International Trade and Capital Flows Flashcards
(27 cards)
Gross domestic product vs. Gross National Product
GDP: goods and services within the borders of a country.
GNP: good and services by the citizens of a country.
What is an absolute advantage?
If one country can produce a good at a lower cost in terms of resources compared to another.
What is an comparative advantage?
A country has a comparative advantage in the production of a good if its opportunity cost in terms of other good that could be produced instead is lower than that of another country.
Opportunity cost of Wine = Cost Wine/Cost of Cloth
Opp. cost of A= Cost A/Cost B
As long as opportunity costs differ, there are benefits from trade.
What is the Ricardian model of trade?
Over has one factor - labor. The source of differences in production is caused by different levels of technology.
What is the Heckscher and Ohlin model of trade?
Two factors of trade - capital and labor. The source of advantage is the relative amounts of factor factor the countries possess. There is a redistribution of wealth within each country between labor and the owners of capital.
What are the arguments for government trade restrictions?
Infant industry - protection from foreign competition is given to new industries to grow to an internationally competitive scale.
National Security - may produce domestic to ensure availability during conflict.
Other but not well supported: protect domestic jobs, protect domestic industries, response to foreign restrictions.
What are the main types of trade restrictions?
Tariffs: taxes on imported goods.
Quotas: Limits on amount of imports.
Export Subsidies: payments to firms that export.
Minimum Domestic : some percentage of product comes from local sources.
Voluntary restraint: limits how much is exported to avoid tariffs and quotas.
What does a tariff do?
Increases domestic price, decreases import. Domestic producers gain, foreign exporters lose, and domestic gov gets revenues.
What does a quota do?
Restricts quantity imported, raises prices, revenue from licenses.
What is the overall effect of trade restrictions?
Reduces Imports Increase Prices Decrease consumer surplus Increase domestic supply Increase producer surplus
What is the overall effect of trade restrictions?
Reduces Imports Increase Prices Decrease consumer surplus Increase domestic supply Increase producer surplus
What are types of capital restriction and its effects?
Prevent flow of capital across borders. Outright denial of investment, prohibition of certain investments. Decreases economic welfare. In short term can protect developing countries from severe capital influx and flight during expansionary and contractionary times.
What are the types of trading blocs in increasing integration?
Free Market - No restrictions.
Customs Union - No barriers amongst members, common resctrictions against non members.
Common Market - Free flow of labor
Economic Union - common institutions and economic policy.
Monetary Union - same currency
What is the balance of payments (BOP)?
Current account + capital account + financial account
What is included in the current account?
Merchandise and Services: all raw materials, and manufactured goods that are bought sold or given away.
Income Receipts: Include foreign income from dividends on stock holdings and interest of debt securities.
Unilateral transfers: one way trasnfers of assets such as money received from those working abroad. Aid - debited from giving country.
What is in the capital account?
Capital transfers: assets brought or taken with when someone leaves.
Sales and purchases of non-financial assets.
What is in the financial account?
Gov owned assets abroad - include gold, currency, securities, reserve position in the IMF, credits, assets, DFI, claims against foreign banks.
Foriegn owned assets in the country.
How do decisions made by consumers, firms and gov effect the BOP?
Foreign borrowing results in a capital account surplus which means there is a trade deficit.
Equality: X - M = private savings + gov savings - investment
How do decisions made by consumers, firms and gov effect the BOP?
Foreign borrowing results in a capital account surplus which means there is a trade deficit.
Equality: X - M = private savings + gov savings - investment
What is the purpose of the IMF, World Bank and World trade org?
IMF: monetary cooperation, expansion and growth of trade, exchange stability, establish system of payments, making resources to member available
World Bank, Technical assistance to developing countries. Two parts - IBRD and IDA IBRD - aims to reduce poverty, IDA helps poorest countries.
WTO: deals with the global rules of trade between nations - interpreting agreements and commitments. Guarentees trade rights.
What is the purpose of the IMF, World Bank and World trade org?
IMF: monetary cooperation, expansion and growth of trade, exchange stability, establish system of payments, making resources to member available
World Bank, Technical assistance to developing countries. Two parts - IBRD and IDA IBRD - aims to reduce poverty, IDA helps poorest countries.
WTO: deals with the global rules of trade between nations - interpreting agreements and commitments. Guarentees trade rights.
How can we take advantage of an arbitrage opportunity with currency?
- Borrow Domestic to buy foreign
- Invest foreign at higher interest rate.
- Buy forward contract and exchange at forward date
- Pay back interest on borrowing
Forward rates prevent arbitrage.
What are the options for countries without their own currency?
Formal Dollerization - just use someone elses currency.
Join Monetary union.
What are the options for exchange regimes for countries that have their own currency?
Currency board - a commitment to exchange a domestic currency for a foreign currency at a set rate.
Conventional fixed peg - pegs its currency against another within a margin. Changes rates by purchasing or selling foreign currency.
Crawling peg - XR is periodically adjusted.
Managed floating exchange rates - influence XR in response to specific indicators such as BOP, inflation, or employment.
Independent floating - free market XR and foreign XR intervention is the only way to change it.
