Chapter 4 - Value Creation Through Trade Flashcards
Trade
occurs when goods, services, or resources are exchanged, sometimes using money as a medium of
exchange
Barter
Trade without money
Trade Based on Tastes
We tend to trade because we like one thing more than another or dislike something less than something else
Trade Based on the Division of Labor/Extent of Market
Elaborate
Trade Based on Abilities
The different abilities on individuals that they offer to market labor
Comparative Advantage
An individual has a comparative advantage at producing a good if he or she has a lower opportunity cost of producing the good, in terms of other goods sacrificed. Differences in abilities of individuals or of other resources give rise to comparative advantage
Transactions Cost
Arise due to sacrifice made to search out, negotiate, and compete an exchange
Balance of Trade
$ value of exported goods and services minus the $ value of imported goods and services
Trade Surplus
Positive balance of trade
Trade Deficit
Negative balance of trade
Bastiat - Trade
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Balance of Current Account
Monetary value of the flow of goods and services
Exports - Imports = Bal of Current Acct
Balance of Capital Account
Stocks and bonds
Exports - Imports = Bal of Capital Acct
Balance of Payments
Capital Accounts + Current Accounts = ALWAYS = 0
Exchange Rates
The price of one’s country’s currency in terms of another country’s currency
Dollar Has Appreciated
Gained in value compared to another currency
Appreciation of the dollar makes it less profitable to export and more profitable to import
A depreciation of the dollar has the opposite effect
Exporting
Like weak $ so people can buy more of your product
Producers
Prefer weak $ so more can be exported
Demand for the Dollar Determined By:
How many US goods, services, and financial instruments the rest of the world wants and if people expect $ to appreciate or depreciate in value in the future (in terms of other currencies)
Supply of Dollars Determined By:
How many of the rest of the world’s goods, services, and financial instruments that people holding $ wish to have. If people expect $ to appreciate or depreciate in value and central bank - US Federal Reserve Bank creating or destroying money
Bastiat - Chapter 7: Restraint of Trade
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Protectionists
Modern day mercantilists are sometime called this
The state restrains trade through a few means:
• Tariffs—taxes on imports, sometimes more than 100% of the import’s price.
• Quotas—restrictions on the quantity of imports that citizens can purchase.
• Subsidies—paying domestic firms to produce. Unless foreign governments retaliate, foreign industries can’t compete.
• Export subsidies—paying domestic firms for each unit they export.
• Domestic content restrictions—laws that say a product made in the country must be primarily made using resources from the country.
• Anti-competitive manufacturing specifications—requiring that a particular imported product be
manufactured with inputs that are difficult to acquire except in the importing country. Putting restrictions on product that is being imported
Immigration and Trade
International persons doing domestic trade
