CH13: The Foreign Sector Flashcards
Why do countries trade with each other?
Because no country has all resources; trade allows specialization and mutual benefit.
What is absolute advantage?
When a country can produce more of a good with the same amount of resources.
What is comparative advantage?
When a country can produce a good at a lower opportunity cost than another country.
Who introduced the concept of comparative advantage?
David Ricardo.
What is an import tariff?
A tax imposed on imported goods to protect domestic industries or raise revenue.
What is a specific tariff?
A fixed amount charged per unit of an imported good.
What is an ad valorem tariff?
A tariff based on a percentage of the good’s value.
What is the purpose of a revenue tariff?
To raise government income, especially where no local alternatives exist.
What is a protective tariff?
A tariff aimed at shielding domestic industries from foreign competition.
What are import quotas?
Limits on the quantity of a good that can be imported.
Why might governments subsidize exports?
To help domestic firms compete internationally, though it may provoke retaliation.
What is dumping in international trade?
Selling goods in foreign markets at unfairly low prices.
What is a countervailing duty?
A tariff imposed to offset unfair subsidies or dumping by other countries.
What is the infant industry argument?
New industries should be temporarily protected until they can compete globally.
How do trade barriers protect employment?
By limiting imports, domestic jobs in protected sectors are preserved.
Why are tariffs important for government revenue in developing countries?
Easier to collect than income or property taxes.
What is the risk of trade barriers leading to retaliation?
Trade wars that hurt exporters and reduce global welfare.
How can trade barriers cause inefficiency?
They reduce competitive pressure on local industries to improve.
What is an exchange rate?
The price of one currency in terms of another.
Who demands foreign currency in South Africa?
Importers, investors buying foreign assets, tourists, and speculators.
Who supplies foreign currency in South Africa?
Exporters, foreign tourists, and investors buying SA assets.
What happens to demand for dollars when the dollar becomes cheaper?
Demand increases, as US goods become cheaper in rand.
Who supplies US dollars in the SA forex market?
Foreign investors buying SA assets, SA investors selling USD assets, foreign tourists, and speculators expecting rand appreciation.
What causes the dollar supply curve to slope upward?
As the rand appreciates, SA exports become more expensive, reducing USD supply.
What is the equilibrium exchange rate?
The rate where quantity of USD demanded equals quantity supplied.
What happens when the exchange rate is above equilibrium?
Excess supply of dollars.
What happens when the exchange rate is below equilibrium?
Excess demand for dollars.
What does it mean when the rand depreciates?
It takes more rand to buy a dollar → R/$ increases.
What are the effects of a depreciated rand?
Exports cheaper, imports more expensive, inflation rises, current account improves.
What are the effects of an appreciated rand?
Exports more expensive, imports cheaper, inflation falls, may worsen current account.
What is managed floating?
A system where the central bank occasionally intervenes in the forex market to stabilize the currency.
How can the SARB prevent the rand from depreciating?
Sell USD from reserves to meet demand and hold the exchange rate steady.
How can the SARB prevent the rand from appreciating?
Buy excess USD in the market, adding to forex reserves.
Why is it difficult for SARB to manage a depreciating currency?
It may lack sufficient USD reserves to meet high demand.
Why is managing appreciation easier than depreciation?
Central banks can always buy foreign currency (build reserves), but cannot print it.
What are the three policy options in a floating exchange rate system?
1) Do nothing, 2) Intervene (managed float), 3) Adjust interest rates.
How does raising interest rates affect the rand?
Attracts foreign capital, increases demand for rand, and strengthens the rand.
Why is the rand/dollar exchange rate the base in SA?
Other currency rates are derived from their values against the USD.
What is a cross-rate?
An exchange rate between two currencies derived from their rates with a third currency (usually the USD).
