Chapter 2 World Trade and International Monetary System Flashcards
Integrated Markets
Market in which equivalent assets have the same price everywhere— Characterized by:
- Low or No transaction Cost
- Low or No Institutional interference
- Little or No Informational barriers
- High Factor Mobility (Labor and Capital)
Segmented Markets
Market in which equivalent assets prices vary depending on the location
Characterized by:
- High transaction Cost
- Frequent Institutional interference
- High Informational barriers
- Low Factor Mobility (Labor and Capital)
Factors Contributing to market segmentation
- Transaction Costs
- Informational Barriers
- Regulatory and institutional interference
- Factor (Labor, Capital) Immobility
How to integrate world markets?
Eliminate Trade Barriers
Various Trade Blocs
Custom Unions, Common Market, Economic Union, Monetary Union
Custom Union
Two or more countries form a Free Trade Area in which trade barriers between the countries are abolished and member countries maintain a common tariff against non-member countries.
Common Market
A Common Market is like a customs union but there is free flow of factors of productions between the countries. Ex: No permits are required to work in another member country
Economic Union
A Economic Union has the same benefits as a common market but there is a common tax system
Monetary Union
A Economic Union has the same benefits as a common market but there is a common tax system with a common currency
Floating Exchange rate System
- Currency values are allowed to change based on market demand and supply without direct interference from government authorities.
- The value of a currency may appreciate or depreciate relative to others.
Protectionism pros and cons
Pros
- Prevent Dumping
- Protect Infant industries
- Revive declining industries
- Reduce Balance of Trade Deficit
Cons
- Reduced International Trade
- Inevitable Retaliation
- Slows Economic Growth
- Political Consequences—elections, allies etc.
Protectionist measures
Direct Measures
- Tariffs or customs duties
- Import quotas, including embargo
Indirect Measures
- Hidden export subsidies
- Devaluation of local currency
Optimal Tariff argument
Restrict imports up to the point where the benefit from the last import equals the cost to society as a whole
Domestic firms’ competitiveness enhancing measures
- Export Subsidies
- Grants to Domestic Producers
- Waiver of Customs Duties on Inputs
- Funding for industrial Research
- Funding for Industrial Training
Fixed Exchange rate System
- Governments try to dictate the value of currencies.
a. Hard Pegs
b. Soft Pegs - The government may devalue or revalue its currency relative to others.
a. Floating Arrangements
b. Residual
Balance of Payment and its main accounts
The record of all economic transactions between the residents of the country and the rest of the world in a particular period of time.
The BoP’s main accounts are: Current Account, Capital Account and Financial Account
Organization that compile BoP statistics
The IMF (International Monetary Fund)
Current Account
The account records all international economic transactions with income or payment flows occurring within the year and shows whether the country is a net exporter (Current Account Surplus) or a net importer (Current Account Deficit) of goods and services.
The account has 4 subcategories:
a. Goods trade
b. Services trade
c. Factor income payments
d. Transfer payments
Capital Account
Account records net changes in ownership of national assets
Capital Account= FDI+ Portfolio Investment + Other Investment+ Reserve Account
Financial Account
Part of the Capital account that records cross-border transactions associated with changes in ownership of long term financial assets and liabilities.
Trade Account
The account records all cross-border transactions of goods. The term commonly used to refer to the account is Trade Balance
Trade Balance
The value that characterizes the Trade Account. It informs on the country’s status as a net exporter or importer of goods.
Official Reserve Assets (ORA)
The ORA account is the account that records the foreign currency and securities held by the central bank of a country used to balance the payments from year-to-year.
The reserves increase in case of a trade surplus and decrease when there is a trade deficit
These assets are:
(i) gold,
(ii) foreign exchanges,
(iii) special drawing rights (SDRs), and
(iv) reserve positions with the IMF
Error and Omission of BoP
Measurement errors can occur when attempting to measure the value of funds transferred into or out of a country and are offset with Official Reserve Assets.
Sub-Accounts of BoP
Direct Investment Account
Portfolio Investment Account
Other Investment Account
World Trade Organization (WTO)
The organization that regulates trade between nations enforcing the GATT (General Agreement on Tariffs and Trade). Its primary goal is to open trade for all.
Most Favoured Nation Principle
WTO clause that prevents any nation entering a trade agreement with a WTO member country to favor that country alone but gives the rights of that trade agreement to all WTO member countries.
International Monetary Fund (IMF)
The IMF is an international organization that was formed in 1944.
The organization is made up of 189 countries
Its primary mission is to ensure the stability of the international monetary system—the system of exchange rates and international payments that enables states and their citizens to transact with each other.
IMF v IBRD Functions
IMF: Provide short term loans to governments with BoP deficiencies
IBRD: International Bank of Reconstruction and Development– Provides loans to middle-income developing countries
Bid rate v Ask rate v Mid rate
Bid rate: price at which the dealer is willing to buy the asset
Ask rate: price at which the dealer is willing to sell the currency
Mid rate
Bid-ask spread
Ask minus bid (Ask-Bid)
