international Flashcards
(134 cards)
1
Q
What is International Economics?
A
Branch of economics which deals with the economic relations among different nations.
These relations can be through trade of goods and services, short-run flows of money, and long-run investment flows.
2
Q
What is the difference between domestic and international trade?
A
International trade involves the movement of goods and services across countries, while domestic trade is limited to a self-sufficient country consuming what it produces.
No trade means countries are self-sufficient.
3
Q
What motivates countries to trade?
A
WA + WB + gains from trade = motivation for trade.
WA and WB represent social welfare in each country.
4
Q
What is the gravity model in international trade?
A
It analyzes who trades with whom and the volume of trade based on a nation’s size and distance between markets.
Size is measured by GDP.
5
Q
How does the size of a nation affect international trade?
A
Larger economies have more goods to export and generate more income for imports.
Bigger nations produce and consume more.
6
Q
What negative effects does distance have on trade?
A
Distance increases transportation costs and complicates personal contact and communication.
Volume of trade is negatively impacted by distance.
7
Q
What factors besides size and distance can affect trade?
A
- Cultural ties
- Geography
- Borders
- Trade agreements
- Political stability
- Natural resources
- Health and safety
- Exchange rates
- Common currency
- Common union
Examples include GATT and GATS.
8
Q
What is the mercantilist view on trade?
A
Mercantilism advocates exporting more than importing to accumulate wealth, typically through government intervention.
It was popular from the 16th to the 18th century.
9
Q
What is Adam Smith’s theory of absolute advantage?
A
Smith argued for free trade, stating nations should specialize in commodities where they have an absolute advantage.
This leads to increased global output.
10
Q
What is the law of comparative advantage?
A
Even a nation with an absolute disadvantage can benefit from trade by specializing in the commodity it produces least inefficiently.
Introduced by David Ricardo in 1817.
11
Q
What assumptions does Ricardo’s theory of comparative advantage rely on?
A
- Only two nations and two commodities
- Free trade
- Perfect labor mobility within nations
- Constant production costs
- No transportation costs
- No technical changes
- Labor theory of value
These assumptions help simplify the model.
12
Q
What is the significance of the exchange rate in international trade?
A
It determines the terms of trade that must be better than domestic rates for both nations to benefit from trade.
Gains from trade can be determined through exchange rates.
13
Q
What happens when trade rates fall outside the mutually beneficial range?
A
Trade will not occur if the exchange rate is not favorable for both nations.
Both nations will prefer to trade only if they gain from the exchange.
14
Q
What is the impact of specialization on total production?
A
Specialization increases total production of commodities in both nations compared to self-sufficiency.
This is illustrated through comparative advantage.
15
Q
What is the role of labor value theory in trade?
A
Labor value theory posits that the price of goods can be expressed in terms of the labor needed to produce them.
It helps to understand the gains from trade.
16
Q
How does comparative advantage apply to nations with absolute disadvantages?
A
Nations should specialize in the commodity where their disadvantage is least, allowing for mutually beneficial trade.
This principle allows even the least efficient producers to engage in international trade.
17
Q
What is a key criticism of Smith’s theory?
A
Smith’s theory does not address scenarios where one nation has an absolute advantage in both goods and the other has an absolute disadvantage in both.
This raises questions about the existence of trade in such cases.
18
Q
What is the purpose of purchasing currency in international trade?
A
To import goods from another country
This process introduces the concept of exchange rates.
19
Q
What does a wage rate of $6 per hour imply in terms of wheat production in the US?
A
One hour produces 6W, and the price of a bushel of wheat is Pw=$1.
20
Q
What is the wage rate in the UK and its implications for wheat production?
A
£1 per hour; one hour produces 1W, Pw=£1.
21
Q
What happens if the exchange rate is £1=$2?
A
Pw=£1=$2 and Pc=£0.5=$1 in the UK.
22
Q
What does it mean if the dollar price of wheat is lower in the US than in the UK?
A
It indicates that the US has a comparative advantage in wheat production.
23
Q
What occurs when the exchange rate is £1=$1?
A
Trade would be unbalanced in favor of the UK, leading to less demand for US wheat.
24
Q
What is the impact of an exchange rate of £1=$3?
A
Trade would be unbalanced in favor of the US, reducing demand for UK cloth.
25
What is David Ricardo's law of comparative advantage?
Even if a nation has an absolute disadvantage, there is still potential for mutually beneficial trade.
26
What does the labor theory of value propose?
The value of a commodity depends on the amount of labor required for its production.
27
What are the key assumptions of Ricardo's labor theory of value?
* Labor is the only factor of production
* Labor is used in fixed proportions
* Labor is homogeneous.
28
What is the opportunity cost theory as explained by Haberler?
Cost of a commodity is the amount of a second commodity that must be given up to produce one additional unit.
29
What defines a nation with a comparative advantage?
It has a lower opportunity cost in producing a commodity compared to another nation.
30
What is the production possibility frontier (PPF)?
A curve showing different combinations of outputs that a nation can produce using all its resources.
31
What does a downward-sloping PPF indicate?
The opportunity cost or trade-off needed to produce one good over another.
32
What does the marginal rate of transformation represent?
The slope of the PPF, indicating the opportunity cost of producing one good in terms of another.
33
What happens to global production when countries are allowed to trade?
Global production expands beyond the limits of each country's PPF.
34
What is the equilibrium price determined by in a trade scenario?
The intersection of the combined supply and demand curves.
35
What are the factors of production according to economic theory?
* K - capital
* Land
* L - labor
* Entrepreneurship.
36
What are the main assumptions of the Heckscher-Ohlin theory?
* Two nations and two commodities
* Same technology used in production
* Commodity X is labor-intensive, Y is capital-intensive
* Constant returns to scale
* Incomplete specialization
* Equal tastes in both nations
* Perfect competition
* Perfect factor mobility within nations.
37
What is the significance of the Heckscher-Ohlin theorem?
It forms the basis of modern international trade theory.
38
What is perfect competition in the context of commodities and factor markets?
Everybody is a price-taker with no market power and no global effect on prices
## Footnote
Perfect competition implies that if one nation produces more of a commodity, it does not affect the global price.
39
What is meant by perfect factor mobility within each nation?
Capital and labor can move freely between the production of different goods without friction
## Footnote
This means that labor can easily shift from one industry to another within the same nation.
40
What are the implications of having no transportation costs or tariffs in international trade?
There is free movement of goods across borders but no movement of labor or capital
## Footnote
This focuses on trade without additional costs when goods are exchanged between nations.
41
What does it mean for all resources to be fully employed in both nations?
There is no slack in the economy, and resources are used to their fullest potential
## Footnote
This ensures that both nations operate on their production possibility frontier.
42
What does balanced international trade between two nations entail?
The total value of each nation’s exports equals the total value of the nation’s imports
## Footnote
This means that the value exchanged between the two nations is equal.
43
Define factor intensity.
The ratio of capital to labor or labor to capital used to produce a particular good
## Footnote
For example, commodity Y is capital intensive if its capital-labor ratio is greater than that of commodity X.
44
What indicates that commodity Y is capital intensive compared to commodity X?
The capital-labor ratio (K/L) for Y is greater than for X
## Footnote
For instance, if K/L for Y is 1 and for X is 1/4, Y is capital-intensive relative to X.
45
How can factor abundance be defined in terms of physical units?
By comparing the overall amount of capital and labor available to each nation
## Footnote
A nation is capital abundant if its capital-to-labor ratio is higher than that of another nation.
46
What is the relationship between factor abundance and relative factor prices?
A nation is capital abundant if the ratio of the rental price of capital to the price of labor is lower
## Footnote
This indicates easier access to capital.
47
What does the Heckscher-Ohlin (H-O) theorem state?
A nation will export the commodity whose production requires the intensive use of its relatively abundant and cheap factor
## Footnote
Conversely, it will import the commodity that requires the intensive use of its relatively scarce and expensive factor.
48
What is the effect of tariffs on imports and exports?
Tariffs can be import or export duties imposed on traded commodities
## Footnote
Import tariffs protect domestic industries, while export tariffs help developing countries manage prices and revenues.
49
Name the three types of tariffs.
* Specific tariff
* Ad valorem tariff
* Compound tariff
## Footnote
Each type is calculated differently based on trade commodity specifics.
50
What is the primary economic effect of tariffs?
Tariffs affect domestic consumption, production, and imports
## Footnote
The analysis typically uses a partial equilibrium model to understand these effects.
51
What happens to domestic consumption when a tariff is imposed?
Domestic consumption decreases due to higher prices resulting from the tariff
## Footnote
For example, a 100% ad valorem tariff can lead to a significant drop in consumption levels.
52
What is the consumption effect of a tariff?
The reduction in domestic consumption resulting from the tariff
## Footnote
This is quantified by the decrease in quantity consumed due to price increases.
53
What does the production effect of a tariff refer to?
The expansion of domestic production resulting from the tariff
## Footnote
This occurs as higher prices incentivize local producers to increase output.
54
What is the trade effect of a tariff?
The decline in imports due to the tariff
## Footnote
This is a consequence of reduced demand for foreign goods as domestic consumption decreases.
55
What is the revenue effect of a tariff?
The revenue collected by the government from tariffs imposed on imports
## Footnote
This represents a significant source of income for the government.
56
What is the production effect of a tariff?
10X (CM)
## Footnote
This refers to the expansion of domestic production resulting from the tariff.
57
What is the trade effect of a tariff?
30X (BN + CM)
## Footnote
This represents the decline of imports due to the tariff.
58
What is the revenue effect of a tariff?
$30 (= $1 on each of the 30X imported)
## Footnote
This is the revenue collected by the government from tariffs.
59
How does consumption change when a tariff is imposed?
Decreases from 70 to 50
## Footnote
This indicates the effect of the tariff on consumption.
60
What happens to domestic production as a result of a tariff?
Increases from 10 to 20
## Footnote
This is the production effect working in the opposite direction of consumption.
61
How does the elasticity of demand affect the graph of a tariff's impact?
The more elastic the demand, the flatter the line is on the graph
## Footnote
This indicates that elastic demand leads to a less steep demand curve.
62
What is consumer surplus graphically measured by?
Area under the demand curve above the price line
## Footnote
This represents the benefit consumers receive when they pay less than what they are willing to pay.
63
What is the impact of a 100% tariff on consumer surplus?
Reduction in consumer surplus
## Footnote
This is illustrated by the shaded area AGHB in the graph.
64
What is the effect of a 100% tariff on producer surplus?
Increase in producer surplus
## Footnote
This increase is represented by the shaded area AGJC.
65
What does the area MJHN represent in the context of tariffs?
Tariff revenue collected by the government
## Footnote
This is the revenue from the tariff that is calculated based on the quantity imported.
66
What is a common measure used to evaluate trade protection?
Rate of effective protection
## Footnote
This is calculated using a specific formula involving nominal tariff rates.
67
What is the formula for calculating the rate of effective protection (g)?
g = t - (ai x ti)
## Footnote
Where t is the nominal tariff rate, ai is the ratio of cost of imported input, and ti is the nominal tariff rate on imported inputs.
68
What is an import quota?
A direct quantitative restriction on the amount of a commodity allowed to be imported
## Footnote
This is a type of nontariff trade barrier aimed at protecting domestic industry.
69
How does an import quota affect domestic price?
Raises the domestic price of the commodity
## Footnote
This occurs as a result of reduced supply due to the quota.
70
What happens to imports when a quota is imposed?
Imports go down
## Footnote
This is due to increased domestic production and reduced consumption.
71
What is the difference between import quotas and import tariffs?
Quotas provide certainty while tariffs lead to uncertainty in market responses
## Footnote
This also leads to different impacts on consumer and producer behavior.
72
What are Voluntary Export Restraints (VERs)?
Agreements where an importing country asks another nation to reduce its exports 'voluntarily'
## Footnote
This is typically done under the threat of higher trade restrictions.
73
What is dumping?
Exporting a commodity at below cost or at a lower price abroad than domestically
## Footnote
This practice can be classified into persistent, irregular, and greedy dumping.
74
What are export subsidies?
Direct payments or tax relief to stimulate a nation's exports
## Footnote
These can also be seen as a form of dumping.
75
What is the effect of an export subsidy on domestic producers?
Increases domestic prices and production
## Footnote
This results in higher costs for domestic consumers.
76
What is the marginal revenue condition for a monopolist to maximize profits?
MR = MC
## Footnote
This means marginal revenue must equal marginal cost for profit maximization.
77
In a monopoly market, what is the demand curve's relationship to the monopolist?
The monopolist demand curve is the market demand curve
## Footnote
This reflects the control the monopolist has over pricing.
78
What is the monopolist price function?
P = a - bQ
## Footnote
The monopolist price is derived from the inverse of the demand function.
79
How is the monopolist average revenue (AR) calculated?
AR = TR / Q
## Footnote
Total revenue (TR) is divided by the quantity produced and sold.
80
What does the monopolist marginal revenue (MR) represent?
Change in total revenue from selling an additional unit of output
## Footnote
MR is equal to the first derivative of the TR function with respect to quantity.
81
In a monopoly market, what does it mean that MR < AR?
The MR curve lies below the demand curve.
82
What is the condition for profit-maximizing output in monopoly?
MR = MC
## Footnote
The profit-maximizing output occurs when the MR curve intersects with the MC curve.
83
What is the monopolist selling price determined by?
The intersection of the equilibrium output line with the demand curve.
84
What is the formula for total revenue (TR) for a monopolist?
TR = P x Q
## Footnote
P is the price, and Q is the quantity sold.
85
How is total cost (TC) calculated for a monopolist?
TC = AC x Q
## Footnote
AC is the average cost determined by the intersection with the AC curve.
86
How are monopolist profits calculated?
Profits = TR - TC
## Footnote
Profits can also be represented as the summation of areas B and E.
87
What does area A represent in a monopoly diagram?
Consumer's surplus.
88
What characterizes monopolistic competition compared to monopoly?
More firms and product differentiation.
89
What does a symmetric model in monopolistic competition assume?
All companies are identical with the same technology and cost structure.
90
What happens when profits are greater than zero in monopolistic competition?
Firms have an incentive to enter the industry.
91
What is the equilibrium number of firms in an industry?
The number at which each firm achieves zero profits.
92
What are gains from trade in monopolistic competition attributed to?
Economies of scale and differentiation.
93
What effect does international trade have on market size?
Increases market size and industry sales.
94
What is the Balance of Payments (BoP)?
A table summarizing all transactions between residents of a nation and the rest of the world.
95
What are the two types of transactions in BoP?
* Credit transactions
* Debit transactions
96
What does a credit transaction represent in BoP?
Receipt of payments from foreigners.
97
What does a debit transaction represent in BoP?
Payments made to foreigners.
98
What are the three broad accounts in BoP?
* Current account
* Capital account
* Financial account
99
What does the current account primarily include?
* Imports and exports
* Services
* Income receipts
* Net unilateral transfers
100
What is double-entry bookkeeping?
Each international transaction is recorded twice, once as a credit and once as a debit.
101
What does the balance of payments identity theoretically sum to?
Current account + capital account + financial account = 0.
102
What does depreciation of a currency mean?
Decrease in the value of a currency relative to another currency.
103
What does appreciation of a currency mean?
Increase in the value of a currency relative to another currency.
104
What are spot rates in currency exchange?
Exchange rates for transactions executed in the present.
105
What are forward rates in currency exchange?
Exchange rates for transactions that will occur at a future date.
106
What influences the demand for currency deposits?
* Rate of return
* Real rate of return
* Risk
* Liquidity
107
What is the DD-AA model used for?
To analyze changes in exchange rates and macroeconomic variables.
108
What are the two parts of the DD-AA model?
* Goods market
* Money market
109
In the goods market of an open economy, what does the current account equal?
CA = X - M (exports - imports).
110
What does T represent in the context of income?
T = income tax
111
What is the equation for current account (CA)?
CA = X - M = exports - imports
112
What is aggregate demand?
Demand for goods and services produced domestically
113
How does consumption relate to disposable income?
Consumption depends positively on disposable income (Y - T)
114
What happens to consumption when taxes (T) increase?
Consumption decreases as disposable income (Y - T) decreases
115
What are the assumed characteristics of investment and government spending?
Assumed to be exogenous and fixed
116
What does net exports depend on?
Depends positively on real exchange rate q and negatively on disposable income
117
What is the relationship between Y - T and consumption?
If Y - T increases, consumption increases and imports (M) also increase
118
How is the real exchange rate (q) calculated?
q = E * (p*/p) where E is the nominal exchange rate
119
What does a devaluation of domestic currency indicate?
An increase in the price of foreign currency in terms of domestic currency
120
What is the effect of currency depreciation on exports and imports?
Exports increase and imports decrease
121
What is the equilibrium condition in the goods market?
Output (Y) equals demand
122
What does the DD curve illustrate?
Positive relationship between output and exchange rate
123
What causes movements along the DD curve?
Changes in exchange rate (E)
124
What effect do changes in government spending (G) have on the DD curve?
Shifts the DD curve to the right, increasing output at all exchange rates
125
What is the equilibrium condition for the money market?
Real money demand equals real money supply
126
What happens when real income (Y) increases in the money market?
Demand for money increases, shifting the money demand curve to the right
127
What is the AA curve?
Illustrates the negative relationship between output and exchange rate
128
What shifts the AA curve to the right?
Increase in money supply (Ms)
129
What is the DD-AA model used for?
Determining short-run equilibrium values for nominal exchange rate and real output
130
What occurs during monetary expansion?
Interest rates decrease, causing domestic currency to depreciate
131
What is the effect of fiscal expansion on the DD curve?
Shifts the DD curve to the right, increasing aggregate demand
132
What relationship does the XX curve represent?
Positive relationship between domestic income and current account
133
What happens to current account (CA) during monetary expansion?
CA increases in the short run
134
What happens to current account (CA) during fiscal expansion?
CA decreases in the short run
