Global Economics

international trade benefits

• lower prices

• grater choice

• increased competition

• a source of foreign exchange

advantage types

1. Absolute advantage

   • can produce more goods/services than other countries

   due to: resources, technology, workforce

2. Comparative advantage

   • can produce the same amount of output at a lower opportunity cost

limits:

• ignores transport costs

• overlooks externalities

• overspecialization: vulnerability to shocks-dependency

Tariffs and quotas, effects on different sectors

tax imposed on goods and services-a way to support domestic firms

effect on:

Consumers: prices go up-less consumer choice

Producers: face less competition-sell more-better off

Market: less total trade-efficiency and welfare fall

Governments: short term benefit, other countries might complain, start a trade war

Quotas:

limits how much of a good/service can be imported

same effects except governments do not generate tax revenue

administrative barriers

measures that restrict trade, but can protect national interests

ex. licensing requirements, complex documents

Free trade vs protectionism

For trade protection

• national security

• protect domestic jobs

• prevent unfair competition

• preserve cultural identity

For free trade

• lower price for consumers, more choice

• greater efficiency: focus on comparative advantage

• international cooperation

economic integration types

-countries cooperating to reduce trade barriers

1. preferential trade agreement

   • deal between countries giving them special access for trading

   • bilateral=2 countries, multilateral=2+

2. Trading blocs

   • groups of countries joining together to reduce trade barriers

   • no tariffs, free trade areas (FTA)

3. Monetary union

   • group of countries sharing a common currency ex. EU union

   • single central bank

exchange rate types

-shows how much one currency is worth compared to another

1. Floating exchange rate: value of currency changes based on supply and demand in the forex market

   • appreciates: value increases compared to other countries

   • depreciates: value decreases compared to other countries

   factors:

   • foreign demand: foreign D🔼=D🔼-USD will appreciate

   • domestic demand: domestic D🔼=S🔼-USD will depreciate

2. Fixed: currency kept at set value by buying, selling currencies

   • Devaluation: deliberately lowering the value

     • exports are cheaper and more competitive-reduces trade barriers

   • Revaluation: increasing the value of a currency

     • to control inflation, reduce trade surplus

     • reflects strong economic performance

3. Managed: central bank intervenes to influence the exchange rate-no specific target, but range

   • Overvalued currencies: value above equilibrium in the long run

     • imported goods are cheaper than what they should be-exports become expensive

   • Undervalued currencies: below equilibrium in the long run

     • imported goods more expensive than should be-exports become cheaper

balance of payments credit vs debit

-a record of the value of all transactions between a country and the rest of the world

+Credit item: payments received from foreign consumers, firms

-Debit: payments given to foreign consumers, firms

what BOP consists of

1. Current account

   • trade goods

   • trade in service

   • income

   • current transfers (transfer of money with no goods/services)

2. Capital account

   • non-financial, asset transfers

   • (natural resources, intangible assets)

3. Financial account

   • direct investment (property, land)

   • portfolio investment (bonds, stocks, shares, bonds)

   • reserve assets (government reserves)

account surplus, account deficit and how to fix it

surplus: credit>debit

deficit: credit<debit

how to fix deficit:

• reducing imports-boost exports

• supply side policies

• improve a country’s competitiveness

marshall lerner condition

states a currency depreciation will improve the trade balance only if PED exports+PED imports>1

the J curve effect

when a country devaluates its currency balance gets worse before it gets better

why:

1. short run: more money going out than coming in-country spends more than it earns = trade deficit gets worse

2. long run: Other countries start buying more exports because they’re cheaper,

   • exports go up-the country earns more and spends less = trade balance improves