(Macroeconomics)
Comparative advantage of free trade enables the countries involved to consumer more than under restricted trade.
^^Infant Industry^^: Industries that are just getting started (baby steps). It is important to keep an economy diverse in terms of where they import products from. Diversity is health, and trade barriers can promote diversity.
^^Dumping^^: The practice of foreign products selling in the domestic market for less than it cost to produce it. This is a well known term in international trade. Trade barriers can prevent dumping
Arguments for Trade Restrictions:
An ^^import quota^^: is a limit on the amount of a product that can be imported. When the import quota is set at zero, domestic producers are completely protected from foreign competition.
An ^^Import Tariff^^ is a tax on the specific imported product. The tariff serves to raise the price of the imported products in the eyes of domestic consumers. The gives the edge to domestic producers.
Other restrictions:
^^Exchange rates^^: The value of one country’s currency in terms of another’s. The demand for dollars in the foreign exchange market is not the same as the demand for money. The demand for dollars in the foreign market is downward sloping.
Two things that could cause the demand for dollars by foreigners to increase:
Two things that could cause the supply of dollars to increase:
^^Appreciation^^: The increase of the value of a currency in terms of another country
^^Depreciation^^: the decrease of the value of a currency in terms of another currency
Determinants of Exchange Rates:
^^Net Investment income:^^ amount US citizen earns as interest and dividends from abroad minus how much was paid to foreigners in interest and dividends
^^Net transfers:^^ Money our government and citizens send as gifts or aid to foreigners mius how much foreigners send to us in gifts and aid
^^Gold standard:^^ kept exchange rates between countries fixed, a unit of currency that is equivalent to a stated amount of gold. The gold standard was one of the main methods of exchange of money. Economists believe that the gold standard led to balance of payments crisis and the great depression.
^^Managed float:^^ the current system for determining international exchange rates.
^^Monetary and fiscal policy^^: can be used to fight inflation or recession. The impacts of monetary and fiscal policy in the context of an open economy are more complicated. Monetary and fiscal policy are less than effective when the economy is more open as opposed to closed to foreign trade.
In a closed economy, an increase in the money supply stimulates output and income in the short run. In an open economy, these effects will be dampened because imports will rise.
The exchange rates are impacted by the relative level of income and the relative level of prices in a nation.