E: International Trade and Capital Flows

**Gross domestic product** (GDP) measures the 

**market value** of goods and services from production factors such as labor and capital **in a country** within a given period of time

Gross national product (GNP) measures the

market value of all production activities carried out strictly by the **citizens** of a country both **within and outside the country**

XXX is a more accurate measure of a state’s income than XXX

GNP

GDP

XXX is based on the **location of ownership,** whereas XXX is based on the **geographical area of production**

GNP

GDP

To get the GNP of a nation, simply take GDP and

add the net property income from foreigners

Which of the following statements is the most accurate regarding both GDP and GNP? They both:


1. are based on the location of ownership.
2. consider income generated from foreign sources.
3. measure depreciation and indirect taxes in the calculation of income.

3

Benefits of international trade

1. **High prices for exports** and **lower prices for imports** are a net gain for a country
2. Trade liberalization **increases real GDP**
3. Development of high-quality and more effective institution policies **encourages domestic innovations**
4. Global competition motivates companies to become **more efficient** because they face an open field
5. Consumers access a **variety of goods and services at lower prices**
6. Increase in competition leads to a **fall in monopoly power**
7. Trade encourages **efficiency**

costs of international trade

1. Loss of jobs and income inequality causes by competition
2. Less efficient firms exit the market
3. An increase in imports causes domestic industries to compete against imports

A country producing goods at a lower cost than its trading partner has an

absolute advantage

a country producing a good at a lower relative opportunity cost than its trading partner has a

comparative advantage

Which of the following statements is the *most accurate*?

A. Comparative advantage implies absolute advantage.

B. Comparative advantage requires absolute advantage.

C. Comparative advantage does not require absolute advantage.

C

The Ricardian model suggests that

a country without absolute advantage in international trade could still benefit from trade through comparative advantage

According to the Ricardian model, XXX is responsible for the differences in labor productivity

technology

The Hecksher-Ohlin model states that

nations exporting products use their cheap and abundant factors of production and import products that consume scarce factors

what model of trade is a mathematical model?

The Heckscher-Ohlin model

if country X’s capital and land are locally available but labor is scarce, it will have a comparative advantage in goods that require

a lot of capital and land but little labor

The main types of trade restrictions are:

1. Tariffs
2. Licenses
3. Import Quotas
4. Voluntary Export Restraints (VER)
5. Local Content Requirement

tariffs

tax that imposes additional costs on imports

licenses

granted to a business by the government. Increases prices.

import quota

restricts the amount of a specific good that can be imported

Voluntary Export Restraints (VER)

created by the exporter, restrains the amount that can be exported (similar to an import quota)

local content requirement

percentage of goods must be made within a country

the most obvious difference between trade restrictions and capital restrictions is that

trade restrictions **limit access to a wide range of goods and services**, while capital restrictions **limit access to financial markets**

Who benefits/loses from restriction controls and how?


1. Government
2. Industries
3. Consumers

1. Benefits from revenue
2. Benefits from reduced competition
3. Lose because higher prices

Trading bloc

a number of nations within a geographical area that guard themselves against imports and non-members

common markets

A number of nations imposing few or no duties on trade with one another, and a common trade with other nations 

economic unions

a type of trade bloc that is constituted of a common market with a customs union

Motivations for trading blocs, common markets and economic unions:

1. Getting into new international markets
2. Acquiring knowledge
3. Increasing available resources
4. Reducing future competition
5. Gaining competitive advantage
6. Suppressing trade barriers

Advantages of trading blocs, common markets and economic unions

1. Free trade
2. Economies of scale
3. Job creation
4. Protection
5. Easy access to market and trade creation

If Columbia and Ecuador have free trade between themselves and a common policy excluding non-members from this free trade, then they are a part of a:


1. Customs union.
2. Free trade area.
3. Common market.

1

Capital restrictions are the measures that governments or central banks take to control

the flow of foreign money in and out of a country’s economy

The main objective of capital restrictions is to

help maintain a balance of unstable exchange rates resulting from extremely volatile short-term capital flows

Which of the following trade controls is likely to cause the biggest economic gain for a country that is importing?


1. Tariffs
2. Import quotas
3. Export subsidies

1

why would tariffs likely cause the biggest economic gain for a country that is importing?

Imposing tariffs will lead to an increase in the government’s revenue

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The balance of payments consists of three broad groups:

1. Current account
2. Financial account
3. Capital account

current account

* inflow and outflow of goods and services
* public and private gains on investment

Generally, the current account is decomposed into four sub-accounts, namely:

1. Merchandise trade
2. Services
3. Income receipt
4. Unilateral transfer

the merchandise trade

all commodities and manufactured goods bought, sold, or given away

income receipt

income derived from the ownership of assets

unilateral transfer

* earnings sent by individuals who are based abroad to their respective countries
* foreign aid provided by other countries

The capital account includes

recordings of international capital transfers

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The two sub-accounts included in the capital account are:

1. **Capital transfers** 
2. **Sales and purchase of non-produced**, **non-financed assets** 

\
The financial account is sub-divided into:

1. Financial assets abroad
2. Foreign-owned assets

When a country is faced with trade deficits, it’s likely to experience a XXX in its reserves and a XXX in its currency

fall

depreciation

An increase in imports above the value of exports (imports > exports) affects the balance of payments. It should, all other things being equal, XXX the domestic country's currency

depreciate

What does the IMF do?

lends foreign currencies to its members to aid them during periods of crisis or periods of important external deficits

what is the main role of IMF?

to ensure the stability of the international monetary system

How is the IMF able to carry out its role?

the many currencies contributed by members

What does the WTO do?

Regulate cross-border trade relationships across the globe

What is the World Bank Group’s main objective?

to enhance a good environment for normal economic growth and help developing countries curb poverty