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BEC I and II > 6-1. International Economics > Flashcards

6-1. International Economics Flashcards

1
Q

What is international economics?

A

Study of economic activity that occurs across national boundaries.

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2
Q

What are 3 major reasons for international economic activity?

A
  • Increase market for sale of goods and services
  • Obtain commodities not otherwise available, or available only in limited supply
  • Obtain commodities at a lower cost than is available in home country
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3
Q

What is absolute advantage?

A

Ability of a country, business or individual to produce a good or provide service more efficiently (with fewer input resources) than another entity.

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4
Q

What is comparative advantage? Where are differences derived from?

A

Ability of one country, business or individual to produce goods or provide a service with lower opportunity cost than another entity.
From differences in availability of resources and technology among entities.

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5
Q

Comparative advantage: What can an entity to maximize output?

A
  • Should specialize in the goods or services they produce at the least opportunity costs
  • Should trade with other entities for goods or services for which they don’t have a comparative advantage
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6
Q

What is the principle of comparative advantage?

A

The total output of 2 or more entities will be greatest when each produces the goods or services for which it has the lowest opportunity cost and they engage in trade with each other.

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7
Q

Ex: Who has what?
Production of TVs and provision of financial services with a given set of inputs;
US: TV=20, FS=60
China: TV=100, FS=80

A

China has absolute advantage.

Comparative advantage: US should produce FS and China TVs. And they should engage in international trade.

  • US has a lower opportunity cost for FSs.
  • China has a lower opportunity cost for TVs.
US = 1 TV or 3 services - 1 FS or 0.33 TV (opportunity cost to US for providing FS = To provide 1 FS, they have to give up .33 TVs)
China = 1 TV or 0.8 FS - 1 FS or 1.25 TVs (opportunity cost)
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8
Q

What are Porter’s 4 attributes of National Advantage?

A
  1. Factor endowment - Advantages in factors of production - land, labor, infrastructure, etc.
  2. Demand conditions - Nature of domestic demand for a good or service.
  3. Relating and supporting industries - Extent to which supplier and related industries are internationally competitive.
  4. Firm strategy, structure, and rivalry - How entities are created, organized, managed and how they compete.
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9
Q

What are Porter’s 4 outcomes that give national advantage?

A
  1. Availability of resources and skills
  2. Information used to determine which opportunities to pursue with resources and skills
  3. Goals of individuals within entities
  4. Pressure on entities to innovate and invest
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10
Q

Socio-political issues: what is the central claim?

A

International economic activity causes or exacerbates domestic social and economic problems.

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11
Q

Socio-political issues: what are examples?

A
  • Increased domestic unemployment from using cheaper foreign labor
  • Loss of domestic manufacturing capabilities
  • Loss of industries essential to defense
  • Lack of protection for domestic start-up companies
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12
Q

Socio-political issues: What are primary historical responses?

A
  • Import quotas: restrict the quantity of goods that can be imported
  • Import tariffs: taxes on imported goods that increase cost in domestic market
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13
Q

Socio-political issues: are historical responses appropriate? Why? What are better responses? Examples?

A

No because they can backfire if other countries response in like manner
Better: Policies that support domestic economic activity.
*Training/retaining
*Research and development support
*Improved infrastructure

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14
Q

What is currency exchange rate?

A

Price of one unit of a country’s currency expressed in units of another country’s currency.

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15
Q

When exchange rate is $1.10=1 euro rather than $1.25=1 euro, is $1.10 stronger or weaker? How does this impact imports and exports?

A

Stronger because $1.10 can buy more euro with less than $1.25.

  • More imports of Euro-based goods
  • Less exports to Euro-based buyers
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16
Q

What is balance of trade? What happens when exports>imports? Vice versa?

A

Difference between money value of imports and exports.
Exports > Imports = Trade surplus
Exports < Imports = Trade deficit

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17
Q

What is balance of payments?

A

Summary accounting of US-base transactions with all other countries during a period of time.

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18
Q

What does balance of payments accounts include?

A

Current account, capital account, financial account.

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19
Q

What is current account?

A

Net dollar value for period of;
*Amounts earned from export of goods/services
*Amounts spent on imports of goods/services
*Net factor flow (income) from foreign investments: dividends and interest
*Net factor flow from foreign aid and grants
= Net Balance

20
Q

What is capital account?

A

Net dollar value for period of:

  • Inflows from investments and loans by foreign entities
  • Outflows from investments and loans by US entities made abroad
21
Q

What does capital account reflect? What does it mean when foreign investment in US > US investment abroad?

A

Net change in foreign ownership of US assets and US ownership of foreign assets.
Surplus for period.

22
Q

What is financial account?

A

Net dollar amount of:

  • US-owned assets located abroad
  • Foreign-owned assets in the US
23
Q

What does financial account show?

A

Accumulated amount of investments;

  • Both government and private
  • Monetary (e.g. gold, securities, etc) and non-monetary (e.g. property, plant and equipment etc).
24
Q

What are balance of payments outcomes?

A
  • Surplus = sum of earning and inflows > sum of spending and outflows
  • Deficit = sum of spending outflows > sum of earnings and inflows
25
Q

When does deficit balance payments occur? What does it result in regarding dollars and foreign currency?

A

Imports and foreign investment by US entities > Exports and investment by foreign entities in US
Creates greater demand for foreign currency than dollars

26
Q

How does the increase in the demand of foreign currency impact its value? How does it impact exports/imports?

A
  • It increases the value of foreign currency and now takes more dollars to buy given amount of foreign currency (weakens exchange rate of dollar)
  • Imports decrease and exports increases causing import/export to reverse
27
Q

What is the role of free-floating exchange rates (free market rates)?

A

Helps maintain balance of payment equilibrium.

28
Q

What is dumping?

A

the sale of a product in a FOREIGN market at a price that is either;

  • lower than is charged in the domestic market or
  • lower than the firm’s production cost.
29
Q

What is direct exchange rate? Indirect exchange rate?

A

Direct: Domestic price of one unit of a foreign currency.
1 Euro = $1.10
Indirect: Foreign price of one unit of a domestic currency.
$1.00 = .909 Euro

30
Q

What are 2 major ways exchange rates determined?

A
  • Free-floating currency: exchange rate is determined by market forces of supply and demand for a currency
  • Pegged or movable currency: exchange rate is fixed by the government with frequent revisions
31
Q

What is spot rate?

A

The exchange rate between currencies for immediate delivery (exchange); the rate “on the spot.”

32
Q

What is forward exchange rate?

A

The exchange rate between currencies existing at the present for future delivery (exchange).

33
Q

What is exchange rate discount? Premium? What does it mean?

A
  • Discount: the forward rate < the spot rate (market believes that the value of dollar relative to other will increase: strengthen)
  • Premium: the forward rate > the spot rate (value of dollar with weaken)
34
Q

How is the premium/discount computed?

A

[(Forward rate – Spot rate)/Spot rate] ×

[Months or days in year/Months in forward period]

35
Q

Currency demand factors: Political and economic environment?

A

Political stability and strong economy increase demand.

36
Q

Currency demand factors: Relative interest rates?

A

Higher interest rate relative to comparable countries increases investment which increase demand.

37
Q

Currency demand factors: Relative inflation rates?

A

Lower rate retain purchasing power which increases demand.

38
Q

Currency demand factors: Level of public debt?

A

Higher level of debt increases risk of inflation which deters investment and decreases currency demand.

39
Q

Currency demand factors: Current account balance?

A

Higher deficit (excess imports over exports and investment outflows over inflows) increases demand for foreign currency relative to domestic currency.

40
Q

Currency demand factors: what are other factors?

A
  • Consumer preferences
  • Relative incomes
  • Currency speculation: attempts to make a profit on trading in currencies
41
Q

Currency supply: who determines?

A

A country’s central bank.

US: Fed Reserve Bank determines currency supply through monetary policy.

42
Q

How does Fed affect exchange rates: Supply side? Demand side?

A

*Supply: Buy dollars in open market using foreign currency reserves - supply of dollars is reduced and more foreign currency in circulation - increase value of dollar.
If sold dollars and buy foreign currency - increase supply of dollars (decrease value).
*Demand: Increase interest rate - more demand for US investment instruments - more dollar needed to acquire those instruments (increased demand).
Decrease interest rates - less demand for dollars (decreased value).

43
Q

What is the 2 results of changes in exchange rates?

A
  • Currency appreciation: the value of currency increases (become stronger) relative to another currency
  • Currency depreciation: the value decreases (weaken)
44
Q

What are consequences of currency appreciation?

A
  • Foreign goods become cheaper for domestic buyers
  • Encourages increased domestic efficiencies to compete
  • Puts downward pressure on domestic inflation by keeping price low
  • Makes it difficult for domestic producers to compete in domestic and foreign market
45
Q

What are consequences of currency depreciation?

A
  • Domestic goods become cheaper relative to foreign goods, which increases exports
  • Increased exports increases domestic employment
  • Import goods become more expensive
  • Drive up cost of foreign inputs (raw materials, components etc and consumer goods)

BEC I and II (12 decks)

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