Chapter 10 - International Trade and Capital Flows Flashcards
Merchandise trade balance
Tracking solid or physical items that were transported between countries
Current account balance
Includes other international flows of income and foreign aid
Four components of current account balance
Goods, services, unilateral transfers, income receipts and payments
Income payments
Money received by financial investors on foreign investments, payments to foreign investors who invested their funds here
Unilateral transfers
Payments made where money is sent abroad without any direct good or service being received in return
Trade balance
Gap between a country’s exports and its imports
Trade deficit
Net inflow of financial capital from abroad
Trade surplus
Net outflow of financial capital to places abroad
Financial capital
International flows of money that facilitates trade and investment
Balance of payments
When the connection between trade balances and international flows of financial capital is close
Flow from home country to rest of the world
Foreign investment, payment for imports, exports, investment income paid
Flow from rest of the world to home country
Payment for exports, imports, investment income received, investment from abroad
Current account deficit
The country is a net borrower from the rest of the world
Current account surplus
The country is a net lender to the rest of the world
National saving and investment identity
Provides a useful way to understand the determinants of the trade and current account balance
Financial capital market
The quantity of financial capital supplied must equal the quantity of financial capital demanded to make investments
National savings
Total of private and public savings (individuals and government)
National savings identity equation
Supply of financial capital = demand for financial capital
S + (M - X) = I + (G - T)
S, M, X, I, G, T
S : Private savings M : Imports X : Exports I : Investment G : Government spending T : Taxes
Trade deficit equation
Trade deficit = Domestic investment – Private domestic saving – Government savings
(M – X) = I – S – (T – G)
Trade surplus equation
Trade surplus = Private domestic saving + Public saving – Domestic investment (X – M) = S + (T – G) – I
Recession causes…
Economic growth causes…
Increase in trade balance (more surplus or lower deficit)
Decrease in trade balance (lower surplus or higher deficit)
Is trade surplus or deficit better?
Neither are guarantee of economic health or weakness
Cons of trade deficit
Borrowed funds are not invested in a way that leads to increased productivity, investors can become considered with economic health and pull investments
Pros of trade deficit
Can help with investments that increase productivity
Level of trade
Measured by exports of goods and services as a share of GDP
High level of trade
High amount of GDP is exported
Three factors that determine level of trade
Size of economy, geographic location, and history of trade
Size of economy
Bigger countries can sell more within their own country
Geographic location
Neighbouring countries can sell to each other
History of trade
Established pattern of international trade
