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”
