Capital flows that sustain trade imbalances eventually stop, and when they do, adjust ments in sources of comparative advantages must take place so that the trade surplus countries become less competitive.
There are a number of ways in which this adjustment can occur.
The next section is likely to have two adjustments.
We will likely hear calls for trade restrictions in the coming decade because neither of these is 198 Microeconomics # International Economic Policy Issues.
In a later chapter, I will discuss how trade restriction policies can make things worse.
The U.S. wage advantage can only be maintained if the total cost of production of a good in the United States is less than the total cost of production in other countries.
The degree to which production shifts because of lower wages abroad depends on the U.S. comparative advantages listed above.
Some of them will support higher U.S. wages.
Even with higher U.S. wages, the United States will keep much production in the country.
We can expect a narrowing of the wage gap between the United States and China and India in the coming decades.
The only realistic strategy for the United States is to adapt to this new situation because of the strong market forces.
Its best strategy is to maintain existing comparative advantages by investing in education and infrastructure, while continuing to provide an environment for innovation so that it develops comparative advantages in new industries.
Transferrable sources of comparative advantage aren't the only way to eliminate trade imbalances.
Exchange rates are not the only ones.
The foreign exchange market is called the foreign exchange market.
The exchange rates that newspapers report on a daily basis are determined by the market and can be seen in the table below.
The price of foreign currencies in dollars is reported in the second column.
The rates are easy in the third column.
The price for 1 U.S. dol ar is 24.98 Argentinean pesos.
People buy and sell goods and assets in other countries.
An American who wants to buy stock in a company that trades on the EU stock exchange needs to buy euros with dollars.
He will need to buy 150 euros for the stock.
He will need to pay $180 to buy 150 euros with an exchange rate of $1.20 for 1 euro.
He can't buy the stock until that happens.
Let's look at a graphical analysis of the foreign exchange market.
You have an upward-sloping supply curve and a downward-sloping demand curve in the graphical analysis of foreign exchange rates.
You have to specify which currency you are using because you are talking about the prices of currencies.
The supply and demand for euros are presented in Figure 9-2.
The quantity of euros goes on the horizontal axis while the dollar price of euros goes on the vertical axis.
The demand for the other currency is equal to the supply of the other currency.
To demand one currency, you need to supply another.
I assume there are only two supply another currency.
The demand for dollars is equivalent to the demand for euros.
Europeans who want to buy U.S. goods or assets need dollars, so they supply euros to buy dollars.
Let's look at an example.
A European wants to buy a jacket made in the United States.
The U.S. producer wants dollars, but she has euros.
She or the U.S. pro ducer needs to exchange euros for dollars to buy the jacket.
The price of a dollar to a European has fallen.
A good that costs $100 in Europe now costs 83 euros.
Europeans buy more U.S. goods and dollars because they are cheaper.
Americans want to buy European goods or assets.
The lower the dollar price of euros, the more U.S. citizens want to buy it.
When the quantity supplied is equal to the quantity demanded, the market is in equilibrium.
equilibrium occurs at a dollar price of $1.20 for 1 euro.
If forces shift the supply and demand for euros, people will want to hold their assets in dol ar-denominated assets.
Americans lose faith in the euro and buy less of it.
The euro has lost value because one euro buys fewer dol ars.
When the dollar price of euros goes from $1.20 to $1.10, the euro goes down in value.
The dollar is appreciated in value because it can be exchanged for more euros.
The demand for a country's domestic goods is influenced by the exchange rate.
The domestic and international supply of tradable goods can be seen on the same graph.
Foreign countries are willing to sell as much as is demanded at a single price.
If domestic producers want to sell any goods, they must match the world price.
As quantity supplied rises, suppliers have to charge higher prices to cover higher costs of production, which is determined by the wage and productivity of workers in the United States.
The comparative advantages of U.S. producers are reflected in the supply curve.
International trade depends on the exchange rate.
The cost of production increases relative to the cost of world production when output increases.
The world supply intersects the domestic supply.
imports will be offset by exports.
A country has a trade deficit.
Deficits are not sustainable.
A decrease in the domestic economy's exchange rates can eliminate the trade deficit.
Exchange rate adjustment can eliminate a U.S. trade deficit with China.
Exchange rates affect a trade balance.
As the exchange rate changes, the price of a country's goods to people in other countries changes.
If the dollar depreciates, U.S. citizens will pay more dollars for each good they buy from China, which increases the price of foreign goods.
The world supply curve will shift due to a depreciation of the domestic country's currency.
U.S. producers will compete for an appreciation.
The world supply world supply curve will be affected by an appreciation.
The exchange rate adjustment can bring two countries' advantages into alignment.
The story economists tel about comparative advantages is based on the assumption that exchange rates will adjust to bring trade into balance.
The story assumes that the trade deficit is zero because of comparative advantages.
If the supply and demand for currencies only applied to tradable goods, trade among countries would be in balance, and countries would have equal sectors of comparative advantages in producing goods.
The demand for a country's currency reflects not only the demand for produced goods but also the demand for its assets.
The value of a country's currency will be high when the demand for assets is high.
The world price of produced goods will be low and the domestic country will have a comparative advantage compared to other countries.
Over the past 30 years, that has been the case in the United States, and is one of the reasons manufacturing production has been so bad.
The curse is due to the fact that the country that has a comparative 2 has a weighted combination of goods in an economy.
The position is that of consis tent with significant imports and exports of particular goods, as long as the aggregate balances out.
The trade balance is captured by the graph.
International Economic Policy Issues advantage in resources finds that the demand for its resources pushes its exchange rate.
A higher exchange rate leads to the shifting of the world supply curve and reduces the comparative advantage of other goods.
The resource curse reduces employment because a decline in employment in other goods is not offset by an increase in employment in the resource sector.
The production of the resource doesn't require a lot of workers.
When the Netherlands discovered offshore oil, it was called the Dutch disease.
Natural resources are not always the cause of the resource curse.
When one sector of an economy gains there is a large increase in global demand for that sector's goods.
Other sectors must lose their comparative advantage or there will be a trade deficit when one sector gains a comparative advantage.
During the rise in globalization in the United States, this happened.
Globalization increased the demand for people who provide logisti cal support.
On average, these jobs were an enormous boon to the U.S. economy.
The low-wage U.S. workers in other tradable goods industries lost their comparative advantage because of the increase in demand.
While total income in the United States rose, income and employment in the low wage manufacturing sector fell, causing hardship and unemployment in these sectors.
Changing comparative advantages and international trade have become more and more important for the United States.
With other countries' economies growing, the U.S. economy will inevitably become more interdependent with them.
The lives of most Americans will be improved by the international trade.
The path for US citizens in the sector will be very difficult.
According to the principle of comparative advantage, economists and lay people differ in their views on trade as long as the relative opportunity costs are the same.
The United States has comparative advantages when it comes to international trade.
Language is one of the things that smaller countries tend to have.
The comparative advantages are based on factors.
Gains from trade go to countries that don't change.
They are not subject to economies of scale.
An appreciation of a currency will shift the world that can change relatively easily.
The law of one price supply of a good can eliminate comparative advantages.
The depreciation of a country's currency makes the United States less competitive in trade.
The curse of the resource occurs when the prices of natural resources are discovered.
The value of the resource can be raised in the same way as any other good by using the supply and demand model.
A domestic country's currency makes other sectors of the dollar less competitive.
Buy more foreign currency is a variation of the resource curse.
When a single dollar buys less foreign tion in the United States, a depreciation of the one reason for a greater inequality of income distribution occurs.
Will a country do better exporting?
There are 60 workers at Widgetland.
Each worker can make up to 4 different things.
Each resident in Widgetland consumes 2 things.
Each can produce up to 50 and up to 12 wadgets.
The residents of Wadgetland consume 1 and 8 Widgets.