Chapter 4 Concepts and Terms Flashcards
Trade
when goods, services, or resources are exchanged, sometimes using money as a medium of exchange
Barter
trade without money
The incentive to trade comes from what three motivations?
People differ in taste; people differ in ability; more highly populated markets give rise to better use of resources through specialization
Why do we trade?
Sometimes we trade because we like one thing more than another, other times we trade because we dislike one thing less than another
What did Adam Smith say about the limitations on the specialization of labor?
The division of labor is limited by the extent of the market. (Millions of people trade to produce a single good. But if only one person wants a good, it would not be profitable to do all of the trading necessary to make it.)
Comparative Advantage
when an individual producing a good has a lower opportunity cost of producing the good in terms of other goods sacrificed (this is due to differences in abilities of people)
When is trade advantageous?
if the EXTERNAL COST of trading for a good is lower than the INTERNAL COST of producing a good
Transaction Costs
limit trade; arise due to the sacrifice that must be made to search out, negotiate, and complete an exchange
The Balance of Trade
the dollar value of exported goods and services minus the dollar value of imported goods and services
Trade Surplus
a positive balance of trade
Trade Deficit
a negative balance of trade
The Current Account
the monetary value of the flow of GOODS and SERVICES
The Capital Account
the monetary value of STOCKs and BONDS held
The Balance of Payments
the sum of the Current account and the Capital account (if we import more than we export, foreigners must be investing in our companies or our government - a good thing; right?)
As stated by Adam Smith, “The true wealth of a nation lies in…”
“possessing goods and services”
Exchange Rate
the price of one country’s currency in terms of another country’s curreny
What do exchange rates depend on?
The supply and demand for each currency - as with any other price
The demand for dollars is determined by:
how many US goods, services, and financial instruments the rest of the world wants; whether people expect the dollar to gain or lose value in the future - in terms of other currency
The supply of dollars in determined by:
how many of the rest of the world’s goods, services, and financial instruments that people holding dollars wish to have; whether people expect the dollar to gain or lose value in the future - in terms of other currency; the Central Bank - the US Federal Reserve Bank (the fed) creating or destroying money
Appreciation and depreciation of the dollar…
the dollar has gained in value, compared to other currencies - (an appreciation of the dollar makes it less profitable to export and more profitable to import) - a depreciation of the dollar has the opposite effect
What effect does an appreciation/depreciation of the dollar have on export/import businesses?
Export businesses prefer a weak dollar (depreciation) and industry that uses foreign resources prefer a strong dollar (appreciation)
What happens to the money supply as it rises?
dollars are easier to find, so their price falls - that is, the dollar depreciates (a depreciating dollar hurts import industries)
What are Protectionists?
Basically modern day mercantilists
How does the state restrain trade?
tariffs, quotas, subsidies, export subsidies, domestic content restrictions, and anti-competitive manufacturing specifications
