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Open Economy – International Trade and Finance
Open Economy – International Trade and Finance
Macroeconomics Unit 6
Big Idea:
An open economy interacts with the rest of the world both through the goods market and the financial markets, and it is important to understand how a country’s transactions with the rest of the world are recorded in the balance of payments accounts. Students should understand the meaning of trade balance, the distinction between the current account balance and the financial account (formerly known as capital account) balance, and the implications for the foreign exchange market.The course should also focus on the foreign exchange market and examine how the equilibrium exchange rate is determined. Students should understand how market forces and public policy affect currency demand and currency supply in the foreign exchange markets and lead to currency appreciation or depreciation. How financial capital flows affect exchange rates, and how appreciation or depreciation of a currency affects a country’s exports and imports should be an integral part of the presentation. Having learned the mechanics of the foreign exchange markets, students should then understand how changes in net exports and financial capital flows affect financial and goods markets. It is important to examine what the effects of trade restrictions are, how the international payments system hinders or facilitates trade, how domestic policy actions affect international finance and trade, and how international exchange rates affect domestic policy goals.
Essential Questions:
What are the policies towards developing economies; policies of trade and aid?
What are Exchange rates?
The definitions and measurement of exchange rates – nominal, real, trade-weighted exchange rates?
The determination of exchange rates – floating, fixed, managed float?
The factors underlying changes in exchange rates?
What are the effects of changing exchange rates on the domestic and external economy using AD?
What is depreciation/appreciation ,devaluation/revaluation?
What are the terms of trade?
What is the measurement of the terms of trade?
What are the causes of changes in the terms of trade?
What is the impact of changes in the terms of trade?
What is a free trade area, customs union, monetary union, full economic union?
What is trade creation and trade diversion • the benefits of free trade, including the trading possibility curve?
What is Protectionism?
What is the meaning of protectionism in the context of international trade?
What are the different methods of protection and their impact, for example, tariffs, import duties and quotas, export subsidies, embargoes, voluntary export restraints (VERs) and excessive administrative burdens (‘red tape’)>
What are the arguments in favour of protectionism?
Important Topics:
Determining comparative advantage
Economic efficiency and gains from trade
Capital and Barriers to trade
Free trade area, customs union, monetary union, full economic union
Principles of absolute and comparative advantage
Imbalance of payments
Exchange rates
Exchange rates on the domestic and external economy using AD
The effects of monetary and fiscal policies on exchange rates
The international way of thinking
Protectionism
Arguments in favour of protectionism
Please check out this calendar with all the classes and topics intended to be covered for Unit 4.
https://docs.google.com/document/d/1VnM5xaaSBN5zlsu8wVJVuZ5K1lmZfOFxSqfkA0vQuq4/edit
This is the AP Microeconomics Problem Bank for Unit 5
This is a study guide for Unit 4:
This is the link to this unit's summative assessment
Asynchronous Guide for Unit 5:
These are the modules that have to be read for this unit:
Module 30: Long Run Implications of Fiscal Policy, pg 292-303
This module corresponds to Section 8 of Paul Krugman’s book, found on the link below:
Videos:
Class 1: Module 41 Capital Flows and Balance of Payments
Pg 409-420
Understand the meaning of the balance of payments accounts
Explain the determinants of the international capital flows
Vocabulary:
Current Account
Capital Account
Asset
Inflows
Outflows
Deficit
Surplus
Goods and services
Factor income
Transfers
Capital Flow
Class 2: Module 42 Foreign Exchange Market
Pg 421-430
Understand the role of the foreign exchange market and the exchange rate
Explain the importance of real exchange rates and their role in the current account
Vocabulary:
Foreign exchange market
Exchange rate
Currency appreciation
Currency depreciation
Equilibrium exchange rates
Class 3: Module 43 Exchange Rate Policy
Pg 431-436
Explain the meaning and purpose of devaluation and revaluation of a currency under a fixed exchange rate regime
Understand why open economy considerations affect macroeconomic policy under floating exchange rates
Vocabulary:
Devaluation
Revaluation
Fixed exchange rate regime
Floating exchange rate regime
Class 4: Module 45 Putting it all Together
Understand how to use macroeconomic models to conduct policy analysis
(Explain how to approach free response macroeconomic questions)
Class 4:
Discuss last summative. Two grades, one data, one graph, the result of four grades:
iv. Self Grade (please insert in Google classroom slot that has been created for it).
Video Jacob Clifford
Shifts in FOREX market
https://www.youtube.com/watch?v=D41EuDh3epI
Fixed and Floating Exchange Rates
https://www.youtube.com/watch?v=_pL_5trI6YY
Popcorn reading 437 to 440
Teacher presentation on Shifts in Forex Markets and Fixed and Flexible Exchange Rates
Year Review of FRQ's
Homework for next class: review Spending Multiplier (Section 4, Module 21 pg 211 to 217)
Book chapter in this link:
https://drive.google.com/drive/folders/1wKE2GfZakJnQHde9Eo5dCxDV28SwiYJB
Class 3: Open Economy:
https://docs.google.com/document/d/1wZwzJAyXY17OtRp0pcCFT7dC924YSN6RVBDlvdPGr-A/edit
Part One: Graphs.
Materials: For this activity, you will need pencil, pencil sharpener, paper (notebook), and a ruler. Colored pencils and pens are advised. You can use also use Sheets.
Please graph the following:
Music proposals
Part two: Class explanation on ER.
Part Three:
Please look at the following chart containing the right answer for the last AP test.
In breakout rooms, please prepare one slide that contains the following:
One of the following questions: 1, 3, 8, or 19. Teacher will assign you one.
One question that you felt confident answering (and you got right).
One question that you found hard to answer. Please answer correctly.
How you feel about the red questions (PPC, Opportunity Cost and Trade).
You will present the slide during the next class.
Part Four: Don’t forget the FOMC announcement of today please! You can still bet a brownie.
Class 2: AP Test and Teacher presentation
Class 1:
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