ECO 1 - Chapt 16 - The foreign sector

ECO 1 - Chapt 16 - The foreign sector

1. Why countries trade

   • Absolute advantage
     • Comparative (or relative) advantage
       • Comparative advantage in action

2. Trade policy to protect domestic firms

   • • Import tariffs
     • • Import quotas
       • • Subsidies
         • • Non-tariff barriers
           • • Exchange controls
             • • Exchange rate policy
   • S - ubsidies
     • I - mport tarifs
       • N - on Tarrif Bariers
         • Q - outas on imports
           • E - xchange control
             • E- xchange rate policies

3. Exchange rates

   • The foreign exchange market
     • ■ THE DEMAND FOR DOLLARS
       • ■ THE SUPPLY OF DOLLARS
         • ■ THE EQUILIBRIUM EXCHANGE RATE
           • ■ CHANGES IN SUPPLY AND DEMAND: CURRENCY DEPRECIATION AND APPRECIATION
   • Intervention in the foreign exchange market
   • TABLE 16-1 Changes in supply and demand of dollars: a summary - PAGE 308
     • TABLE 16-2 Impact of changes in rand/dollar exchange rate for South Africa
   • Exchange rate policy
     • With a floating currency, there are basically only three policy options:
       • • Do nothing
         • • Intervene in the foreign exchange market by buying or selling foreign exchange
           • •Use interest rates to influence exchange rates

4. The terms of trade