Chapter 10 - International Trade and Capital Flows

Question 1

Merchandise trade balance

Answer 1

Tracking solid or physical items that were transported between countries

Question 2

Current account balance

Answer 2

Includes other international flows of income and foreign aid

Question 3

Four components of current account balance

Answer 3

Goods, services, unilateral transfers, income receipts and payments

Question 4

Income payments

Answer 4

Money received by financial investors on foreign investments, payments to foreign investors who invested their funds here

Question 5

Unilateral transfers

Answer 5

Payments made where money is sent abroad without any direct good or service being received in return

Question 6

Trade balance

Answer 6

Gap between a country’s exports and its imports

Question 7

Trade deficit

Answer 7

Net inflow of financial capital from abroad

Question 8

Trade surplus

Answer 8

Net outflow of financial capital to places abroad

Question 9

Financial capital

Answer 9

International flows of money that facilitates trade and investment

Question 10

Balance of payments

Answer 10

When the connection between trade balances and international flows of financial capital is close

Question 11

Flow from home country to rest of the world

Answer 11

Foreign investment, payment for imports, exports, investment income paid

Question 12

Flow from rest of the world to home country

Answer 12

Payment for exports, imports, investment income received, investment from abroad

Question 13

Current account deficit

Answer 13

The country is a net borrower from the rest of the world

Question 14

Current account surplus

Answer 14

The country is a net lender to the rest of the world

Question 15

National saving and investment identity

Answer 15

Provides a useful way to understand the determinants of the trade and current account balance

Question 16

Financial capital market

Answer 16

The quantity of financial capital supplied must equal the quantity of financial capital demanded to make investments

Question 17

National savings

Answer 17

Total of private and public savings (individuals and government)

Question 18

National savings identity equation

Answer 18

Supply of financial capital = demand for financial capital

S + (M - X) = I + (G - T)

Question 19

S, M, X, I, G, T

Answer 19

S : Private savings
M : Imports
X : Exports
I : Investment
G : Government spending
T : Taxes

Question 20

Trade deficit equation

Answer 20

Trade deficit = Domestic investment – Private domestic saving – Government savings
(M – X) = I – S – (T – G)

Question 21

Trade surplus equation

Answer 21

Trade surplus = Private domestic saving + Public saving – Domestic investment (X – M) = S + (T – G) – I

Question 22

Recession causes…

Economic growth causes…

Answer 22

Increase in trade balance (more surplus or lower deficit)

Decrease in trade balance (lower surplus or higher deficit)

Question 23

Is trade surplus or deficit better?

Answer 23

Neither are guarantee of economic health or weakness

Question 24

Cons of trade deficit

Answer 24

Borrowed funds are not invested in a way that leads to increased productivity, investors can become considered with economic health and pull investments

Question 25

Pros of trade deficit

Answer 25

Can help with investments that increase productivity

Question 26

Level of trade

Answer 26

Measured by exports of goods and services as a share of GDP

Question 27

High level of trade

Answer 27

High amount of GDP is exported

Question 28

Three factors that determine level of trade

Answer 28

Size of economy, geographic location, and history of trade

Question 29

Size of economy

Answer 29

Bigger countries can sell more within their own country

Question 30

Geographic location

Answer 30

Neighbouring countries can sell to each other

Question 31

History of trade

Answer 31

Established pattern of international trade