Chapter 28- Macroeconomics and INternational Trade Flashcards
gains from specialization
economic gains that society can obtain by having some individuals, regions or countires specialize in the production of certain GS.
Will specialization work without trade?
No
absolute advantage
-if producer can produce more units per hour than other producers can
comparative advantage
-when producer has a lower opportunity cost per unit produced compared to other producers
market prices will adjust to what?
-market prices will adjust so that individuals choose occupations consistent with their competitive advantages
why is trade crucial?
Trade is essential to achieve an efficient allocation of ressources.
Why comparative trade is beneficial for the US ipod manufacturing industry? China and US international trade analysis
page 734-735
Are there losers of international trade?
Yes, those workers who are made worse-off by the outsourcing of assembly jobs to countries like China,
Why do economists favor free international trade?
- because the efficiencies achieved by exploiting comparative advantege and specialization are large enough to outweigh the costs born by the losers. This means in particular that by means of a system of government taxes and transfers, the winning households could compensate the losing households, so that everyone would be better off as a result of free trade. (not always happens due to politics)
- oppostition to globalisation can occur. Job losses are more salient than job gains,
What is a closed economy? Opened economy?
- a closed economy does not trade with the rest of the world
- an open economy trades freely with the rest of the world
trade barriers
- tariffs (special taxes levied only on imports)
- discourage international trade
- some developping countries use tarfiffs to raise revenue, because they don’t have well functioning tax systemes and can more easily tax imports that flow through a few urban ports tha they can tax domestic economic actvity that is widely geographyically dispersed.
- developed countries overwhelmingly use tariffs to protect domestic producers. Sometimes they block imports completely and raise no revenue. (=cost to domestic consumer who pay higher prices)
Is economy always balanced?
No, bilateral trade will rarely be balanced.
trade deficit
excess of imports over exports and is thus the name given to the trade balance when it is negative.
trade surplus
excess of imports and is thus the name given to the trade balance when it is positive.
net exports
value of a coutriy’s exports minus imports. (also known as trade balance)
Net exports= payments from abroad for exports - payments to foreigners for imports
income based payments from foreigners
3 ways that domestic residents receive icome-based payments from foreigners:
1) Receiving payments from the sale of goods and services to foreigners (exports)
2) Receiving income from assets that the domestic residents owns in foreign countries. (factor payments from foreigners)
3) Receiving transfers (remittances) from individuals who reside abroad or from foreign governments (transfers from foreigners)
Income based Payments to foreigners
sources:
1) making payments to foreigners in return for their GS (imports)
2) paying income on assets that foerign residents own in the domestic economy (factor payments to foreigners)
3) Making transfers to individuals who reside abroad or to foreign governments (transfers to foreigners)
current account
sum of net exports, net factor payments from aborad and net transfers from abroad.
current account= (net exports)+(net factor payments from abroad) + (net transfers from abroad)
net factor payments from abroad
net factor payments from abroad = factor payments from abroad - factor payments to foreigners
Net transfers from abroad
transfers from abroad-transfers to foreigners
financial account
increase in domestic assets held by foreigners minus the increase in foeign assets held domestically (only registers transactions that change an asset’s ownership and does not measure changes in asset prices)
-The financial account is defined so that the net flows in the financial account offset the net flows in the current account.
current account + financial account = 0
- The financial account is just the accounting system that records the asset purchases that domestic residents and foreigners make.
- a change in the current acc balance will be matched by a change in the opposite direction in the financial acc.
- when a country makes net purchases of GS from foreigners, the country must make net asset sales to foreigners to pay the bills.
S-I= NX=net capital outfloes (page 745)
net capital outflows
difference between I by the home country and foreign investment in the home country.
- when us firms export more, net capital outflows will increase
- when US firms and consumers import more, net capital outflows will decline
Describe the relationship between net capital outflows and the real interest rate
- when real r rises, the US becomes more attractive to global investors, as capital pours in, net capital outfloes decrease and net exports therefore decrease
- when real r decrase the opposite happens
- rising real r => iscourages net capital outflows and recudes net exports
- falling real r => encourages net capital outflows abd increases net exports
International trade and technology
-transfers technology from advanced to less advanced economies, thus contributing in the recepient’s productive capacity.
Foreign direct investment
investments by foreign individuals and companies in domestic firms and businesses. To qualify as foreign direct investment, these flows need to generate a large foreign ownership stake in the domestic business.
-major conduit for technology transfer, though in most cases this transfer is not
technology and international trade
- technolgy transfer creates one more type of cross-coutry interdependence
- countries are technologically interlinked
Disadvantages of globalisation
-inequities across countries
