6-1. International Economics Flashcards
(45 cards)
What is international economics?
Study of economic activity that occurs across national boundaries.
What are 3 major reasons for international economic activity?
- Increase market for sale of goods and services
- Obtain commodities not otherwise available, or available only in limited supply
- Obtain commodities at a lower cost than is available in home country
What is absolute advantage?
Ability of a country, business or individual to produce a good or provide service more efficiently (with fewer input resources) than another entity.
What is comparative advantage? Where are differences derived from?
Ability of one country, business or individual to produce goods or provide a service with lower opportunity cost than another entity.
From differences in availability of resources and technology among entities.
Comparative advantage: What can an entity to maximize output?
- Should specialize in the goods or services they produce at the least opportunity costs
- Should trade with other entities for goods or services for which they don’t have a comparative advantage
What is the principle of comparative advantage?
The total output of 2 or more entities will be greatest when each produces the goods or services for which it has the lowest opportunity cost and they engage in trade with each other.
Ex: Who has what?
Production of TVs and provision of financial services with a given set of inputs;
US: TV=20, FS=60
China: TV=100, FS=80
China has absolute advantage.
Comparative advantage: US should produce FS and China TVs. And they should engage in international trade.
- US has a lower opportunity cost for FSs.
- China has a lower opportunity cost for TVs.
US = 1 TV or 3 services - 1 FS or 0.33 TV (opportunity cost to US for providing FS = To provide 1 FS, they have to give up .33 TVs) China = 1 TV or 0.8 FS - 1 FS or 1.25 TVs (opportunity cost)
What are Porter’s 4 attributes of National Advantage?
- Factor endowment - Advantages in factors of production - land, labor, infrastructure, etc.
- Demand conditions - Nature of domestic demand for a good or service.
- Relating and supporting industries - Extent to which supplier and related industries are internationally competitive.
- Firm strategy, structure, and rivalry - How entities are created, organized, managed and how they compete.
What are Porter’s 4 outcomes that give national advantage?
- Availability of resources and skills
- Information used to determine which opportunities to pursue with resources and skills
- Goals of individuals within entities
- Pressure on entities to innovate and invest
Socio-political issues: what is the central claim?
International economic activity causes or exacerbates domestic social and economic problems.
Socio-political issues: what are examples?
- Increased domestic unemployment from using cheaper foreign labor
- Loss of domestic manufacturing capabilities
- Loss of industries essential to defense
- Lack of protection for domestic start-up companies
Socio-political issues: What are primary historical responses?
- Import quotas: restrict the quantity of goods that can be imported
- Import tariffs: taxes on imported goods that increase cost in domestic market
Socio-political issues: are historical responses appropriate? Why? What are better responses? Examples?
No because they can backfire if other countries response in like manner
Better: Policies that support domestic economic activity.
*Training/retaining
*Research and development support
*Improved infrastructure
What is currency exchange rate?
Price of one unit of a country’s currency expressed in units of another country’s currency.
When exchange rate is $1.10=1 euro rather than $1.25=1 euro, is $1.10 stronger or weaker? How does this impact imports and exports?
Stronger because $1.10 can buy more euro with less than $1.25.
- More imports of Euro-based goods
- Less exports to Euro-based buyers
What is balance of trade? What happens when exports>imports? Vice versa?
Difference between money value of imports and exports.
Exports > Imports = Trade surplus
Exports < Imports = Trade deficit
What is balance of payments?
Summary accounting of US-base transactions with all other countries during a period of time.
What does balance of payments accounts include?
Current account, capital account, financial account.
What is current account?
Net dollar value for period of;
*Amounts earned from export of goods/services
*Amounts spent on imports of goods/services
*Net factor flow (income) from foreign investments: dividends and interest
*Net factor flow from foreign aid and grants
= Net Balance
What is capital account?
Net dollar value for period of:
- Inflows from investments and loans by foreign entities
- Outflows from investments and loans by US entities made abroad
What does capital account reflect? What does it mean when foreign investment in US > US investment abroad?
Net change in foreign ownership of US assets and US ownership of foreign assets.
Surplus for period.
What is financial account?
Net dollar amount of:
- US-owned assets located abroad
- Foreign-owned assets in the US
What does financial account show?
Accumulated amount of investments;
- Both government and private
- Monetary (e.g. gold, securities, etc) and non-monetary (e.g. property, plant and equipment etc).
What are balance of payments outcomes?
- Surplus = sum of earning and inflows > sum of spending and outflows
- Deficit = sum of spending outflows > sum of earnings and inflows
