Measuring TradeMeasuring Trade

Chapter 17Chapter 17

United States ImportsUnited States ImportsCIA Fact Book 2010CIA Fact Book 2010

•Industrial supplies 32.9% (crude oil 8.2%)

•Consumer goods 31.8% (automobiles, clothing, medicines, furniture, toys)

Capital goods 30.4% (computers, telecommunications equipment, motor vehicle parts, office machines, electric power machinery)

•Agricultural products 4.9%

United States Exports CIA Fact Book 2010

•Capital goods - 49.0% (transistors, aircraft, motor vehicle parts, computers, telecommunications equipment)

•Industrial supplies - 26.8% (organic chemicals)

•Consumer goods - 15.0% (automobiles, medicines)

•Agricultural products - 9.2% (soybeans, fruit, corn)

The Balance of TradeThe Balance of Trade

Balance of tradeBalance of trade– relationship – relationship between a nation’s imports and its between a nation’s imports and its exportsexports

Trade surplusTrade surplus– a nation exports – a nation exports more than it imports more than it imports

TradeTrade deficit deficit– when a nation – when a nation imports more than it exportsimports more than it exports

The United States Trade DeficitThe United States Trade Deficit

-400

-350

-300

-250

-200

-150

-100

-50

0

1972 1976 1980 1984 1988 1992 1996 2000

Results of the United States Trade Results of the United States Trade Deficit Deficit

Extra dollars end up in the hands of Extra dollars end up in the hands of foreignersforeigners

Foreigners use these dollars to purchase Foreigners use these dollars to purchase land, stocks and bondsland, stocks and bonds• This is a form of export and balances our trade This is a form of export and balances our trade

accountsaccounts

The value of the dollar against other The value of the dollar against other currencies may fallcurrencies may fall

Exchange RatesExchange Rates

Exchange rateExchange rate– the value of a – the value of a foreign nation’s currency in terms of foreign nation’s currency in terms of another nation’s currencyanother nation’s currency• Converts prices from one currency to Converts prices from one currency to

another currency another currency • For Example: For Example:

10 pesos equal 1 dollar10 pesos equal 1 dollar

Foreign Exchange MarketForeign Exchange Market

Foreign exchange marketForeign exchange market– – consists of 2,000 banks and other consists of 2,000 banks and other financial institutions that facilitate financial institutions that facilitate the buying and selling of foreign the buying and selling of foreign currencies currencies

Located: New York, London, Tokyo Located: New York, London, Tokyo and many other major citiesand many other major cities

Strong and Weak CurrenciesStrong and Weak Currencies

AppreciationAppreciation– increase in the value – increase in the value of a currency. It takes less of a of a currency. It takes less of a currency to buy another currency.currency to buy another currency.

This currency is getting “stronger” This currency is getting “stronger”

DepreciationDepreciation– decrease in the value – decrease in the value of a currency. It takes more of a of a currency. It takes more of a currency to buy another currency. currency to buy another currency.

This currency is “weakening”This currency is “weakening”

Effects on Net ExportsEffects on Net Exports

StrongStrong DollarDollar Weak DollarWeak Dollar

As the dollar

becomes stronger

American exports decline

As the dollar

becomes weaker…

American exports

riseImports Increase

ImportsDecrease

Exchange Rates and the Exchange Rates and the Balance of TradeBalance of Trade

A strong dollar will decrease US A strong dollar will decrease US exports and increase our trade deficitexports and increase our trade deficit• A strong dollar means our goods are A strong dollar means our goods are

more expensive to the rest of the world.more expensive to the rest of the world.• A strong dollar means other countries’ A strong dollar means other countries’

goods cost us less.goods cost us less.

Exchange Rates and the Balance Exchange Rates and the Balance of Tradeof Trade

A weak dollar will increase US A weak dollar will increase US exports and reduce our trade deficit.exports and reduce our trade deficit.• A weak dollar means our goods are A weak dollar means our goods are

cheaper to the rest of the world.cheaper to the rest of the world.• A weak dollar means other countries’ A weak dollar means other countries’

goods cost us more.goods cost us more.

Exchange Rate Table Exchange Rate Table http://money.cnn.com/data/currencies/index.html

U.SU.S AustraliaAustralia U.KU.K CanadiaCanadiann

YenYen EuroEuro Mexican Mexican NP NP

Chinese Chinese renminbirenminbi

U.S.U.S. 11 .6489.6489 1.5991.599 .6764.6764 .01.01 1.0511.051 0.110.11 0.120.12

AustraliaAustraliann

1.5411.541 11 2.4652.465 1.0421.042 0.010.01 1.621.62 0.170.17 0.190.19

U.KU.K 0.62520.6252 .4057.4057 11 0.42290.4229 0.010.01 0.6570.657 0.070.07 0.080.08

CanadianCanadian 1.4781.478 0.95930.9593 2.3652.365 11 0.012930.01293 1.5541.554 0.160.16 0.180.18

YenYen 114.3114.3 74.1974.19 182.9182.9 77.3477.34 11 120.2120.2 12.2412.24 13.8113.81

EuroEuro 0.95160.9516 0.61750.6175 1.5221.522 0.64360.6436 0.010.01 11 0.10.1 0.110.11

Mexican Mexican nuevo nuevo pesopeso

9.339.33 6.066.06 14.9414.94 6.36.3 0.080.08 9.819.81 11 1.131.13

Chinese Chinese renminbirenminbi

8.288.28 5.375.37 13.2513.25 5.65.6 0.070.07 8.78.7 9.89.8 11