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Chapter 28 Free Trade

Chapter 28 Free Trade. Free Trade---free flow of goods and services between countries Most Economists support free trade Many others oppose the idea of free trade Why the different views?. Why Support of Free Trade?. Competition (lower prices, more choice) Mutual Benefits of Free Trade

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Chapter 28 Free Trade

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  1. Chapter 28 Free Trade • Free Trade---free flow of goods and services between countries • Most Economists support free trade • Many others oppose the idea of free trade • Why the different views?

  2. Why Support of Free Trade? • Competition (lower prices, more choice) • Mutual Benefits of Free Trade • Improved Standard of Living • Comparative Advantage • Specialization

  3. Why Oppose Free Trade? • U.S. Producers Want Protection • U.S. Workers Want Protection • Excessive Pollution Overseas • Exploitation of Workers Overseas • Others Countries “Dump” Goods • National Security Reasons

  4. International Trade Restrictions • Tariffs---tax on imports • Quotas---restrictions in the number (quantity) of imports • Embargo---elimination of trade (usually for political reasons)

  5. Post WW II Expansion of Trade • GATT---Reduction in Tariffs Worldwide • European Union---Free Trade Zone in Europe (15 countries and adding) • NAFTA---Free Trade Agreement Between U.S./Canada/Mexico • WTO---Settles International Trade Disputes

  6. Summary • Trade Protection is “Expensive” • In General, the “Costs” (higher prices to consumers) Exceed the “Benefits” (jobs protected for domestic workers) • Concepts: specialization, comparative advantage, trade, tariffs, quotas • QCC’s: 4, 30, 31

  7. CH. 30 The Euro • 12 European Countries Have Adapted a Single Currency • In January 2002, the Existing Currencies (francs, marks, lira, etc.) Were Replaced by the Euro • Huge Benefits Expected

  8. Evolution of EURO • European Union (15 countries and expanding) • Maastricht Treaty (1991)---formal agreement for a single currency • January 1, 2002---replacement of national currencies with the EURO • Will UK become part of EURO?

  9. Advantages of Single Currency • No need to exchange currencies • Promotes trade between countries • Currency will not lose value relative to other countries with same currency • Easier to compare prices between countries • EURO as rival currency to U.S. dollar

  10. Disadvantages • Loss of flexibility • Loss of control of monetary policy • Loss of national sovereignty For the above reasons, the UK has thus far opted out of the EUROZONE

  11. Value of Euro vs. $ • January 1999 $1.16 • January 2000 $1.00 • January 2001 $ .93 • January 2002 $ .88 • June 2003 $1.17

  12. Impacts of Weak Dollar • U.S. goods are cheaper for Europeans • U.S. exports will rise (imports will fall) • Inflation might become a problem for the U.S. • Europeans are upset

  13. Future Issues • How will the dollar “play-out” relative to the EURO? • Will the U.K. decide to adopt the EURO? • Concepts: EURO, Foreign exchange, currency fluctuations • QCC’s: 12,31

  14. Chapter 31 Monetary Policy and Interest Rates • Federal Reserve---U.S. Central Bank (est. 1913) • Monetary Policy---changes in interest rates and/or money supply and impact on economy • Federal Reserve is “independent.” Currently chaired by Alan Greenspan.

  15. How Monetary Policy Works • An increase in the growth rate of money (or lower interest rates) will generally help the economy grow faster • A decrease in the growth rate of money (or higher interest rates) will generally slow the economy down

  16. Counter-Cyclical Nature of Policy • Fed’s goal is the stabilize the economy • If high unemployment, increase rate of growth of money • If high inflation, slow down growth rate of money • Some economists prefer less interference (stable growth rate of money all the time)

  17. Interest Rates • Fed controls short term rates (Discount Rate and the Federal Funds rate) • Discount Rate---rate of interest Fed charges banks to borrow funds • Federal Funds---rate of interest one bank charges another bank to borrow funds • Other Rates “indirectly impacted”

  18. Interest Rates • Federal Funds has declined over time from about 6.5% in late 2000 to 1.25% today • Discount rate was 6% in late 2000. It is now at .75% • Why the aggressive lowering of rates?

  19. How Does the Fed Lower Rates? • Federal Reserve must increase the supply of loanable funds (called “reserves”) • It does this by buying securities (bonds) from banks • These bonds are paid for with newly created reserves • Banks can now make more loans

  20. Current Federal Reserve Policy • Fear of recession has led the Fed to pursue an expansionary policy • Recent economic reports suggest the Fed will continue to keep interest rates low • Concepts: Federal Reserve System, interest rates, monetary policy, countercyclical policy • QCC’s: 11,15,20,23,27,28

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