Ch. 18 Reflection: Open Economy: Basic Concepts

Ch. 18 Reflection: Open Economy: Basic Concepts

            Three things that I found interesting regarding Chapter 18 were, the “In the News” article, the “Case Study” about the US trade deficit and the definition and theory of purchasing-power parity. Specifically, the “In the News Article” spoke about the pros and cons to the Trans-Pacific Partnership. One particular quote stood out to me from Joseph A. Massey as former US trade negotiator. He said, “the biggest threat to jobs in the United States isn’t free-trade agreements; its domestic policy”. I found that interesting since there is so much talk about US jobs moving overseas regarding TPP. I wonder which domestic policies Massey is referring to? 

             As far as the “Case Study” goes, I found the opening line particularly disturbing, calling the United States, “the world’s largest debtor”. I know from a personal finance standpoint that it’s not a good idea to become the largest debtor period. I also found it interesting that the experts disagree that citizens’ welfare in increase by decreasing the national trade deficit. In other words, economists around the globe believe that running a trade deficit can make citizens better off. 

            Lastly, I found the purchasing-power parity particularly interesting especially its limitations. Its definition says it’s “a theory of exchange rates whereby a unit of any given currency should be able to buy the same quantity of goods in all countries”. However, when discussing the limitations, the text explains that exchange rates “do not always move to ensure that a dollar has the same real value in all countries all the time”. This is further explained by the “Big Mac” Hamburger Standard. In some cases that actual exchange rate is less than the predicted exchange rate and in some cases more, but it’s never exactly the same real value in both countries. This plays into the idea of arbitrage and when it could be worthwhile to buy goods in one place and sell them in another or buy one currency hoping that it appreciates over time.

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