WELCOME TO SEMINAR 10

March 11, Wed. 10-11 pm ET

MT445-01 MANAGERIAL ECONOMICSINSTRUCTOR: PAUL CHOI, PH.D.

LIVE SEMINARS(Wednesday 10-11 PM ET)

Live Seminar Schedule: • Live Seminar 1: January 7 (Wednesday 10-11 pm ET) • Live Seminar 2: January 14 (Wednesday 10-11 pm ET) • Live Seminar 3: January 21 (Wednesday 10-11 pm ET) • Live Seminar 4: January 28 (Wednesday 10-11 pm ET) • Live Seminar 5: February 4 (Wednesday 10-11 pm ET) • Live Seminar 6: February 11 (Wednesday 10-11 pm ET) • Live Seminar 7: February 18 (Wednesday 10-11 pm ET) • Live Seminar 8: February 25 (Wednesday 10-11 pm ET) • Live Seminar 9: March 4 (Wednesday 10-11 pm ET) • Live Seminar 10: March 11 (Wednesday 10-11 pm ET)

• It is strongly suggested that you attend the graded seminar at the regularly scheduled time. If you are unable to attend the seminar, you can complete the following assignment.

UNIT 10 READING

Chapter 9 discusses the United States in the international economy; comparative advantage in international trade; how countries gain from international trade; government policies that restrict international trade; and the argument over trade policies and globalization.

UNIT 10 READING

Chapter 30 discusses exchange rate systems, the current exchange rate system, and international capital markets.

READING: CHAPTER 9

The United States in the International Economy

Tariff: A tax imposed by a government on imports.

Imports: Goods and services bought domestically but produced in other countries.

Exports: Goods and services produced domestically but sold to other countries.

READING: CHAPTER 9

Comparative Advantage in International Trade

Absolute Advantage: The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors.

Comparative Advantage: The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors.

Opportunity Cost: The highest valued alternative that must be given up to engage in an activity.

READING: CHAPTER 9

How Countries Gain from International Trade

Autarky: A situation in which a country does not trade with other countries.

Increasing Consumption through Trade Terms of Trade: The ratio at which a

country can trade its exports for imports from other countries.

READING: CHAPTER 9

How Countries Gain from International Trade

Why Don’t We See Complete Specialization?

• Not all goods and services are traded internationally.

• Production of most goods involves increasing opportunity costs.

• Tastes for products differ.

READING: CHAPTER 9

How Countries Gain from International Trade

Where Does Comparative Advantage Come From?

• Climate and natural resources. • Relative abundance of labor and capital. • Technology. • External economies. External economies: Reductions in a firm’s costs

that result from an increase in the size of an industry.

READING: CHAPTER 9

How Countries Gain from International Trade

Comparative Advantage Over Time: The Rise and Fall – and Rise – of the U.S. Consumer Electronics Industry

Once a country has lost its comparative advantage in producing a good, its income will be higher and its economy will be more efficient if it switches from producing the good to importing it.

READING: CHAPTER 9

Government Policies That Restrict International Trade

Quotas and Voluntary Export Restraints Quota: A numeric limit imposed by a government

on the quantity of a good that can be imported into the country.

Voluntary export restraint (VER): An agreement negotiated between two countries that places a numeric limit on the quantity of a good that can be imported by one country from the other country.

READING: CHAPTER 9

Government Policies That Restrict International Trade

Measuring the Economic Effect of the Sugar Quota

We can use the concepts of consumer surplus, producer surplus, and deadweight loss to measure the economic impact of the sugar quota.

READING: CHAPTER 9

Government Policies That Restrict International Trade

Gains from Unilateral Elimination of Tariffs and Quotas

Some politicians argue that eliminating U.S. tariffs and quotas would help the U.S. economy only if other countries eliminated their tariffs and quotas in exchange.

Other Barriers to Trade In addition to tariffs and quotas, governments

sometimes erect other barriers to trade.

READING: CHAPTER 9

The Argument over Trade Policies and Globalization

World Trade Organization (WTO): An international organization that oversees international trade agreements.

Why Do Some People Oppose the WTO? Globalization: The process of countries becoming

more open to foreign trade and investment. Anti-Globalization: Some people believe that free

trade and foreign investment destroy the distinctive cultures of many countries. Many governments have resisted globalization proposals.

READING: CHAPTER 9

The Argument over Trade Policies and Globalization

Why Do Some People Oppose the World Trade Organization?

“Old-Fashioned” Protectionism Protectionism: The use of trade barriers to

shield domestic firms from foreign competition.

Protectionism is usually justified on the basis of one of the following arguments:

- Saving jobs; Protecting high wages; Protecting infant industries; Protecting national security

READING: CHAPTER 9

The Argument over Trade Policies and Globalization

Dumping Dumping: Selling a product for a price

below its cost of production. Positive versus Normative Analysis ( Once

Again) Positive analysis concerns what is. Normative analysis concerns what ought

to be.

READING: CHAPTER 9

The Argument over Trade Policies and Globalization

Positive versus Normative Analysis ( Once Again)

The success of industries in getting the government to erect barriers to foreign competition depends partly on some members of the public knowing full well the costs of trade barriers but supporting them anyway. However, two other factors are also at work:

1. The costs tariffs and quotas impose on consumers are large in total but relatively small per person.

2. The jobs lost to foreign competition are easy to identify, but the jobs created by foreign trade are less easy to identify.

READING: CHAPTER 30

Exchange Rate Systems Floating currency: The outcome of a

country allowing its currency’s exchange rate to be determined by demand and supply.

Exchange rate system: An agreement among countries on how exchange rates should be determined.

READING: CHAPTER 30

Exchange Rate System Managed float exchange rate system: The

current exchange rate system, under which the value of most currencies is determined by demand and supply, with occasional government intervention.

Fixed exchange rate system: A system under which countries agree to keep the exchange rates among their currencies fixed.

READING: CHAPTER 30

The Current Exchange Rate System

The Current Exchange Rate System Has Three Important Aspects:

1. The United States allows the dollar to float against other major currencies.

2. Most countries in Western Europe have adopted a single currency, the euro.

Euro: The common currency of many European countries.

3. Some developing countries have attempted to keep their currencies’ exchange rates fixed against the dollar or another major currency.

READING: CHAPTER 30

The Current Exchange Rate System

What Determines Exchange Rate in the Long Run?

The Theory of Purchasing Power Parity Purchasing power parity: The theory that

in the long run, exchange rates move to equalize the purchasing powers of different currencies.

READING: CHAPTER 30

The Current Exchange Rate System

What Determines Exchange Rate in the Long Run?

The Theory of Purchasing Power Parity Three real-world complications keep

purchasing power parity from being a complete explanation of exchange rates, even in the long run:

• Not all products can be traded internationally.

• Products and consumer preferences are different across countries.

• Countries impose barriers to trade.

READING: CHAPTER 30

The Current Exchange Rate System

What Determines Exchange Rate in the Long Run?

The Four Determinants of Exchange Rates in the Long Run

• Relative Price Levels. • Relative Rates of Productivity Growth. • Preferences for Domestic and Foreign

Goods. • Tariffs and Quotas.

READING: CHAPTER 30

The Current Exchange Rate System

Pegging Against the Dollar A final key aspect of the current exchange rate

system is that some developing countries have attempted to keep their exchange rates fixed against the dollar or another major currency.

The East Asian Exchange Rate Crisis of the Late 1990s

Pegging: The decision by a country to keep the exchange rate fixed between its currency and another currency.

READING: CHAPTER 30

The Current Exchange Rate System

Pegging Against the Dollar The Decline in Pegging Following the disastrous events experienced by

the East Asian countries, the number of countries with pegged exchange rates declined sharply. The trend has been toward replacing pegged exchange rates with managed floating exchange rates.

The Chinese Experience with Pegging In 1978, China began to move away from central

planning and toward a market system.

UNIT 10 DISCUSSION Topic 1 Globalization is becoming very important in

economic discussions. While some politicians favor protectionist policies because they feel these policies protect domestic producers, others claim free trade increases economic activity and has advantages for the country as a whole. Describe a recent foreign purchase. Do you think it is better to source from overseas or should tariffs be in place to protect American industries? Why or why not?

UNIT 10 DISCUSSION

Topic 2 The Economist regularly publishes the Big Mac

index to examine the validity of purchasing power parity. If purchasing power parity holds, a consumer should be able to take the same amount of money required to buy a Big Mac in the U.S. and buy a Big Mac in any other country. What are the reasons purchasing power parity may not hold? If the U.S. dollar depreciates against the euro and purchasing power parity holds, would a Big Mac in Europe become more or less expensive? Why? If purchasing power parity doesn’t hold, does an American tourist in Europe pay more or less for a Big Mac? Why?

re is always debate regarding the structure of the current income tax system in the U.S. Many opponents of the current system argue that under its current structure, many wealthy households are able to avoid taxes and for most households, the tax system is simply too complicated and confusing. One solution that has been proposed is the “flat tax.” What are the benefits and detriments of replacing the current income tax system with a flat tax system? Who benefits and who might be harmed? What implications does the flat tax system have for tax preparation companies such as H&R Block?

UNIT 10 ASSIGNMENT

Instructions Summary: Please Read Unit 10 Assignment Instructions

• Please answer the following questions located in the template document. Submit the file as a Microsoft Word ® document to the Dropbox when completed.

SEMINAR

Read About Graded Seminars Attending seminars is important to your

academic success. They (seminars) will allow you to review the important concepts that are presented in each unit, discuss work issues in your lives that pertain to these concepts, ask your instructor questions and allow you to come together in real time with your fellow classmates.

There will be a seminar in units 1 through 10 in this course. You must either attend the seminar or complete the Alternative Seminar Assignment in order to obtain the points for this part of class.

UNIT 10 SEMINAR

Unit 10 Alternative Assignment: • It is strongly suggested that you attend the

graded seminar at the regularly scheduled time. If you are unable to attend the seminar, you must complete the following alternative assignment to earn points for this part of the class.

View this week’s archived Seminar and write a 1 page paper, double spaced that summarizes the Seminar and what you learned.

Once completed, submit your alternative assignment to the Seminar Dropbox.