The Six Stages of Economic Integration (Holiday Special!)

In the first stage of integration my trading partners gave to me, access to certain products duty free! This special holiday lesson will introduce the different ways nation’s economies integrate with one another and remove trade barriers, from the lowest level of preferential trade agreements to complete economic integration! All with a little holiday cheer and some singing thrown in for good measure!

Share this lesson!

Calculating Exchange Rates from Linear Equations

An exchange rate is simply an equilibrium price in a market for a currency, and like the prices of other goods, services and resources, a currency’s value can be calculated if the equations for supply and demand are known. This lesson will demonstrate how to calculate an equilibrium exchange rate from linear equations, and in part 2 demonstrate how an intervention by a central bank can lead to a change in demand or supply of a currency and thus trigger a change in its value.

Part 1:

Part 2:

Share this lesson!

Calculating Prices in different Currencies using Exchange Rates

If you know the exchange rates of two currencies, you can calculate the prices of goods in one country in another country’s currency. This lesson walks you through several problems in which calculations of different exchange rates allow us to determine how much goods and services in one currency will cost in terms of another.

 

Share this lesson!

Protectionist Subsidies

A final tool available to government for promoting domestic production over imports is the protectionist subsidy. This less will explain, illustrate and evaluate the impact of a payment from the government to domestic producers meant to reduce imports and protect domestic jobs and firms.

This lesson also examines the economic justification for protectionism.

Share this lesson!

Managed Exchange Rate Systems part 2

To avoid the volatility and uncertainty that often accompany a floating exchange rate, some governments and central banks choose to manage or peg their currency’s value against another currency. This lesson explains the tools by which an exchange rate can be managed and maintained within a range of values, using the Swiss National Bank’s decision to peg the Swiss franc against the euro in 2011 as an example.

Share this lesson!

Managed Exchange Rate Systems part 1

To avoid the volatility and uncertainty that often accompany a floating exchange rate, some governments and central banks choose to manage or peg their currency’s value against another currency. This lesson explains the tools by which an exchange rate can be managed and maintained within a range of values, using the Swiss National Bank’s decision to peg the Swiss franc against the euro in 2011 as an example.


Share this lesson!

Protectionist Quotas

Quotas offer policymakers looking to protect domestic industries from foreign competition another tool to keep imports out. This lesson provides a graphical analysis of the impact of a protectionist quota and evaluates its effect on domestic and foreign stakeholders.

Share this lesson!

The Gains from International Trade in a Demand and Supply Diagram

International trade results in an increase in efficiency and total welfare among consumers and producer in the countries that participate in it. This is a thesis presented by advocates of free trade all the time. This lesson provides a simple illustration of the gains from trade experienced by an exporting and an importing nation, showing the increases in consumer and producer surplus and total welfare resulting from specialization based on comparative advantage.

Share this lesson!

The Gains from International Trade in the PPC Model

Now that we’ve established the difference between absolute and comparative advantage, we can proceed to how countries stand to gain from trade when they specialize in and produce the goods for which they have a comparative advantage. In this lesson we will explain how a “real exchange rate” can be determined between two goods and two countries that is mutually beneficial for both countries and then show how trade can increase the total possible level of consumption and effectively shift the PPC curve outwards.

Share this lesson!

Determining Absolute and Comparative Advantage

Why do nations stand to gain from trading with one another, and how should a nation determine the goods it should specialize in and which it should import? To answer these questions we must introduce some basic concepts of International Trade: absolute and comparative advantage. This lesson introduces these two concepts and uses a simple PPC model to determine how two countries should allocate their resources towards the production of a particular good to maximize the benefit they derive from trading with one another.

In the next lesson we’ll learn how to illustrate the potential gains from trade in the PPC diagram.

Share this lesson!

Protectionist Tariffs

While Economists generally agree that free trade creates more winners than loser, policymakers don’t always agree, and turn to protectionism to shelter domestic producers from foreign competition.

A tariff is one form of protectionism employed around the world by governments to shelter domestic firms from cheap imports. This lesson examines the impact tariffs have on the market for an imported good and evaluates their effect on different stakeholders, including consumers, producer and the government.


Share this lesson!

Balance of Payments and Exchange Rates – AP Free Response Questions

This lesson presents worked solutions to three AP Free Response Questions on Balance of Payments and Exchange Rates. You may wish to download and attempt these questions yourself before watching the video. Here is the original quiz I gave my AP Macro students: AP Macro Balance of Payments Quiz

The original AP Questions and others can be found on the College Board Site: AP Macroeconomics – Sample questions and Scoring guidelines

The quiz covers the following questions:

  • 2011 Form B Question #2
  • 2008 Question #2
  • 2007 Form B Question #3

Share this lesson!

The relationship between the Current Account Balance and Exchange Rates

A nation’s balance of payments measures all economic transactions between that nation’s people and the people of all other nations. A country that spends more on imports than it earns from the sale of its exports is said to have a trade deficit. Such imbalances have become controversial topics of debate in political and economic circles, particularly over the last decade as the Chinese economy has emerged as the world’s largest exporter.

As goods and services flow from one country to another, the exchange rates of those countries’ currencies tend to fluctuate to promote balanced trade between the two nations. However, in some cases, most notably China, a country’s central bank will intervene in the market for its own currency to manage its exchange rate against that of a trading partner. When such interventions occur, the normal, moderating effect that rising and falling exchange rates has on trade flows is disrupted, and trade imbalances can become persistent.

This lesson will illustrate how trade flows should lead to appreciation and depreciation of currencies in a floating exchange rate system, and then explain how in the case of China, central bank policy aimed at buying large quantities of US government debt keeps the supply of Chinese currency high in the US and the demand for US dollars high in China. This means the dollar remains stronger than it otherwise might relative to the Chinese RMB, contributing to the persistent trade deficits the US exhibits in its trade with China.

 

Share this lesson!