Global Review Flashcards
(37 cards)
benefits of international trade
- increase competition
- lower prices
- greater choice
- acquisition of resources
- more foreign exchange earnings
- access to larger markets
- economies of scale
- more efficient resource allocation
- more efficient production
absolute advantage
A country has an absolute advantage in the production of a good if it can produce more if it with the same resources or, equivalently, if it can produce the same amount using fewer resources compared to another country.
comparative advantage
When a country can produce a good at a lower opportunity cost compared to another country.
tariffs
A tax that is placed on imports to protect domestic industries from foreign competition and to raise revenue for the government.
quotas
An import barrier that set limits on the quantity or value of imports that may be imported into a country.
subsidy
An amount of money paid by the government to a firm, per unit of output, to encourage production and provide the firm an advantage over foreign competition.
export subsidy
Payments made by the government to exporting firms on the basis of the number of units exported.
adminstrative barriers
Trade barriers in the form of regulations that aim to limit imports into a country. These barriers may take the form of product safety standards, sanitary standards or pollution standards but may also include more stringent than necessary application of customs procedures.
pros of trade protections
- protect jobs from foreign competition
- correct a trade deficit
- protect against possible dumping
- enhance government revenues
- protect infant industries
- help a developing country diversify its produce and export base
disadvantages of trade protection
- breeds inefficiency as a result of less competition and greater monopoly power
- highe rprices for consumers decreasing their purchasing power
- limits choice for consumers and firms
increases production cots of firms importing intermediate goods - reduce export competitiveness of domestic firms relying on more expensive imported inputs
- deprives domestic firms of taking advantage of the technological progress embodies in imported capital goods
- increases the possibility of retaliation by trading partner
types of trade agreements
free trade areas
An agreement between two or more countries to phase out or eliminate trade barriers between them, members of the agreements are free to maintain their own trade policy towards non members.
custom unions
An agreement between countries to phase out or eliminate tariffs and other trade barriers and establish a common external barrier twoard non-members
commons markets
When a group of countries agree not only to free trade of goods and services but also to free movement of capital and labour
pros of trading blocs
- trade creation
- greater access to markets offer potential for economies of scale
- with freedom of labour, there are greater employment opportunities
- membership in a trading bloc may allow for stronger bargaining power in multilateral negotiations
- greater political stability and cooperation
cons of trading blocs
- trade diversion
- loss of sovereignty
challenge to multilateral trading negotiations
monetary union
Where two ore more countries share the same currency and have a common central bank
pros of monetary union
-lower transaction cost as currency conversions are unnecessary
-greater price transparency, facilitating price comparisons
-no exchange rate risks that associated uncertainty cots
-greater negotiations and bargaining power in world affairs
cons of monetary union
-no independent monetary policy
-no exchange rate policy
-limited room for independent fiscal policy
-loss of economic sovereignty
floating exchange rate
when exchange rate is determined only by the interaction of demand and supply without any government or central bank intervention (free)
fixed exchange rate
when the exchange rate it set by the government at some level and is maintained at that level through appropriate intervention (central bank)
managed exchange rate
when the exchange rate is allowed to float but there is periodic intervention by the central bank whenever the direction or the speed of change is considered undesirable. The frequency of such intervention varies. (middle)
credit and debit items
components of balance of payments
