International Trade and Capital Outflows Flashcards
(21 cards)
Definition: Import
Goods and services that firms, individuals, and governments purchase from producers in other countries.
Definition: Export
Goods and services that firms, individuals, and governments from other countries purchase from domestic producers.
Definition: Autarky or closed economy
A country that does not trade with other countries.
Definition: Free Trade
A government places no restrictions or charges on import and export activity.
Definition: Trade Protection
A government places restrictions, limits, or charges on exports or imports.
Definition: World Price
The price of a good or service in world markets for those to whom trade is not restricted.
Definition: Domestic Price
The price of a good or service in the domestic country, which may be equal to the world price if free trade is permitted or different from the world price when the domestic country restricts trade.
Definition: Net Exports
The value of a country’s exports minus the value of its imports over some period.
Definition: Trade Suprlus
Net exports are positive; the value of the goods and services a country exports are greater than the value of the goods and services it imports.
Definition: Trade Deficit
Net exports are negative; the value of the goods and services a country exports is less than the value of the goods and services it imports.
Definition: Terms of Trade
The ratio of an index of the prices of a country’s exports to an index of the prices of its imports expressed relative to a base value of 100. If a country’s terms of trade are currently 102, the prices of the goods it exports have risen relative to the prices of the goods it imports since the base period.
Definition: Foreign Direct Investment
Ownership of productive resources (land, factories, natural resources) in a foreign country.
Definition: Multinational Corporation
A firm that has made foreign direct investment in one or more foreign countries, operating production facilities and subsidiary companies in foreign countries.
GDP vs GNP: Definitions and
Gross domestic product over a period, typically a year, is the total value of goods and services produced within a country’s borders.
-The income to capital owned by foreigners invested within
a country is included in the domestic country’s GDP but
not in its GNP.
Gross national product is similar but measures the total value of goods and services produced by the labor and capital of a country’s citizens.
-Includes earnings of citizens working abroad and earnings
on citizens capital outside the country.
What are the benefits of trade?
Benefit to Importing Country: Lower cost goods
Benefit to Exporting Country: Increasing employment, increasing wages for workers, and the profits from its export products.
Cost to Domestic Country competing with importing goods: As imports increase, domestic producers lose jobs, worse off in the short run. Potential retraining.
-The benefits of international trade exceed the costs.
What is absolute advantage and comparative advantage?
Absolute advantage: A country is said to have an absolute advantage in the production of a good if it can produce the good at a lower resource cost than another country
Comparative advantage: A country is said to have a comparative advantage in the production of a good if it has a lower opportunity cost in the production of that good, expressed as the amount of another good that could have been produced instead.
Economic analysis tells us that, regardless of which country has an absolute advantage, there are potential gains from trade as long as the countries’ opportunity costs of one good in terms of another are different.
To illustrate the benefits of trade, consider the output change if Portugal shifts 8 worker-days from cloth production to wine production and England shifts 10 worker-days from wine production to cloth production.
Ricardian model of trade
-Labor is the only factor of productivity.
-Comparative advantage depends on relative labor productivity for different goods.
Heckscher-Ohlin Model of trade
-Two factors of production: capital and labor
-Comparative advantage depends depends on relative amount of each factor possessed by a country.
-Is a redistribution of wealth within each country between labor and the owners of capital.
Heckscher-Ohlin Model of trade Explained
The price of the relatively less scarce (more available) factor of production in each country will increase so that owners of capital will earn more in England, and workers will earn more in Portugal compared to what they were without trade. This is easy to understand in the context of prices of the two goods. The good that a country imports will fall in price (that is why they import it), and the good that a country exports will rise in price. In our example, this means that the price of wine falls, and the price of cloth rises in England. Because with trade, more of the capital-intensive good, cloth, is produced in England, demand for capital and the price of capital will increase in England. As a result, capital receives more income at the expense of labor in England. In Portugal, increasing the production of wine (which is labor intensive) increases the demand for and price of labor, and workers gain at the expense of the owners of capital.
