GPE Midterm preparation

session
Maaik Gankema MA
Dr. Jovan Pešalj
 Autarky and comparative advantage
(Figure 3.4)

Could you briefly explain these graphs?

What do the points A, B and C represent?
Hekscher-Ohlin Model of CA: Trade between Vietnam and Japan
(Figure 4.7)

• Could you briefly explain these graphs?

• What do the points A, B and C represent?
A tariff on Japan’s imports of rice
(Figure 7.2)

Moving to Pw+T
Consumer surplus
decreases: ABCD
 No trade - Autarky
P SD

Consumer
surplus
Consumer A

PA Consumer B

Producer Producer C
surplus Consumer C
Producer B

Producer A

Q
Q A
 With trade, no tariffs, welfare analysis
P SD

Consumer
surplus
Consumer A

Gains from
trade PA Consumer B

Producer C
Consumer C
Producer B
Producer PW

surplus Producer A

Q
QS Imports (QD – QS) QD
 With trade, with a tariff, welfare analysis
P SD
Consumer surplus
Loss of A, B, C,
D
Consumer A

Gains from
trade Consumer B
Producer C

Producer PW+ tariff

surplus + A (tariff) A Producer B
B C D Consumer C

Government PW
revenue C Producer A

Welfare loss
D
B, D
Imports
(QD tariff – QS tariff)
Q
QS (tariff) QD (tariff)
The supply of pesos and trade deficit (Figure 17.3)
X axis: the trade deficit, the amount of the currency
traded
Y-axis: the value of the currency. If we would use e,
that would be strange, because the increase of e
actually means a fall of the value of a currency or a
decrease in its price. We are used to show an increase
in price on the y axis.
We use instead. If it goes up, the currency is stronger,
if it goes down, it is weaker.

For example if e = 100 (for $1 you get 100 pesos) a year

ago then = = 0.01 was year ago
1. e = 120 the currency is weaker, and = = 0.008
2. e = 80, the currency is stronger, and = = 0.013
Capital inflows and the peso market (Figure 17.5)
Interest rates and the peso market (Figure 17.7)
Why is the demand curve (Sf) downward sloping?
• r = interest rate
(peso • e = actual exchange rate
strong)
• = expected future exchange rate (after one year)
• = expected future return on Mexican assets
• = expected future return on American assets
• =
• =+
• Let us assume that:
• = 5% and
• = 100 (pesos for 1 USD)
• Actual exchange rates are
1. or
2. = 80 or
 Why is the demand curve (SF) downward sloping?
Let us assume that: If you invest your pesos in dollar assets you will
= 5% and get different return for your pesos:
= 100 (pesos for 1 USD)
Current exchange rates are or = 80 or
Mexican investors can invest either in peso-denominated At you expect to get after one year:
assets or in dollar-denominated assets = + = 0.05 + = 0.05 + = 0.05 + 0 = 0.05 or
= - If you invest pesos in Mexican assets after one year you +5%
will gain 5% = 0.05 At (strong peso) you expect to get after one year:
= + = 0.05 + = 0.05 +
= 0.05 + 0.25 = 0.3 or +30%
If the peso is strong, better to invest in USD => the
demand for pesos is weak

At (weak peso) you expect to get after one year:

= + = 0.05 + = 0.05 +
= 0.05 + (- ) = 0.05 – 0.17 = –0.12 or –12%
If the peso is weak, better to invest in pesos => the
demand for pesos is strong
Interest rates and the peso market (Figure 17.7)