International Trade 1

What differences in economies promote trade

Natural resource variation, capital vs labor abundant

What are some consumption gains

Lower prices, variety gains (diff products), consume beyond production fronterier

Production gaisn

Export revenue

Distributional welfare gains (losses)

Increase economic gains

If the world price exceeds the domestic price, you do what

Export

If the world price is less than domestic you do what

Import

Inter-industry trade is characterized by what

Comparative advantage

What is the Ricardian model of trade

Difference in productivity between countries leads to specialization

What is absolute advantage

Producing more of a good with the same amount of resources

Comparative advantage

Producing a good with a lower opportunity cost than other states

What is a benefit of comparative advantage

Leads to consumption outside a countries production possibilities frontier

Autarky

No trade

When a graph has two diff products on the axis what is the slope called

Opportunity cost

What is new trade theory

Trade between similarly endowed countries where economies of scale determine production and specialization

What are distributional effects

Gains and losses from production (job creation/loss in industries)

What is PTA

Preferential trade area

What are different types of PTA

Free trade, customs union, common market, monetary union

What are reasons states may protect their domestic economy

To protect import-competing industries, domestic labor, infant industry, boost domestic demand for domestically produced goods, security and geopolitics

Tariff

Tax on imported goods, there are Ad valorem and specific tariffs

Economic effects to domestic economy

Gouvernement revenue, producer gains, consumer losses

Examples of Non-tariff barriers

Quotas, Subsidiés, Voluntary export restraints, import licensing, health & safety standards, environmental standards

Quotas

Quantitative limits on imports set by importing country

Main difference between quotas and tariffs

C is windfall gain to foreign suppliers instead of government

Subsidies

Government payments/incentives to domestic firms

When their is a subsidy what do the consumers pay

They pay the world price

Floating exchange rate

Value of currency is allowed to be determined solely by the market

fixed exchange rate

Value of a currency is fixed, or pegged, to the value of another currency or to the average value of a selection of currencies.

Managed exchange rate

Currencies allowed to fluctuate within a narrow band in the short run and allowed to be realigned in teh long run

Purchasing power

The number of goods/services that can be purchased with a domestic currency

Arbitrage allows for what

Convergence of one price

Monetary policy is what

Changes to teh money supply to meet macroeconomic goals

How to central banks increase the aggregate demand (AD)

They increase the money supply (buy bonds)

How do central banks decrease the aggregate demand (AD)

They decrease the money supply (sell bonds)

Two ways to change money supply

Change the interest rates, open market operations (bonds)

What does LRAS

Long run aggregate supply

What does SRAS

Short run aggregate supply

Monetary union

One exchange rate and one monetary policy

Does monetary union increase or decrease interpedendence

Increased interdependence

What is the difficulty of varied economies

Growth, unemployment, inflation, debt

Structural deficits

Imbalance of gov’t revenues and expenditures

What happened in 2009

The Great Recession and downgrading of sovereign debt

What happened in 2010

Greek bailout with austerity concerns

The disparity and interdependence created what

Resentment from both Mediterranean and Germany