Expert answer:Need economics help with Currency Exchange Rates
Answer & Explanation:Currency Exchange Rates
After reading chapters 16, 17, 18, and 19, write a 2-page paper describing how currency exchange rates are determined in markets.
Exemplify how it occurs by showing it in graphical form.
How does a country’s balance of trade coincide with its exchange rate with another country?
chapter_16__15th_fin.pptxchapter_17__15th_fin.pptxchapter_18__15th_fin.pptxchapter_19__15th_fin.pptx
chapter_16__15th_fin.pptx
chapter_17__15th_fin.pptx
chapter_18__15th_fin.pptx
chapter_19__15th_fin.pptx
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GWARTNEY – STROUP – SOBEL – MACPHERSON
Creating an Environment
for Growth and Prosperity
Full Length Text — Part: 3
Macro Only Text — Part: 3
Chapter: 16
Chapter: 16
To Accompany: “Economics: Private and Public Choice, 15th ed.”
James Gwartney, Richard Stroup, Russell Sobel, & David Macpherson
Slides authored and animated by: James Gwartney & Charles Skipton
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
First page
Historical Perspective on the
Economic Growth of the Past
Two Centuries
15th
edition
Gwartney-Stroup
Sobel-Macpherson
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
First page
15th
Per Capita Income: The last 1000 years
•Income stagnated for the
800 years following year
1000, but growth has
exploded during the last
200 years.
•(Measured in 1990 dollars)
world per capita income
was $667 in 1820 – only
about 50% higher than year
1000. By 2003, however,
income had risen to $6,516
– 10 times the 1820 level.
•During the past 200 years,
the income growth of the
high-income industrial
countries (west) has been
even higher – nearly 20
fold.
$25,000
edition
Gwartney-Stroup
Sobel-Macpherson
GDP Per Capita
2003: $23,710
$20,000
West GDP per capita
$15,000
2003: $6,516
$10,000
World GDP per capita
1820: $1,202
$5,000
1820: $667
1000 1100 1200 1300 1400 1500 1600 1700 1800 1900 2003
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
First page
15th
Life Expectancy: The last 1000 years
•There is a pattern in the
life expectancy data that
is similar to that in per
capita income.
•Life expectancy at birth
for the world rose from
24 to 26 years between
1000 and 1820, but it
soared to 64 by 2003.
•Life expectancy in the
high-income industrial
countries (West) followed
a similar pattern.
edition
Gwartney-Stroup
Sobel-Macpherson
Life Expectancy
80
(at birth)
2003: 76
70
60
2003: 64
50
40
1820: 36
West life expectancy
30
20
10
World life
expectancy
1820: 26
1000 1100 1200 1300 1400 1500 1600 1700 1800 1900 2003
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
First page
Economic Growth, Production
Possibilities, & the Quality of Life
15th
edition
Gwartney-Stroup
Sobel-Macpherson
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
First page
15th
The Importance of Economic Growth
edition
Gwartney-Stroup
Sobel-Macpherson
• Economic growth is important because it is a necessary ingredient
for higher incomes and higher living standards.
• GDP is a measure of output and income. Growth of output is
necessary for the growth of income.
• Per capita GDP is the nation’s GDP divided by its population.
Growth of per capita GDP means more goods & services per person.
• In most cases, higher per capita GDP means that the typical person
has a better diet, improved health and access to medical services, a
longer life expectancy, and greater educational opportunity.
• Growth leads to more than just material goods. It also generally
leads a cleaner environment and more time for leisure and
recreation.
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
First page
15th
The Importance of Economic Growth
edition
Gwartney-Stroup
Sobel-Macpherson
Consumption
goods
•Economic growth makes
larger outputs possible.
B
•This can be illustrated by
an outward shift in the PPC
(production possibilities
curve).
A
PPC2025
PPC2015
•Economic growth means that
a larger quantity of goods and
services can be produced.
A
B
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
Capital
goods
First page
15th
The Rule of 70
edition
Gwartney-Stroup
Sobel-Macpherson
• Economic growth and the Rule of 70:
• Dividing 70 by a country’s average growth rate gives
the number of years required for an economy’s
income level to double.
• Example:
If the U.S. had a growth rate of 2.5%, how many
years would it take for the income level of the U.S.
to double?
70
= 28
2.5
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
First page
Impact of Economic Growth Rate
Differences Over a 30-Year Period
15th
edition
Gwartney-Stroup
Sobel-Macpherson
•Impact of growth rate
differences over 30 years:
•Note how a country growing
at a 4% annual rate will have
a substantially higher
income level than the others
30 years later.
– Annual Growth Rate –
•Here we illustrate how
countries with an initial
per capita income of
$10,000 differ after 30 years
for growth rates
of 0%, 1%, 2%, and 4%.
–––––– Per Capita Income Level after 30 years––––––
4%
$32,434
2%
1%
0%
$18,114
$13,478
$10,000
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
First page
Sources of Economic Growth
and High Incomes
15th
edition
Gwartney-Stroup
Sobel-Macpherson
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
First page
15th
Sources of Economic Growth
edition
Gwartney-Stroup
Sobel-Macpherson
• Sources of Economic Growth:
• Gains from trade
• Entrepreneurial discovery
• Investment in physical and human capital
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
First page
15th
Sources of Economic Growth
edition
Gwartney-Stroup
Sobel-Macpherson
• Gains from trade:
• Trade makes larger outputs possible because of
division of labor, specialization in areas of comparative
advantage, and application of mass production
techniques.
• The gains from trade will be greater when transactions
costs are lower and people are permitted to trade over
a larger market area.
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
First page
15th
Sources of Economic Growth
edition
Gwartney-Stroup
Sobel-Macpherson
• Entrepreneurial discovery:
• Discovery of improved products and lower cost production
methods is a driving force of economic growth.
• Technological improvement is scientific discovery while
innovation is its practical application and dissemination.
• Each of these play a role in the development of improved
products and better ways of doing things.
• Schumpeter referred to this process as “creative
destruction.”
• It is vitally important that entrepreneurs have a chance to try
out new ideas, but it is also important that resources are not
wasted on inefficient projects. In a market economy, profits
and losses perform these functions.
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
First page
15th
Sources of Economic Growth
edition
Gwartney-Stroup
Sobel-Macpherson
• Investment in physical and human capital:
• More and better machines and tools can enhance the
productivity of people.
• Education and training that improves the skill level of
workers will also increase output.
• Other things constant, countries that invest more will
tend to grow more rapidly. But, investment is costly;
it involves the sacrifice of current consumption.
• High investment rates do not guarantee rapid growth.
The investment must be channeled into wealth-creating
projects.
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
First page
15th
Questions for Thought:
edition
Gwartney-Stroup
Sobel-Macpherson
1. If a country has sustained growth of per capita income
of 5% annually, how many years will it take for income
to double?
2. List five new products that have replaced older products
and largely rendered them obsolete.
3. What is “creative destruction”? Explain in your own
words how it influences our living standards and the
quality of our lives.
4. In a market economy, what must an entrepreneur do in
order to be successful? How do the actions of successful
entrepreneurs influence economic growth?
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
First page
15th
Questions for Thought:
edition
Gwartney-Stroup
Sobel-Macpherson
5. What are the three major sources of economic growth?
Can you think of another major source of growth that
has significantly increased our living standards? If so,
what is it?
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
First page
The Institutional Environment
15th
edition
Gwartney-Stroup
Sobel-Macpherson
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
First page
The Institutional Environment
and Economic Growth
15th
edition
Gwartney-Stroup
Sobel-Macpherson
• Modern growth analysis stresses that institutions and
policies influence the realization of gains from trade,
discovery and dissemination of improved products and
production methods, and the level and productivity of
investment.
• Modern analysis builds on the work of Nobel Laureate
Douglass North and Peter Bauer. Other leading
contributors are Daron Acemoglu (MIT), Robert Barro
(Harvard), and Barry Weingast (Stanford).
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
First page
The Institutional Environment
and Economic Growth
15th
edition
Gwartney-Stroup
Sobel-Macpherson
• Economic growth is a complex process that generally
involves a combination of several interrelated factors.
• Counterproductive policies in one or two key areas can
substantially harm the overall performance of an
economy.
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
First page
What Institutions and Policies
Will Promote Growth?
15th
edition
Gwartney-Stroup
Sobel-Macpherson
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
First page
Key Elements of a Sound
Institutional Environment
15th
edition
Gwartney-Stroup
Sobel-Macpherson
• Institutional elements that are key to the growth process:
• a legal system that protects property rights and
enforces contracts even-handedly,
• competitive markets,
• access to money of stable value,
• minimal regulation,
• avoidance of high marginal tax rates, and,
• trade openness.
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
First page
15th
Modern Growth Analysis
edition
Gwartney-Stroup
Sobel-Macpherson
• Modern growth analysis stresses the importance of
institutions and policies.
• Consider how the six factors mentioned in the previous
slide will influence the gains from trade, discovery of
better ways of doing things, and investment.
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
First page
Key Element for Growth:
— Legal System
15th
edition
Gwartney-Stroup
Sobel-Macpherson
• A legal system that protects property rights and enforces
contracts even-handedly is necessary for the smooth
operation of markets.
• Private ownership provides people with a strong incentive
to develop and use resources wisely, innovate and
discover better ways of doing things, and to invest and
conserve for the future.
• In contrast, insecure property rights weaken the incentive
to invest and to engage in entrepreneurial activity.
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
First page
Key Element for Growth:
— Legal System
15th
edition
Gwartney-Stroup
Sobel-Macpherson
• If contracts are not enforced or if they are enforced in a
biased manner, transaction costs will be higher, trade will
be riskier, and the volume of trade will fall.
• The security of property rights is often undermined by
political instability, civil unrest, and war.
• In recent years, political instability has contributed to
the dismal economic performance of several nations,
including the Democratic Republic of Congo, Zimbabwe,
Haiti, Nicaragua, Russia, and Iraq.
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
First page
Key Element for Growth:
— Competitive Markets
15th
edition
Gwartney-Stroup
Sobel-Macpherson
• When markets are competitive, self-interested individuals
have a strong incentive to develop resources and provide
goods that are highly valued by others.
• In a competitive setting, producers must provide goods at
a low cost and serve the interests of consumers because if
they don’t, other suppliers will.
• The freedom to compete will encourage entrepreneurial
activity and provide producers with a strong incentive to
produce quality products at a low cost.
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
First page
Key Element for Growth:
— Monetary and Price Stability
15th
edition
Gwartney-Stroup
Sobel-Macpherson
• When the inflation rate is low and highly predictable, the
risks of exchange across time periods is reduced.
• In contrast, high and variable rates of inflation generate
uncertainty and thereby increase the cost of exchanges
across time periods and reduce investment. Thus, the
gains from trade, entrepreneurial discovery, and
investment are diminished.
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
First page
Key Element for Growth:
— Minimal Regulation
15th
edition
Gwartney-Stroup
Sobel-Macpherson
• Regulation is a blunt instrument and it often generates
harmful secondary effects.
• Regulations that restrict entry and interfere with voluntary
exchange will reduce the competitiveness of markets and
the volume of trade.
• Regulations that favor some at the expense of others will
encourage rent-seeking and political corruption.
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
First page
Key Element for Growth:
— Avoid High Marginal Tax Rates
15th
edition
Gwartney-Stroup
Sobel-Macpherson
• High marginal tax rates reduce the incentive of people to
earn, invest, and engage in other productive activities.
• High taxes also reduce efficiency by driving productive
activity into the underground economy, encouraging tax
avoidance, and even inducing highly productive persons to
move to other countries.
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
First page
Key Element for Growth:
— Trade Openness
15th
edition
Gwartney-Stroup
Sobel-Macpherson
• Like domestic trade, international trade is mutually
advantageous.
• With trade, countries can specialize in the production of
goods they can produce economically and trade for those
that would be costly to produce domestically. As a result,
joint output can be expanded and both trading partners
can consume a larger, more diverse bundle of goods.
• Tariffs, quotas, and other trade restrictions reduce the
gains from specialization and international trade and
thereby reduce income below its potential.
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
First page
Key Element for Growth:
— A Summary
15th
edition
Gwartney-Stroup
Sobel-Macpherson
• What can governments do to promote prosperity?
• Governments promote economic progress when they
protect individuals & their property, enforce contracts
impartially, provide access to money of stable value,
avoid high taxes and excessive regulation, and foster
competitive markets and free international trade.
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
First page
Other Factors That May Influence
Growth and Income
15th
edition
Gwartney-Stroup
Sobel-Macpherson
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
First page
15th
Other Views on Growth
edition
Gwartney-Stroup
Sobel-Macpherson
• Through the years, economists have developed several
theories about why some countries grow and others
stagnate. While some are valid, history has shown others
to either be fallacious or incomplete.
• This section will consider some of these alternative views.
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
First page
15th
Population and Growth
edition
Gwartney-Stroup
Sobel-Macpherson
• In 1798, economist Thomas Malthus argued that if income
rose above subsistence level, this would trigger a
population boom that would drive income back down to
subsistence level.
• Malthus argued that population would grow exponentially
(e.g. 1, 2, 4, 8, 16, etc.) while the resources required to
expand production would grow only linearly (1, 2, 3, 4,
etc.). Therefore, any increase of income above subsistence
would soon be eliminated by rapid population growth.
• Malthus was wrong because he did not understand the
importance of technological improvements, innovation,
and entrepreneurial discovery.
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
First page
15th
Natural Resources and Growth
edition
Gwartney-Stroup
Sobel-Macpherson
• There is a tendency to think that income differences across
countries are largely the result of natural resources.
• While resources may give a country an advantage, the linkage
between resources and income is weak.
• Many high income countries have few natural resource …
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