Chapter 4 Flashcards
(22 cards)
Trade occurs
when goods, services, or resources are exchanged, sometimes using money as a medium of exchange
Barter is
trade without money
The incentive to trade comes from
three motivations: differing tastes, differing abilities, and more highly populated markets giving rise to better use of resources through specialization
When people trade voluntarily,
they do so to make themselves better off
An individual has a comparative advantage at producing a good
if he/she has a lower opportunity cost of producing the good in terms of other goods sacrificed.
Differences in abilities or resources give rise to
comparative advantage
Trade is limited by
transaction costs
Transaction costs arise due
due to the sacrifice that must be made to search out, negotiate, and complete an exchange.
Mercantilism
is aimed at keeping as much money in the country as possible–not letting it escape.
To mercantilists,
importing is bad and exporting is good
Mercantilists are obsessed with
the balance of payments.
The balance of payments is
the dollar value of the exported goods and services minus the imported goods and services.
A positive balance of payments is
a trade surplus.
A negative balance of payments is
a trade deficit.
For every flow of money
there is a matching flow of goods
Mercantilists only look at
the current account.
The current account
measures monetary flow of goods and services.
The capital account
measures financial instruments (stocks and bonds of US companies
The capital and current accounts
must always balance out each other
The exchange rate
is the price of one country’s currency for another country’s currency.
The exchange rate
depends on the supply and demand for the currency.
To appreciate
means to gain in value compared to something else.
