Example 2 EXAMPLE 3

Draw a suitablediagram toexplainthe useasuitablediagramdiagramtosnownowa explainwhathappens to the
affectofexportsubsidiesbytheegyptiangov depreciated exchange rateofBrazilduetohigher Japaneseyen if usaincreases

poteapine pea macro DIAGRAM yeninterms

pot
a
sets
not outflows
seas

ii
s.cm
p

i p I i tt
pt Din t t t t
t
t
t
t
Dagg
t
1 AD ADrapp t t
Qe Q Y 4 sq
Higher
american reduced emandon
tariffs asusanasanignerrelative ratethan
i nterest
thegovprovidesahigherexportssubsidiesthis Japan
as win
m aneitsexports
cheapertovk.cetvisparias.sn ingoemanacurvetotnerignttrom
Brazilianexportswhich
worsen
accountbalancecanwhichisa
current moreJapanesepeople win savein vs Bannsshifting
ban to bicasanianopperates egyptian poundtrompetop componentofan.eerusparisussuitting the supplycurvetothe rightfromsimstos.cm
andananatywadeainireasestromatoa ascertwarastromantoandecreasing
rareeromy tourunemployment
depreciatingineyenfrompetopand thequantity
and tradedincreases
froma too
putans
trompetorn
 It
intensifies Capitations

D X Exports arelocal productsboughtbyforeignconsumersorforeignexchangecomingintothecountry

invesmentinflows
ofDI byMnc capitalinflows
foreignersbuyingsharesstock
inthecountriesexchangemarket foreignersbuying assetshouses
oMNCs
oforeignerssaved
moneyincountries buying naturalresources
banks

sont.int9
tsst
ffig.n productsbought
bylocalconsumers
invesmentoutflows CAPITAL outflows
olocalfirmsinvestingabroad olocalsbuyinghousesorassetsin foreign
Peoplesavingtheirmoneyinother
countries
countriesbanks Localcompanybuyingnaturalresourcesin
a foreigncountry
localsbuyingshares inforeignexchange
markets

Example usinganexchangeratediagram explainwhathappens totheKuwaitiDinar if moreJapanese

tourists visit Kuwait

n'Ynwaterminfy

g
EXPLINATION
astherearemoreJapanesetouristscomingintoKuwaitKuwait
exportswillincreasecausingdemandon theKuwaitidinar
P
1
it I M
to increasecetusparisusshiftingDemandtotheright
fromDex to Dex appreciatingthedinarasitspriceincreases
1
II frompeto p andquantityincreasingfromQeto a
1
1 I DCx
1 I
Qe
1
HQofEngaiti
Q
 fixed pegged Exchange rate
is
EE I
Regimewhereacurrency pegged
Definition

toanothercurrencyorgold
IIsoD
Assumption assumethat the Demand forJoD since invesment Demandcurveshiftsrightwards

from D to D
Price
of firstshiftDemand
51m's.IM

p
g
ofson

Assumption shortageofJob Gov in Jordanneeds to Supply by buying another

currency Demand to supplyJob woulditincreaseAn
why inimports
increase

priffffin firstshiftsupply
asurplusofJoboccurssinceitsafixed
SLMJ.cm
ratesystemthegovshould
exchange

demandthe
excess
supply ofJob
Demand Demandcurveshifts Pe
rightwardsfromDaritoD.cn AI pit
thepriceofJobin
I
maintaining
D
ofJOD
termsof Dollarsfixedpeggedatpe Qe Q
 MANAGED EXCHANGE RATE SYSTEMS

MANAGED EXCHANGERATEsystem aregime thegovernmentofthecentralbankinterviewsintheexchangeratemarkettoavoidseverefluctuationsof

where

vaines
currency

thatremittanceincreased inJordan
Assumptionassume
ofJobyen
Price

iii
is.in

f
if
EXPLINATION
Thiswould theDemandforJonthe curve
i ncrease

fistfight
shiftsrightwardsfromsixtodie renting
inexcessdemandshortagesThegov to
needs

interveneas yentoa
theJob valueincreased

value neartheupperboundGovsuppliesJob T if
tofixtheshortagesupplyshiftsrightfrom s.int
sinstos.cm whichmanagesthe currency in
excess demand supply

valueat p andavoidfluctuators

the
d ecrease value
evacuation

III III consequences of HIGH EXCHANGE RATES

ADVANTAGESofHIGH
currency Git currency
antaaesn.ec
LowereconomicgrowthasRGDP and unemployment

Highcurrencyvaluemakeexportsbecomeexpensivewhichis

damagingto exportindustriesandsellingtoothercountries
Downwardpressureoninflation
secomeschallengingwhichmightlead to lessoutputthus

evenifit'sathreattointernationalcompetativness lessunemployment

yetdomesticproducerswinbeforcedtoimprovetheir
efficiencyand beableto production widenscurrentaccountdeficitwhere
import aregreaterthan
expenditures

ftp.gfffgg
exportrevenues
 CONSEQUENCES OFLOWEXCHANGERATES
ADEeffmmoenensive

ADVANTAGES DISADVANTAGES

igreateremployment inexportingindustriessinceexportsbecome oneaperemorecompetative

finalGoodsmoreexpensive.nu
make

causecost
pushinflation

momentindomesticindustries pi seas
seas
moreexpensive
importsbecome

Plz T
Pe i t
economic
Drives growth i

i as
makes shrinkwhenexportrevenue importexpenditures
In 4
currentaccountdeficit
rasp

HOW TO CALCULATE EXCHANGE

RATE

É É
E 1 81.07 Q calculate the exchangerate of 1500 to EmiratesDirham if
egg the 17387 5008 5Dirham JODI
385 1.07 6411.95
4
 Any transaction
country and other nations
BALANCE OF PAYMENTS
If

is iiEiEiii
Emissions
Deficit suffice
1 Balance oftrade ingoods 1 Thecapital accounthas 2Subaccounts

capital transfer
2 Balance of trade inservices
Transactions in non produce
3 Income
and non financial assets

4 Current transfers 2 The financialaccount is made of 4

sub accounts
FDI foreigndirectinvestment

the portfolio investment

from into
onecountry
a
finfriantin
reservs Assets

Official Borrowing
BALANCE OF PAYMENT is afinancialrecordof all transactions of a certain country
with other countries peoplegov NPO's MNC'sandanyentityorg

anyforeignmtheycomingintothecountrytosigninflow SURPLUS ifthe ofallsub

sum arepositiveevenif p.ggiegccounts
accounts

anyforeignmfieyleaving the country signoutflow DEFICITifthe of

sum sub arenegativeevenifeng.si
a ccounts accounts