Studied by 18 peopleDefine comparative advantage
The country that can produce something more efficiently than the compared country
Define terms of trade
ratio of a country’s exports vs imports
Define gains from trade
the net benefit a country can earn through trade
Explain comparative advantage using opportunity cost
comparative advantage can be explained with opportunity cost because the country with the smaller opportunity cost should produce the good or service
Demonstrate how specialization and trade allow consumption possibilities to exceed production possibilities
Other countries may have access to more or better natural resources including human labor, techniques, wage options
Determine the terms of trade
Can be shown with a ratio of terms such as 1 bike = 1/2 shoes.
Output based problems = other goes over
Input based problems = other goes under
Define tarrifs
An extra tax placed imported goods (discourages imports)
Define quotas
Import or export restrictions on quantities that can be bought or sold by a country (discourages trade from economic or environmental reasons)
Define regulations to limit trade
Regulations usually restrict how much a supply can be made or consumed (usually safety or environmentally related
Describe policies that are intended to protect the domestic economy from the effects of international trade
Tariffs and quotas are meant to protect domestic firms and workers, leads to higher prices
Explain the effects of tariffs, quotas, subsidies on domestic production and the prices domestic consumers pay
As supply is less, the prices will rise from tariffs and quotas due to lower amounts of resources and supply. Subsides use tax money to bring the prices down and supplier’s cost to produce goods and services
Explain the arguments for and against protectionist policies.
In Favor: less use of foreign products where cheaper wages exist, allows domestic firms to compete despite required higher wages
Against: leads to higher prices from domestic consumers, less disposable income and a need to work more, less domestic demand
Define current account
All imports/exports, interest payments, foreign aid (transfer payments)
define capital accounts
purchases of real estate, businesses, stocks, and bonds (changes in ownership)
Define balances of trade
differences in value between a country’s imports and exports
Define balance of payments
record of all transactions between the residents of one nation to another
What is the difference between debit and credit
Debit is money going out. Credit is money coming in.
Explain how international transactions affect the balance of trade and the balance of payments
the rate or demand that people from one nation purchase good or services from another country can lead to a lopsided balance of trade (USA and China)
Explain how the international value of the dollar is determined
Changes in taste (consumer preferences)
Changes in relative incomes
Changes in relative prices (inflation)
Changes in relative interest rates (inflation by country’s central bank)
Speculation of future changes in value of money
Explain the effects of monetary and fiscal policy on foreign exchange markets
When a country’s central bank adjust interest rates the inflation levels go up or down, fiscal policy also aims to adjust inflation. Can affect speculation demand for foreign currency as well, people dont like to convert money to an unpredictable economy (Brazil had 1000% inflation in one year)
Explain the effects of changes in the international value of the dollar on foreign trade
When the dollar is strong: US import firms do well, exports do poorly. Think about purchasing power.
Explain the effects of changes in net exports on domestic aggregate demand
Net exports can lead to higher domestic aggregate demand since Americans have more disposable income, or if it’s severe with trade deficits can lead to lower AD since less American are employed therefore less money
Define exports
the sale of goods and services created by domestic producers and sold to foreigners
Define imports
the purchasing of goods and services created by foreigners
define Net exports
Exports - imports, the difference between a nation’s exports of goods and services and its imports of goods and services
Define trade deficit
exporting less than is imported (trade gap)
Define trade surplus
Exporting more than is imported. China has a huge trade surplus with the U.S.
What is the balance of payments
Summary of all international transactions within a given year prepared in the domestic country’s currency. It has two accounts, the current account and the financial account
What is current account
Measures the international trade in goods and services, investment income and net transfer payments
What is the Financial account
Measures the international trade of financial assets like stocks, bonds, and real estate
Net capital inflow
The difference between the amount of money coming into a country to buy domestic assets and the amount of money leaving a country to buy foreign assets.
What is the difference between capital inflows and capital outflows
Inflows looks at money coming into the country to buy domestic assets and outflows looks at money going out of the country to buy foreign assets
What kind of relationship do interest rates and capital inflows
positive (interest rates go up, capital inflow goes up)
What kind of relationship do interest rates and capital outflows
inverse (interest rates go up, capital outflow goes down)
Define appreciation
the increase of value of a country’s currency relative to a foreign country
Define depreciation
the decrease of value of a country’s currency relative to a foreign country
What happens to the value of the U.S. dollar if Americans want more Japanese products
American supply more dollars to get yen. the U.S. dollar depreciates. causes rightward shift of supply line.
What happens to the value of pesos relative to the US dollar if interest rates in Mexico increase
Americans demand more Mexican financial assets and Mexicans supply less pesos because they can earn a higher rate of return at home. Leftward shift of demand rightward shift of supply
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Flashcard