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Econ 202 Macroeconomics > Chapter 10: Trade Balance and Financial Capital Flow > Flashcards

Chapter 10: Trade Balance and Financial Capital Flow Flashcards

1
Q

Trade Balance

A

Any gap between a nation’s dollar value of its exports and imports

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2
Q

Trade Surplus

A

Trade exports exceed imports

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3
Q

Trade Deficit

A

Trade imports exceed exports

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4
Q

An exchange rate is nothing more than a _________ and can be analyzed with the tools of ________ and ________.

A

Price
Supply
Demand

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5
Q

Who is the US’s biggest trading partner, and how much?

A

Canada

Over $600 billion per year

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6
Q

What rank is the US in the world as an exporter?

A

2nd largest exporter in the world

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7
Q

What are the US’s main exports?

A

High tech goods (aircraft, pharmaceuticals, jet turbines, generators), intellectural goods (hollywood movies and music), and bulk goods (corn, oil, and cotton)

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8
Q

What is the benefit of international trade instead of producing everything on your own?

A

Focus on what you have a comparative advantage in, and make purchases from other countries that can make items cheaper. Better deal for the US to produce hollywood movies and jet turbines, and buy clothes from Asia.

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9
Q

NAFTA

A

North American Free Trade Agreement, established in 1994 to drop trade barriers between US/Canada/Mexico. Increased US trade deficits, decreased US manufacturing jobs. Decreased prices of all sorts of consumer goods, and created jobs in other industries.

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10
Q

Balance of Payments

A

Accounting record for a nation, that records all international transactions

  • current account
  • financial account
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11
Q

Current Account

A

Subaccount of the Balance of Payments. Records sale and purchase of goods and services, investment income earned abroad, and other transfers like donations/aid

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12
Q

Financial Account

A

Subaccount of the Balance of Payments. Records the purchase/sale of financial assets like stocks and bonds.

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13
Q

Merchandise Trade Balance

A

Tracking of solid/physical items transported between countries, as a measurement of trade balance (common a few decades ago)

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14
Q

Balance of Trade vs Current Account Balance

A

Balance of trade: imports and exports

Current Account Balance: imports, exports, income from investment and transfers

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15
Q

4 Components of Current Account Balance

A

Goods
Services
Income receipts/payments
Unilateral Transfers

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16
Q

Unilateral Transfers

A

Payments made by government, private charities, or individuals, in which money is sent abroad without any good/service being received

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17
Q

Income Payments

as a component of Current Account Balance

A

Money received by US financial investors on their foreign investments, and payments to foreign investors who had invested their funds here

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18
Q

If foreign investors buy more U.S. stocks and bonds, how would that show up in the current account balance?

A

The stock and bond values will not show up in the current account. However, the dividends from the stocks and the interest from the bonds show up as an import to income in the current account.

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19
Q

If the trade deficit of the United States increases, how is the current account balance affected?

A

It becomes more negative as imports, which are a negative to the current account, are growing faster than exports, which are a positive.

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20
Q

When did the US trade deficit start becoming significant?

A

About 1980, and it dropped again in mid-2000s

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21
Q

Are trade surpluses good or bad?

A

Can be either, depending on international flows of financial capital

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22
Q

Current Account Deficit

A

Country is a net borrower from abroad

23
Q

n what way does comparing a country’s exports to GDP reflect how globalized it is?

A

GDP is a dollar value of all production of goods and services. Exports are produced domestically but shipped abroad. The percent ratio of exports to GDP gives us an idea of how important exports are to the national economy out of all goods and services produced. For example, exports represent only 14% of U.S. GDP, but 50% of Germany’s GDP

24
Q

Why does the trade balance and the current account balance track so closely together over time?

A

The trade balance is the difference between exports and imports. The current account balance includes this number (whether it is a trade balance or a trade surplus), but also includes international flows of money from global investments.

25
Q

National Savings of a Country is made up of…

A

Domestic savings by households and companies (private), government savings (public)

26
Q

Two main sources for the supply of financial capital in the US

A
  1. Savings by individuals and firms (S)

2. Inflow of financial capital from foreign investors (M-X)

27
Q

Two main sources of demand for financial capital in the US

A
  1. Private sector investment (I)

2. Government borrowing (G) less taxes collected (T)

28
Q

National Savings and Investment Identity

algebraic expression

A

Supply of financial capital = Demand for financial capital

S + (M - X) = I + (G - T)

29
Q

S

A

private Savings by individuals/firms

30
Q

T

A

Tax revenue for the government

31
Q

G

A

Government spending

32
Q

I

A

Investment/spending from the private sector

33
Q

M - X

A

Imports less Exports

34
Q

G - T > 0

A

Indicates government spending is larger than tax revenue, so budget deficit exists and is a “demander” of financial capital (right side of National Savings and Investment Identity equation)

35
Q

G - T < 0

A

Indicates government spending is less than tax revenue, so budget surplus exists and is a “supplier” of financial capital (left side of National Savings and Investment Identity equation)

36
Q

A recession tends to make a trade deficit ________ or a trade surplus _________

A

Smaller

Larger

37
Q

An economic upswing tends to make a trade deficit ________ or a trade surplus _________

A

Larger

Smaller

38
Q

Trade Balance

A

X-M = S - I - G + T

39
Q

Trade Deficit

A

M-X

40
Q

Trade Surplus

A

X-M

41
Q

Government Budget Surplus

A

T-G

42
Q

Government Budget Deficit

A

G-T

43
Q

If a country is running a government budget surplus, why is (T – G) on the left side of the saving-investment identity?

A

The government is saving rather than borrowing. The supply of savings, whether private or public, is on the left side of the identity.

44
Q

What determines the size of a country’s trade deficit?

A

A trade deficit is determined by a country’s level of private and public savings and the amount of domestic investment.

45
Q

If domestic investment increases, and there is no change in the amount of private and public saving, what must happen to the size of the trade deficit?

A

The trade deficit must increase. To put it another way, this increase in investment must be financed by an inflow of financial capital from abroad.

46
Q

Why does a recession cause a trade deficit to decrease?

A

Incomes fall during a recession, and consumers buy fewer good, including imports.

47
Q

Both the United States and global economies are booming. Will U.S. imports and/or exports increase?

A

A booming economy will increase the demand for goods in general, so import sales will increase. If our trading partners’ economies are doing well, they will buy more of our products and so U.S. exports will increase.

48
Q

Level of Trade

A

Exports of goods and services as a share of its GDP. Tells you how much of its production it exports, measured as a % of GDP.

49
Q

Is it possible to have a high level of trade, and a near-balance of trade?

A

yes

50
Q

Low Level of Trade

A

Low amount of exports relative to total GDP

51
Q

High Level of Trade

A

High amount of exports relative to total GDP

52
Q

3 factors that strongly influence a nation’s Level of Trade

A
  1. Size of economy
  2. Geographic location
  3. History of trade
53
Q

What is a more positive phrase for trade deficit?

A

“attracting foreign financial capital”

54
Q

What is a more negative phrase for trade surplus?

A

“shipping financial capital abroad”

Econ 202 Macroeconomics (15 decks)

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