Macro 20, 21, 6

Trade Deficit

Occurs when imports exceed exports. US has a trade deficit in goods.

Trade Surplus

Occurs when exports exceed imports. US has a trade surplus in services.

Principal US exports

chemicals, agricultural products, consumer durables, semiconductors, and aircraft.

Principal US imports

petroleum, automobiles, metals, household appliances, and computers.

Who is the united states most important trading partner?

Canada

What is the US trade deficit with china?

315 billion dollars

What does the US lead the world in with relation to trade?

combined volume of imports and exports

What percentage of the worlds exports does the United States provide?

8.1%

Why is China good at producing labor-intensive goods?

Because they have abundant and cheap labor

What are land-intensive goods and what is an example of a country that can produce them cheaply?

goods that require a lot of land such as beef, wool, and meat. Australia is good at producing these types of goods.

What is a capital-intensive good and what countries are good at producing these?

goods that require a lot of capital such as airplanes, automobiles, agricultural equipment, machinery, and chemicals. The Unites States and Germany are able to do this easily.

Absolute Advantage

the ability to produce a good using fewer inputs than another producer

Comparative Advantage

the ability to produce a good at a lower opportunity cost than another producer

opportunity-cost ratio

an equivilancy that shows what can be produced with the same resources, domestic exchange ratio.

Self-Sufficiency Output Mix

The output that a country will produce on its PPC if it is isolated and self sufficient from another.

What is the most important factor in determining whether or not nations can gain from specialization and trade?

Comparative Advantage, Absolute Advantage is irrelevant in this case

principle of comparative advantage

ability to produce a good or service at a lower opportunity cost than others can produce it, countries trade and specialize in the good they have comparative advantage in thus increasing their total output.

terms of trade

A country will only trade if it can gain by trading

trading possibilities line

shows the amounts of the two products that a nation can obtain by specializing in one product and trading for the other.

greater output

Specialization according to comparative advantage results in a more efficient allocation of world resources.

gains from trade

the difference between the amount of output gained from trade and self sufficiency

What is the effect of increasing opportunity costs on a countries trade?

Rising opportunity costs cause less-than-complete specialization.

What are the benefits of free trade?

Free trade based on comparative advantage can achieve a more efficient allocation of resources and a higher level of material well-being.

world price

the price that equates the quantities supplied and demanded globally.

domestic price

the price that would prevail in a closed economy that does not engage in international trade.

US Export supply

If the world price exceeds the domestic price a country will produce a quantity at the world price, creating a surplus of which it will export.

export supply curve

an upward sloping line representing the amount of exports that the US will supply at given prices.

import demand

If the world price is below the domestic equilibrium price, countries will produce at this level creating a shortage of which it will import the quantity of this shortage.

Import Demand Curve

a downsloping curve representing the inverse relationship between world price and quantity demanded of imports.

Where does international equilibrium occur?

In a two country model, this happens when one nations import demand curve intersects another nations export supply curve.

Tariffs

excise taxes or duties on the dollar values or physical quantities of imported goods.

revenue tariff

tax on imports used primarily to raise government revenue without restricting imports.

protective tariff

implemented to shield domestic producers from foreign competition.

import quota

a limit on the quantities or total values of specific items that are imported in some period.

nontariff barrier

a nontax measure imposed by a government to favor domestic over foreign suppliers

voluntary export restriction

foreign firms "voluntarily" limit the amount of their exports to a particular country.

export subsidy

government payment to a domestic producer of export goods and is designed to aid that producer.

Decline in consumption from tariffs

the price of DVD players for example will go up if a tariff is imposed on imports which will prompt consumers to buy less DVD players.

Increased domestic production from tariffs

When a tariff is imposed domestic producers are able to enjoy a higher price and thus expand their output, however this takes away from resources that could be put to more efficient domestic industries.

Decline in imports from tariffs

As a result of a tariff although price increases the difference between the new price and the old world price goes to the government and the price for foreign producers remains the same while the volume falls.

Tariff revenue from imports

Total revenue from a tariff comes from multiplying the tariff per unit by the volume imported.

What is a massive indirect effect of tariffs?

Tariffs shift resources in the wrong direction by decreasing the amount of US exports purchased which cuts production of efficient industries with comparative advantage while increasing production of inefficient industries with no comparative advantage which hurts the worlds real output.

What is the difference between a tariff and quota in terms of economic effect?

tariffs generate revenue for the domestic government while quotas transfer this revenue to foreign producers.

What are the three ways that protection raises the price of a product?

The price of the imported product goes up; the higher price of imports causes some consumers to shift their purchases to higher-priced domestically produced goods; and the prices of domestically produced goods rise because import competition has declined.

Military self-sufficiency argument

An argument for protective tariffs that argues that producers of military goods should receive protection in order to preserve national security.

Diversification-for-stability argument

Countries that have highly specialized economies could be effected by changes in demand and supply in the world economy which could cause their domestic income to drastically decreased, protective measured could help stabilize these economies.

Infant industry argument

An argument that industries that are relatively new in a country should be protected so that they can become more efficient and economically mature, however tariffs are usually not the way to do this.

Dumping

Selling goods in another country below market prices

antidumping duties

duties that must be paid by firms as a punishment for engaging in unfair price competition

Protection-against-Dumping

Some argue that tariffs are needed to protect against dumping from foreign producers.

Increased Domestic Employment Argument

The argument here is that reducing imports will divert spending on another nation's output to spending on domestic output thus domestic output and employment rise. However other jobs are created when tariffs aren't imposed such as unloading ships and flying import aircraft.

trade war

a cycle of increasing trade restrictions

Smoot-Hawley Tariff Act

high tariff law that contributed to a global economic downturn in the 1930s

Cheap Foreign Labor Argument

Domestic industries need protection from countries where input costs are low as a result of low wages.

General Agreement on Tariffs and Trade (GATT)

equal, nondiscriminatory trade treatment for all member nations; reduction of tariffs by multilateral negotiation; elimination of import quotas.

World Trade Organization

International organization that regulates international trade.

Doha Development Agenda

An initiative of the World Trade Organization focused on issues of trade and development. Decreasing tariffs and quotas as well as agricultural subsidies.

The European Union

was created to promote economic and political cooperation among the many European nations

eurozone

the countries that have adopted the euro as money

North American Free Trade Agreement

created a free-trade area among the United States, Canada, and Mexico

Those hurt by free trade

When industries lose comparative advantage they are often shut down and workers lose their jobs.

Trade Adjustment Assistance Act

Designed to help individuals hurt by international trade

offshoring

moving production or support processes to foreign countries

International Trade

Exchanging goods and services between countries

International Asset transactions

the transfer of property rights to either real or financial assets between the citizens of one country and the citizens of another country.

intermediate asset transactions

buyers must convert their own currencies into the currencies that the sellers use and accept

balance of payments

the sum of all the financial transactions that take place between its residents and the residents of foreign nations.

What extra things are included in a country's balance payments

tourist expenditures, interest and dividends received or paid abroad, debt forgiveness, and temittances made by immigrants to their relatives back home.

balance of trade on goods

the difference between a country's exports and imports of goods.

balance on goods and services

the difference between US exports of goods and services and US imports of goods and services

balance on current account

adding all transactions in the current account

capital and financial account

the bottom portion of the current account statement that summarizes US international asset transactions. It is made up of the capital account and financial account

capital account

measures debt forgiveness

financial account

summarizes international asset transactions having to do with international purchases and sales of real or financial assets.

balance on the capital and financial account

the sum of credit on the capital account and surplus on the financial account

official reserves

consist of foreign currencies, certain reserves held with the International Monetary Fund, and stocks of gold.

balance-of-payments deficit

an excess demand for foreign currency at current exchange rates

balance-of-payments surplus

an excess demand for domestic currency at current exchange rates

floating-exchange-rate system

demand and supply determine exchange rates and no government intervention occurs

fixed exchange rate

governments determine exchange rates and make necessary adjustments in their economies to maintain those rates.

depreciation

when a currency depreciates more units of it are needed to buy a single unit of some other currency

Determinants of Exchange Rates

Changes in Tastes, Relative Income Changes, Relative Inflation Rate Changes, Relative Interest Rates, Changes in Relative Expected Return on Stocks, Real Estate, and Production Facilities

Changes in Tastes

Any change in consumer tastes or preferences for the products of a foreign country may alter the demand for that nation's currency and change its exchange rate.

Relative Income Changes

If income increases overall demand both domestically and abroad will increase causing a depreciation of the dollar.

Relative Inflation Rate Changes

If inflation rises in one country but not another this will cause an increased demand for foreign goods and depreciate the domestic currency.

purchasing-power-parity theory

exchange rates should eventually adjust such that they equate the purchasing power of various currencies.

Relative Interest Rates

If interest rates rise in one country but don't in another the country will loan money to the one with a higher interest rate and increase its supply resulting in depreciation.

Changes in Relative Expected Returns on Stocks

If investments become more attractive in one country the demand for this country's currency will increase and appreciate their currency.

Speculation

Speculation can cause self-fulfilling prophecies to occur.

What is one important feature of flexible exchange rates?

They automatically adjust and eventually eliminate balance-of-payments deficits or surpluses.

Disadvantages of Flexible Exchange Rates

Uncertainty and Diminished Trade, Terms-of-Trade Changes

Uncertainty and Diminished Trade

The risks and uncertainties associated with flexible exchange rates may discourage the flow of trade.

Terms-of-Trade Changes

A decline in the international value of its currency will worsen a nation's terms of trade.

Instability

Flexible exchange rates may destabilize the domestic economy because wide fluctuations stimulate and then depress industries producing exported goods.

currency interventions

The US government could maintain the exchange rate by increasing the supply of a foreign currency through selling some of its official reserves.

Trade Policies

A country could use trade barriers and bolster exports to try to control exchange rates as well.

Exchange Controls

The US government could distribute foreign currency to importers.

Distorted Trade

Exchange controls distort the pattern of international trade away from the pattern suggested by comparative advantage.

Favoritism

The process of rationing scarce foreign exchange might lead to government favoritism toward selected imports

Restricted Choice

Controls would limit freedom of consumer choice