Ch 2 Flashcards
What is Free Trade?
Trade without any barriers (no tarrifs)
What is the economic principle of Absolute Advantage? What should countries do in order to trade under this principle?
Economic law of absolute advantage: countries should specialize and only produce + export what they are most efficient in manufacturing (lower cost)+ import the rest
What is protectionism and why do countries do it?
attempt to protect native industry using trade barriers
$$$
What was Mercantilism and why is Free Trade sometimes accused of being a new form of Mercantilism (neo-mercantilism)?
Economic theory during colonial times whose goal was the preservation of a country’s capital by maintaining a constant positive balance of trade
(encouraging exports, limiting imports, only to raw material)
– Free trade removes the protective tariffs that developing countries need to industrialize, forcing them to only export raw materials.
What was the purpose of the Bretton Woods Conference and what institutions were created as a result of it?
Created new world economic order, to prevent another depression/world war
- International monetary fund
- World Bank
-GATT
What is the purpose of the IMF? How did it originally promote currency exchange stability? How does it do it now?
Promotes exchange stability + orderly exchange arrangements among member countries
—> og set a system of fuxed currency exchange rates between member nations
- NOW controls floating rates by “firm surveillance” over exchange rates
To whom does the IMF lend money and under what conditions? From where does the IMF get the money that it lends?
Countries with balance payments problems
On the condition that they follow anti-inflationary + austerity policies to correct difficulties
Funded from quotas (members are assigned quote to contribute)
What is an SDR? How is its value presently determined?
IMF used to lend gold, created new currency SDR
Like debit card, allows, countries to draw funds from the IMF
Value computed daily by basket of reserved currencies
What was the original role of the World Bank and what does it do now?
Originally the International Bank for Reconstruction and Development
-created to provide $ to rebuild war-torn Europe
-only lasted a bit bc the US felt rebuilding was slow
It is now different institutions that take care of diff economic needs
-the job is to be a development bank
to build things that they need to grow
What was the GATT? What is its successor organization?
General Agreement on Tariffs + Trade(1948-1995)
- og 120 members w. 3 principles
World Trade Organization is the successor
What are the 3 principles that GATT established as a code of conduct for international trade?
- conduct trade w.o discrimination
- tariffs should be reduced through multilateral negotiations
- member countries should consult together to overcome trade problems
How successful was GATT in reducing world tariffs?
Before GATT 38% tariffs–> 4%
enormously successful
What is the WTO? When was it established? Where is it located?
World Trade Organization
January 1, 1995
Result of last round of GAAT (uruguay round)
successor of GAAT
Geneva, Switzerland
What is the WTO position on: Most Favored Nation (MFN) treatment?
Everyone gets MFN treatment
What is the name of the present round of WTO trade negotiations and what is its present status?
Doha Round
Stuck bc fight between 2 blocks of nations
– developing nations can’t agre w developed countries
- developing wants lower tariffs
What are some of the present complaints against the WTO, IMF and other global institutions?
result of unintended consequences of globalizing
- environmental concerns
worker exploitation + domestic job losses
cultural extinction
higher oil prices
diminished sovereignty of nations
What is the Balance of Payments of a nation?
Accounting of a country’s international transactions for a particular time period
What are the 3 major accounts of the Balance of Payments statement?
current account
financial and capital account
balancing account
What is the Balance of Trade of a country? What constitutes a positive or a negative Balance of Trade? What happens to a country’s official reserves if it has a negative Balance of Trade (trade deficit)? What happens to a country’s official reserves if it has a positive Balance of Trade (trade surplus)?
balance of trade: Encouraging exports, limiting imports to raw materials
If a country has a deficit in its Current Account, what are the 2 things that it can do to keep its Balance of Payments in balance without touching its reserves?
offer sovereign bonds
sell state owned enterprises
encourage foreign investments in your country
What was the Balance of Trade situation of the United States in 2021? Why don’t Americans worry about this situation?
In deficit for many years– bc of imports of energy
dont worry bc trade is a small % of our GDP
What percent of its GDP was the U.S. foreign trade in 2021?
25.9%
What percent of its GDP was the U.S. Current Account deficit in 2021?
-3.7%
What is a tariff? What are “safeguard restrictions?”
Tariff is a tax on an imported product
restrictions: emergency increase on tariffs as a reaction to foreign product
What is a quota?
cap on the amount of import
What is a Voluntary Export Restraint (VER)?
Limits amount of exports to another country
What is a boycott? What is an embargo?
Boycott: prohibition to buy foreign products
embargo: prohibition to EXPORT to a foreign country
What is dumping? What is a subsidy?
dumping: unfair practice where company enters mkt w. price below cost
subsidy: gov pays for part of cost
How do countries punish dumpers? How do countries punish subsidized imports?
anti-dumping penalties: entries of particular products accused of this are not allowed to enter through customs
- guilty until innocent
What is an Exchange Permit and how do countries use them as a non-tariff barrier?
permission to buy foreign exchange
used as a trade barrier when countries deny the permit
What is the economic principle of Relative (or Comparative) Advantage? What should countries do in order to trade under this principle?
countries should specialize + only produce + export what they have the highest advantage (lowest opportunity cost) compared to other countries and import the rest
What is the WTO position on: National treatment?
Once foreign products comes into your country + pays your duties, you MUST treat them as if they had been built in your country
What is the WTO position on: Quotas?
Quotas are limitations on amount of product that can be imported
- OUTLAWED
-trade barriers
What is the WTO position on: Tariffs?
These are reduced
Promote fair competition
What is the WTO position on: Dumping?
Dumping: sell your products in foreign country @ price under your cost to penetrate foreign mkt + become mkt leader
This is PUNISHABLE w. antidumping duties bc it can be a trade barrier
What is the WTO position on: Subsidies?
outlaws subsidies
When gov helps pay for some of the cost for the company to export
Punishment: countervailing duties
What is the WTO position on: Developing countries?
Given transition periods to adjusts to WTO provisions
What is the current account for
international trade goods + services + with earnings on investments
what is the financial + capital account for?
transfers of financial assets like stocks, bonds, + capital assets like copyrights or trademarks
what is the balancing account for
records transfers of official reserve assets
