AP Macro Unit 3

International Trade

comparative advantage

comparative advantage

a person/country can produce a product at a lower opportunity cost than other people/countries, basis of specialization and trade, coined by David Ricardo

absolute advantage

a person/country is the most efficient producer of a product, meaning they produce more output with given resources, coined by Adam Smith

opportunity cost ratio

equivalency showing the number of units of 2 products that can be produced with the same resources

principle of comparative advantage

a person/nation will benefit by specializing in goods with lower opportunity costs than its trading partner, then trade for other desired products

terms of trade

rate at which units of one product can be exchanged for another, exchange ratio

trading possibilities line

shows amounts of 2 products an economy can obtain by specializing in one product and trading to obtain the other product

world price

international price of good/service, determined by world supply and demand

domestic price

price of good/service in a country, determined by domestic supply and demand

export supply curve

upsloping curve showing amount of product domestic firms will export at each world price above domestic price

import demand curve

downsloping curve showing amount of a product an economy will import at each world price below domestic price

equilibrium world price

price of internationally traded product when quantity demanded by importers equals quantity supplied by exporters

tariffs

tax imposed by a nation on an imported good

revenue tariff

tariff designed to generate income for the federal government

protective tariff

tariff imposed to shield domestic producers from competition of foreign producers

import quota

limit on quantity of a good that may be imported for a period of time

voluntary export restriction

voluntary restrictions by nations/firms on their own exports to a foreign nation to avoid enactment of trade barriers by the foreign nation

export subsidy

govt payment to a domestic producer to enable the firm to reduce the price of products to foreign buyers, so they can increase exports

dumping

sale of a product in a foreign country at very low prices below domestic price, attempt to collapse domestic competitors and gain a monopoly

General Agreement on Tariffs & Trade (GATT)

international agreement to eliminate import quotas, reduce tariffs, and give each other equal treatment

World Trade Organization (WTO)

oversees provisions of trade agreements, resolves disputes, holds negotiations

European Union (EU)

eliminated tariffs and quotas among european nations, established common economic policies

eurozone

established euro as common currency among EU members

NAFTA

established free trade zone between US, Canada, and Mexico

Trade Adjustment Assistance Act

US law to provide economic and health support to workers displaced by imports or relocations of US firms

offshoring

shifting work of domestic workers to foreign workers to save money

balance of payments

• summary of all financial transactions that take place between individuals, firms, and govts of different nations in one year

• should amount to zero between current and capital & financial account

current account

records exports and imports of goods/services, net investment income, and net transfers

net investment income

difference between foreign payments to US for services of US capital abroad, and US payments to foreign capital

net transfers

exports of goodwill (foreign aid) and imports of ‘thank you notes’

balance on goods and services

records exports and imports of goods/services minus imports of goods/services in a year

balance on current account

records exports minus imports plus net investment income and net transfers, adds all transactions on current account

capital & financial account

records debt forgiveness and purchases of assets to and from foreign nations

balance of capital & financial account

sum of capital account balance and financial account balance

flexible (floating) exchange rate system

rate of exchange determined by international supply/demand, can rise and fall, no govt intervention

fixed exchange system

govt determines exchange rates, adjusts economy to maintain rates, no rising and falling

purchasing power parity theory

if countries have flexible exchange rates then the exchange rate of nations’ currencies will adjust to equal each other

speculation

people buy and sell currencies to resell and repurchase for profit

official reserves

foreign currencies owned by a central bank of a nation, includes foreign bonds

foreign exchange (FX) reserves

stockpiles of foreign currency by central bank, obtained when selling local currency

sterilization

changes in reserve ratios to offset changes in domestic money supply

exchange controls

restrictions on quantity of foreign currency demanded by citizens

balance of payments deficit

decline in a country’s FX reserves

balance of payments surplus

net increase in a country’s FX reserves

currency interventions

govt buying and selling own or foreign currencies to alter international exchange rates

managed floating exchange rate

exchange rate allowed to change with supply & demand, but sometimes altered by govt selling/buying currencies