Chapter 28- Macroeconomics and INternational Trade

Question 1

gains from specialization

Answer 1

economic gains that society can obtain by having some individuals, regions or countires specialize in the production of certain GS.

Question 2

Will specialization work without trade?

Answer 2

No

Question 3

absolute advantage

Answer 3

-if producer can produce more units per hour than other producers can

Question 4

comparative advantage

Answer 4

-when producer has a lower opportunity cost per unit produced compared to other producers

Question 5

market prices will adjust to what?

Answer 5

-market prices will adjust so that individuals choose occupations consistent with their competitive advantages

Question 6

why is trade crucial?

Answer 6

Trade is essential to achieve an efficient allocation of ressources.

Question 7

Why comparative trade is beneficial for the US ipod manufacturing industry? China and US international trade analysis

Answer 7

page 734-735

Question 8

Are there losers of international trade?

Answer 8

Yes, those workers who are made worse-off by the outsourcing of assembly jobs to countries like China,

Question 9

Why do economists favor free international trade?

Answer 9

• 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,

Question 10

What is a closed economy? Opened economy?

Answer 10

• a closed economy does not trade with the rest of the world

- an open economy trades freely with the rest of the world

Question 11

trade barriers

Answer 11

• 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)

Question 12

Is economy always balanced?

Answer 12

No, bilateral trade will rarely be balanced.

Question 13

trade deficit

Answer 13

excess of imports over exports and is thus the name given to the trade balance when it is negative.

Question 14

trade surplus

Answer 14

excess of imports and is thus the name given to the trade balance when it is positive.

Question 15

net exports

Answer 15

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

Question 16

income based payments from foreigners

Answer 16

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)

Question 17

Income based Payments to foreigners

Answer 17

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)

Question 18

current account

Answer 18

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)

Question 19

net factor payments from abroad

Answer 19

net factor payments from abroad = factor payments from abroad - factor payments to foreigners

Question 20

Net transfers from abroad

Answer 20

transfers from abroad-transfers to foreigners

Question 21

financial account

Answer 21

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)

Question 22

net capital outflows

Answer 22

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

Question 23

Describe the relationship between net capital outflows and the real interest rate

Answer 23

• 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

Question 24

International trade and technology

Answer 24

-transfers technology from advanced to less advanced economies, thus contributing in the recepient’s productive capacity.

Question 25

Foreign direct investment

Answer 25

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

Question 26

technology and international trade

Answer 26

• technolgy transfer creates one more type of cross-coutry interdependence
• countries are technologically interlinked

Question 27

Disadvantages of globalisation

Answer 27

-inequities across countries