2.7 International Trade and Capital Flows Flashcards
Gross domestic product (GDP)
the market value of final goods and services produced by factors located within a country.
includes contributions from foreign citizens in the country
Gross national product (GNP)
he market value of final goods and services produced by factors supplied by citizens of a country
includes the production of goods and services by domestic citizens operating in other countries
The terms of trade
the ratio of export prices to import prices
n increase in this ratio allows a country to purchase more imports with the funds received from exports.
foreign direct investment (FDI)
investment by companies in physical productive assets in foreign countries
FDI tends to be longer-term in nature than FPI.
Through FDI, multinational companies have been able to shift production to wherever it can be done most efficiently as countries compete to become part of a global supply chain
foreign portfolio investment (FPI)
involves holding securities such as stocks or bonds issued by foreign companies or governments
Many arguments support international trade, including:
- Gains from exchange
- Greater economies of scale
- Greater product variety
- Increased competition
- More efficient allocation of resources
Opponents of free trade point to what?
income inequality
job losses in developed countries due to competition from countries with lower-cost operations
when does a country has an absolute advantage in gains from trade?
if it can produce a good or service at a lower total cost than its trading partner.
when does a country has a comparative advantage in gains from trade?
if its opportunity cost of producing a good or service is less than its trading partner
what does the Ricardian model assume?
assumes that labor is the only factor of production
what does the The Heckscher-Ohlin model use?
uses both capital and labor as factors of production.
Both factors can trigger comparative advantages
Which of the following statements best describes the costs of international trade?
A
Countries without an absolute advantage in producing a good cannot benefit significantly from international trade
B
Loss of manufacturing jobs in developed countries as a result of import competition means that developed countries benefit far less than developing countries from trade
C
Resources may need to be allocated into or out of an industry and less-efficient companies may be forced to exit an industry, which in turn may lead to higher unemployment
C
Resources may need to be allocated into or out of an industry and less-efficient companies may be forced to exit an industry, which in turn may lead to higher unemployment
Trade restrictions
measures that limit the free exchange of goods and services between countries
They include tariffs, import quotas, voluntary export restraints, subsidies, embargoes, and domestic content requirements
They may be implemented for several reasons, ranging from increasing government revenues to national security concerns.
Capital restrictions
impose limits on the ability of foreign investors to own domestic assets and the ability of domestic investors to own foreign assets.
Tariffs
taxes levied on foreign goods, often to protect domestic industries
According to the infant industries argument, tariffs can be used to shield companies in emerging sectors until they can compete with larger international firms.
Tariffs can also be used as a source of revenue or to reduce a country’s trade deficit.
in the context of international trade, a country is considered to be large if?
in the context of international trade, a country is considered to be large if
If a large country imposes tariffs on imported goods and services, small country exporters will do what?
reduce their prices to retain their share of the large country’s market.
In theory, imposing tariffs can improve a large country’s terms of trade and welfare by doing what?
this improvement is contingent on which assumptions:
reducing the costs of imports
conditions:
- Other countries do not retaliate.
- The deadweight loss imposed by the tariff is less than the benefit from better terms of trade.
quota
restricts the quantity of a good that can be imported.
The quantity is specified with an import license. Foreigners can often raise the prices of their goods since the supply is limited.
This will give them extra profits called quota rents.
A voluntary export restraint (VER)
self-imposed limit on the quantity of exports to other counties. VERs allow the exporting country to capture quota rents and impose welfare losses on the importing country.
regional trading bloc
group of countries that attempts to reduce or eliminate trade barriers.
Regional trading blocs include the North American Free Trade Agreement (NAFTA) and the European Union (EU)
different levels of integration to regional trading blocs
free trade areas
customs union
common market
economic union
monetary union
free trade areas
eliminate all barriers among member groups
Each country in the group can determine its own policies against non-members
NAFTA is an example.
customs union
extends the free trade area by having common policies against non-members.
common market
takes the integration further by allowing free movement of production factors among the members.
economic union
also coordinates economic policies among the members
The EU is an example.
monetary union
an economic union with a common currency
The Eurozone (which consists of most of the EU member countries) is an example.
Trade creation
replaces higher-cost domestic production with lower-cost imports from member countries
Trade diversion
substitutes lower-cost imports from non-member countries with higher-cost imports from member countries.
why is the free flow of capital is a desirable objective ?
because funds may be allocated to investments that offer the highest risk-adjusted returns
Which of the following trade restrictions is likely to result in the greatest welfare loss for the importing country?
A
A tariff.
B
An import quota.
C
A voluntary export restraint.
C
A voluntary export restraint.
With a voluntary export restraint, the price increase induced by restricting the quantity of imports (= quota rent for equivalent quota = tariff revenue for equivalent tariff) accrues to foreign exporters and/or the foreign government
If Brazil and South Africa have free trade with each other, a common trade policy against all other countries, but no free movement of factors of production between them, then Brazil and South Africa are part of a:
A
customs union.
B
common market.
C
free trade area (FTA).
A
customs union.
A customs union extends a free trade area (FTA) by not only allowing free movement of goods and services among members, but also creating common trade policy against non-members. Unlike a more integrated common market, a customs union does not allow free movement of factors of production among members.
The balance of payments (BOP)
summarizes a country’s economic transactions with the rest of the world
composed of the current account, capital account, and financial account
The current account
measures the flow of goods and services.
It includes the sub-accounts of merchandise trade, services, income receipts, and unilateral transfers.
The capital account
measures the transfer of capital.
It includes the sub-accounts of capital transfers (e.g., debt forgiveness) and sales and purchases of non-produced, non-financial assets (e.g., patents, franchises).
The financial account
records investment flows through the sub-accounts of financial assets abroad and foreign-owned financial assets within the country.
which conference resulted in the creation of the World Bank and led to the establishment of the International Monetary Fund (IMF)?
In 1944, representatives of 45 governments met to discuss a new international economic framework at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire
which was the only framework for regulating international trade for nearly half a century until the World Trade Organization (WTO) was established as a permanent institution in 1995?
the GATT
The IMF has a mandate to:
Provide a forum for cooperation on international monetary problems.
Facilitate international trade.
Promote employment, economic growth, and poverty reduction.
Support exchange rate stability.
Lend to members temporarily under adequate safeguards. This was enhanced following the 2007-2009 financial crisis.
Monitor global, regional, and country economies.
Help resolve global economic imbalances.
Assess financial sector vulnerabilities.
The World Bank
helps countries fight poverty and enhance economic growth
how does the World Bank seek to assist developing countries?
Strengthening government institutions and educating government officials.
Implementing legal and judicial systems that encourage business.
Protecting individual rights and honoring contracts.
Developing robust financial systems.
Combating corruption.
The International Monetary Fund’s functions most likely include:
A
regulating cross-border trade relationships.
B
lending foreign exchange reserves to countries that have current account imbalances.
C
providing low-interest loans to countries that have limited access to international credit markets.
B
lending foreign exchange reserves to countries that have current account imbalances.
Among its other functions, the International Monetary Fund (IM
