Chapter 13-15 (Trade, finance & Globalisation)

Comparative advantage (definition)

A country enjoys comparative advantage over another when it can produce a good with lower opportunity cost in terms of other goods forgone

State the Principle of Comparative Advantage

Trade can benefit all countries, if each country specialises in the production of goods in which it has the lowest opportunity cost

Factor endowments (meaning)

The amount of land and raw material deposits, climate, population size and demography, as well as capital stock of a country

Dumping (definition) [for eval]

When producers sell their goods abroad at a price below the marginal cost of production

Economic integration / cooperation (definition)

Involves agreements between countries that usually include the elimination of trade barriers and the increased flow of labour and investments

Economic globalisation (definition)

Phenomenon where economies are becoming increasingly integrated and more interdependent. This is achieved by increased economic cooperation between countries

Balance of payments (BOP) (definition)

A comprehensive record of the country’s international receipts and international payments between residents and government of a country and the rest of the world, over a period of time usually a calendar year

Credits (meaning)

Receipts of money from abroad (+)

Debits (meaning)

Payments of money abroad (-)

What does the current account record?

Receipts and payments from exports and imports of goods and services as well as income flows and transfers between countries over the course of a year

What does the visible trade account record?

Imports and exports of physical goods from commodities to manufactured goods

What does the invisible trade account record?

Imports and exports of services

What do Unilateral transfers record?

All gifts and remittances sent abroad by local residents to their friends and relatives abroad and gifts and remittances received from abroad

Favourable current account (meaning)

The combined receipts exceeds payments

Balance of trade (meaning)

The balance between export and import values of goods and services

What does the capital and financial account record?

Flow of funds into and out of the country and is associated with changes in ownership of assets

What are short-term capital flows?

Liquid funds moving among financial centers searching for higher interest rates and safety of capital (hot money)

What are long-term capital flows?

Both Foreign Direct Investments (FDI) and Portfolio Investments

FDI (definition)

The acquisition or sale of assets

Portfolio investments (definition)

Changes in the holding of paper assets

BOP equilibrium (definition)

The situation where international payments equal international receipts

Worsening BOP (meaning)

When the BOP experiences a fall regardless of it being a surplus or a deficit

Foreign exchange (meaning)

The trading of one country’s currency for another’s currency

State the Purchasing Power Parity (PPP) Theory

The foreign exchange rate is related to the relative purchasing power of the 2 currencies in their respective countries