International Economics: Trade and Finance Lecture Notes

This flashcard set covers the fundamental principles of international economics, including trade models (Ricardian, Heckscher-Ohlin, Gravity), trade policies (tariffs, quotas, subsidies), and international finance (exchange rates, interest parity, and purchasing power parity).

What are the three main ways nations interact through international economics?

Nations interact through trade of goods and services, flows of money, and investment.

How has the importance of international trade changed for the U.S. economy in the past 60 years?

International trade has roughly tripled in importance compared to the economy as a whole.

Which five countries were the largest trading partners with the United States in 2019?

Mexico, Canada, China, Japan, and Germany.

Write the mathematical expression for the gravity model of trade as presented in the text.

$T_{ij} = A \times \frac{Y_i \times Y_j}{D_{ij}}$, where $T_{ij}$ is the value of trade, $A$ is a constant, $Y_i$ and $Y_j$ are the respective GDPs, and $D_{ij}$ is the distance between countries.

According to the gravity model, what is the predicted effect of a $1\%$ increase in distance between countries?

It is associated with a decrease in the volume of trade of $0.7\%$ to $1\%$.

What was the estimated equivalent physical distance of the U.S./Canadian border's restriction on trade?

The border is equivalent to adding an extra $1,500$ to $2,500\,\text{miles}$ of physical distance.

In the Ricardian model, what is a unit labor requirement ($a_{Li}$)?

The constant number of hours of labor required to produce one unit of output.

What determines the pattern of trade in international economics according to the Ricardian model?

Comparative advantage, not absolute advantage.

What is the inequality representing the Production Possibility Frontier (PPF) for a two-good (cheese and wine) home economy?

$$a_{Lc} \times Q_c + a_{Lw} \times Q_w \text{ } \le \text{ } L$$

Under the Ricardian model, what is the formula for the opportunity cost of cheese in terms of wine?

$$\frac{a_{Lc}}{a_{Lw}}$$

What is the Stolper-Samuelson theorem?

If the relative price of a good increases, then the real wage or rental rate of the factor used intensively in the production of that good increases, while the real wage or rental rate of the other factor decreases.

Define the Heckscher-Ohlin theorem.

The country that is abundant in a factor exports the good whose production is intensive in that factor.

What are the 'terms of trade'?

The price of exports relative to the price of imports.

How does export-biased growth affect a country's terms of trade?

Export-biased growth reduces a country's terms of trade, reducing its welfare and benefiting foreign countries.

What is the difference between external and internal economies of scale?

External economies of scale occur when the cost per unit depends on the size of the industry, while internal economies of scale occur when the cost per unit depends on the size of the firm.

What is 'dumping'?

The practice of charging a lower price for exported goods than for goods sold domestically.

How is a multinational corporation defined in the context of stock ownership?

A firm is classified as a multinational corporation if it invests at least $10\%$ of the stock in a subsidiary in another country.

What are 'quota rents'?

The extra revenue collected by quota license holders when a government uses a quota instead of a tariff to restrict imports.

What is the formula for the uncovered interest parity (UIP) condition?

$$R_{\$} = R_{€} + \frac{E^e_{\$/€} - E_{\$/€}}{E_{\$/€}}$$

What is the formula for covered interest parity (CIP)?

$$R_{\$} = R_{€} + \frac{F_{\$/€} - E_{\$/€}}{E_{\$/€}}$$

Define the Law of One Price.

The same goods in different competitive markets must sell for the same price when transportation costs and barriers are not important.

What is the Fisher effect?

A rise in the domestic inflation rate causes an equal rise in the interest rate on deposits of domestic currency in the long run ($R_{\$} - R_{€} = \text{π}^e_{\$} - \text{π}^e_{€}$).