Assume That Two Nations Conclude A Trade Agreement

China has comparable trade surpluses. However, China has linked the renminbi to the dollar, preventing its exchange rate from rising and thus restoring a trade balance. China does this by using the dollars it accumulates from its trade surplus to aggressively buy U.S. currency in the form of treasury bills. The result was an overvalued dollar and an undervalued renminbi. (This is similar to what Japan did in the early 1980s, when the yen was undervalued and the dollar was overvalued.) In economic theory, “an undervalued exchange rate is both an import tax and an export subsidy, and therefore the mercantilist policy that one can imagine.” [32] Saudi and American consumers are likely to want oil and maize to live on both. Suppose both countries produce and consume at point C or C,, before trade takes place. Thus, the Saudi economy will devote 60 hours of work to oil production before trade, as shown in Table 3. Based on the information contained in Table 1, this choice means that it produces/consumes 60 barrels of oil.

With the remaining 40 hours of work, since it takes four hours to produce a bushel of corn, it can produce only 10 bushels. To be at the point That, the U.S. economy spends 40 hours of work to produce 20 barrels of oil, and the remaining hours of work can be attributed to the production of 60 bushes of corn. Even if a country has high productivity for all products, it can still benefit from trade. The benefits of trade are the result of comparative advantages. By specializing in a property that produces the least, a country can produce more and put this additional production on sale. If other countries specialize in their comparative advantage and trade, the highly productive country may benefit from a lower opportunity cost for production in other countries. A current account surplus or deficit may be affected by the economic cycle. Therefore, if our economy grows rapidly, the demand for imports will increase, as consumers can afford to buy more and businesses will need parts and stocks to grow. Similarly, U.S.

exports are influenced by the economic growth of its trading partners. In short, if it grows faster than its trading partners, it will have a negative impact on the U.S. current account. Conversely, this will have a positive effect on the current account if U.S. trading partners grow faster. Suppose in the pre-trade situation, each nation prefers to make a combination of shoes and refrigerators, which is shown at point A.