ECO212:Test#4

What is comparative advantage?

The ability to produce a good at a lower opportunity cost.

If the world price is higher than the domestic price, what happens?

The country becomes an exporter.

If the world price is lower than the domestic price, what happens?

The country becomes an importer.

Who benefits in an exporting country?

Producers benefit and consumers lose.

Who benefits in an importing country?

Consumers benefit and producers lose.

What happens to total surplus with trade?

Total surplus increases.

What is a tariff?

A tax on imports.

What is a quota?

A limit on the quantity of imports

How do tariffs affect consumers?

Consumers are worse off.

How do tariffs affect producers?

Producers are better off.

How do tariffs affect the government?

The government gains revenue.

What is deadweight loss?

A loss of total surplus due to inefficiency.

What happens to total surplus with a tariff?

Total surplus decreases.

What are net exports (NX)?

Exports minus imports.

What is a trade surplus?

When net exports are greater than zero.

What is a trade deficit?

When net exports are less than zero.

What is net capital outflow (NCO)?

Domestic purchases of foreign assets minus foreign purchases of domestic assets.

What is the key identity between NX and NCO?

NX = NCO.

What is foreign direct investment (FDI)?

Buying or creating a business in another country.

What is foreign portfolio investment?

Buying stocks or bonds in another country.

What is the nominal exchange rate?

The price of one currency in terms of another.

What is the real exchange rate?

The price of domestic goods relative to foreign goods.

What does appreciation mean?

The currency becomes stronger

What does depreciation mean?

The currency becomes weaker.

What happens to exports when the dollar appreciates?

Exports decrease.

What happens to imports when the dollar appreciates?

Imports increase.

What determines the demand for dollars?

Net exports (NX).

What determines the supply of dollars?

Net capital outflow (NCO).

What happens when demand for dollars increases?

The dollar appreciates.

What happens when supply of dollars increases?

The dollar depreciates.

What is national saving (S)?

Income minus consumption minus government spending (Y − C − G).

What is the key identity for saving?

S = I + NCO.

What happens when saving increases?

Interest rates decrease.

What happens when interest rates decrease?

Net capital outflow increases.

What happens when net capital outflow increases?

Net exports increase.

What is the effect of a government budget deficit on saving?

Saving decreases.

What is the effect of a budget deficit on interest rates?

Interest rates increase.

What is the effect of a budget deficit on net capital outflow?

Net capital outflow decreases.

What is the effect of a budget deficit on the dollar?

The dollar appreciates.

What is the effect of a budget deficit on net exports?

Net exports decrease.

What is capital flight?

A large movement of funds out of a country.

What does capital flight do to net capital outflow?

It increases net capital outflow.

What does capital flight do to the supply of dollars?

It increases the supply of dollars.

What happens to the dollar during capital flight?

The dollar depreciates.

What happens to net exports during capital flight?

Net exports increase.

What happens to long-run growth during capital flight?

It decreases.

Do tariffs and quotas change net exports in the long run?

No, they do not.

Why don’t trade policies change net exports in the long run?

Because exchange rates adjust.

net capital outflow (NCO)

The purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners.

net exports (NX)

The value of a country’s exports minus the value of its imports.

foreign direct investment (FDI)

Investment where a domestic resident actively controls or manages a business in another country (like building or buying a company).

foreign portfolio investment

Investment in foreign financial assets like stocks or bonds without controlling the business.

If foreigners buy more U.S. assets, what happens to U.S. net capital outflow?

decreases

Which of the following increases U.S. net capital outflow?

Americans buy foreign stocks

If U.S. interest rates rise, what happens to net capital outflow?

decreases

If a country imports more than it exports, it has:

trade deficit

If the dollar appreciates, what happens to net exports?

decrease

Which of the following increases net exports?

Foreigners buy more U.S. goods

Which of the following is foreign direct investment?

Building a factory in another country

A German company opens a plant in the United States. This is:

foreign direct investment in the U.S.

What is the key feature of foreign direct investment?

ownership/control of business

Which of the following is foreign portfolio investment?

Buying foreign stocks

A U.S. citizen buys bonds from a Japanese company. This is:

foreign portfolio investment

Foreign portfolio investment differs from FDI because it:

does not involve control of a business

FDI

control (factory, business)

Portfolio

paper (stocks, bonds)