Studied by 4 people
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
Note
Flashcard