EC2B3 Topic 9: International Trade in Goods and Assets

Question 1

What is international trade?

Answer 1

The exchange of goods and services across international borders

This includes imports and exports between countries.

Question 2

What are goods in the context of international trade?

Answer 2

Physical items that are traded between countries

Examples include cars, electronics, and agricultural products.

Question 3

What are assets in international trade?

Answer 3

Resources that can generate economic value, including financial assets

Examples include stocks, bonds, and real estate.

Question 4

What is meant by the term ‘imports’?

Answer 4

Goods and services brought into a country from abroad

Imports can be consumer goods, raw materials, or capital goods.

Question 5

What is meant by the term ‘exports’?

Answer 5

Goods and services sold to other countries

Exports contribute to a country’s economy by generating revenue.

Question 6

What is a trade balance?

Answer 6

The difference between a country’s exports and imports

A positive balance indicates a trade surplus, while a negative balance indicates a trade deficit.

Question 7

Define trade surplus.

Answer 7

A situation where a country’s exports exceed its imports

This often leads to a favorable economic position.

Question 8

Define trade deficit.

Answer 8

A situation where a country’s imports exceed its exports

This can indicate economic challenges or reliance on foreign goods.

Question 9

What role do tariffs play in international trade?

Answer 9

Taxes imposed on imported goods

Tariffs are used to protect domestic industries and generate government revenue.

Question 10

What are quotas in international trade?

Answer 10

Limits on the quantity of a specific good that can be imported or exported

Quotas are designed to protect domestic producers by controlling supply.

Question 11

What is free trade?

Answer 11

Trade without restrictions or tariffs between countries

Free trade agreements facilitate easier exchange of goods and services.

Question 12

What is protectionism?

Answer 12

Economic policy aimed at restricting imports to protect domestic industries

This can involve tariffs, quotas, and other trade barriers.

Question 13

Fill in the blank: A _______ is an economic policy aimed at restricting imports.

Answer 13

protectionism

Question 14

True or False: Exports contribute negatively to a country’s GDP.

Answer 14

False

Exports positively contribute to a country’s GDP.

Question 15

What is the purpose of trade agreements?

Answer 15

To facilitate and promote trade between countries

Trade agreements can reduce tariffs and eliminate trade barriers.

Question 16

What is an example of a trade agreement?

Answer 16

NAFTA (North American Free Trade Agreement)

NAFTA was replaced by USMCA, which continues to promote trade between the U.S., Canada, and Mexico.

Question 17

What is foreign direct investment (FDI)?

Answer 17

Investment made by a company or individual in one country in business interests in another country

FDI can include establishing business operations or acquiring business assets.

Question 18

Fill in the blank: _______ refers to the exchange of goods and services between countries.

Answer 18

International trade

Question 19

Are the gains from trade broader than just exchanging goods

Answer 19

broader than just exchanging different goods

Question 20

What can international trade allow country to adjust

Answer 20

Allows it to adjust is level of national saving separately from adjustting investment in physical capital

Question 21

How do countries save and borrow by trading

Answer 21

Save from running CA surpluses

Borrow from running CA deficits

Question 22

What is a country’s current account related to

Answer 22

Related to its stage of development, shocks tto its GDP and fiscal policies

Question 23

What does the possibility of sovereign default do

Answer 23

Puts limit on how much a country is able to borrow in world financial markets

Question 24

What is the other type of trade than just comparative advantage

Answer 24

Intertemporal Trade

Countries exchange goods at different points in time

assets traded between countriies

Question 25

How does a country gain from intermporal trade in assets

Answer 25

Developiing country (exp high income later) borrows now to ssmooth consumption - sell bonds now, import goods now Developed country (exp low growth) gains from lending now - buy bonds now, export goods now to acquire assets

Question 26

What are the accounts of the Balance of Payments (BP)

Answer 26

BP = CA + FA

Question 27

What is Current Account (CA) made up of

Answer 27

CA = NX + NFI NX = Net exports NFI = Net Foreign Income ( Y from ownersship of foreign assets - Y to foreigners from domestic economy)

Question 28

What is Financial Account (FA) made up of

Answer 28

FA = foreign net acquisitions of domestic assets minus domestic net acquisitiions of foreign assets

Question 29

What is BP identity

Answer 29

BP = 0 so FA = -CA international transactions enter BP twice as +ve and -ve

Question 30

Expenditure approach to GDP Y

Answer 30

Y = C + I + G + NX

Question 31

GNP calculation

Answer 31

GNP = Y + NFI

Question 32

National saving calculation

Answer 32

S = Sp + Sg S = Y + NFI - C - G = GNP - C - G

Question 33

Private saving calculation Public saving calculation

Answer 33

Sp = (Y + NFI - T) - C Sg = T- G, taxes minus spending, budget deficit is -Sg

Question 34

as S =GNP - C - G What is this also equivalent to

Answer 34

S = I + CA

Question 35

What does S = I + CA imply

Answer 35

* Country can **save** through investment in domestic capaital stock or through running a current account surplus (CA>0) or financial account deficit (FA< 0) implies country is lending to or acquiring from the rest of the world * Country can **borrow** by running a CA deficit or FA surrplus (FA>0) implies borrowing frrom rest of the world

Question 36

What is Net foreign assets (NFA)

Answer 36

NFA is stock of international savings; value of foreign asssets owned by domestic - value off domestic assestss owned by foreign Future net foreign asssets denoted by NFA' : NFA' = NFA - FA + net capital gains CA gives change in NFA: NFA' - NFA = CA

Question 37

small open economy characteristics

Answer 37

price taker in competitive markets ddoesnt affffect other countries

Question 38

assumptions of small open economy trade to show intertemporal trade benefits

Answer 38

* Single homogenous good everywhere * Single type of asset: bond with IR r Thus NFA held in bonds and thus NFI = r * NFA Ignore investment (I = 0) National saving through trade

Question 39

assumptions of two time period model for inter temporal trade for SOE

Answer 39

* Second period final; no one wants to hold assets NFA' + CA' = 0 * Blank slate in first period NFA = 0 * Accumulation of future ent foreiign assets NFA' = CA

Question 40

What is the international budget constraint of a country

Answer 40

CA + CA' = 0 Present and future balances must offset one another

Question 41

Show from the international budget constraint, the present value of NX and NX'

Answer 41

Question 42

With no investment in physical capital, what is NX =

Answer 42

NX = Y - C - G

Question 43

What is the international budget constraint equivalent to

Answer 43

= to the consolidated budget constraint of the household and the government in the domestic economy

Question 44

Draw Autarky (NX = CA = 0)

Answer 44

* Budget constraint must pass through ( Y - G, Y' - G') * With NX = 0 and NX' = 0, in equilibrium must have C * = Y - G and C' * = Y' - G' Real IR adjusts until equilibrium consumption plan reached

Question 45

Draw the gains from international trade through comparison to Autarky

Answer 45

when r * not equal r(a), households get on to a higher indifference curve

Question 46

How could changes in world interest rate effect countries

Answer 46

never worse off than in autarkey, but similar to savers and borrowers

Question 47

Draw an increase in world interest rate for CA Surplus and

Answer 47

Question 48

Draw CA for fast growing developing country, and country with endowment of natural resource

Answer 48

Question 49

draw a negative shock to real GDP Y

Answer 49

Question 50

Draw a temporary increase in public expenditure

Answer 50

* Households reduce C * and C' * * CA leads to higher deficit

Question 51

Describe effect of Ricardian equivalence on savings

Answer 51

* Private Saving Sp adjusts to offset changes in Sg due to taxes * National saving S = Sp + Sg, hence same is true for CA ( as S=CA due to I = 0)

Question 52

what is the current period of international budge constraint if debts are honoured

Answer 52

Question 53

What is the future budget constraint if debts are honoured

Answer 53

Question 54

Overall budget constraint when B' eliminated

Answer 54

Question 55

What are the future period default and current period default equations

Answer 55

Future default: C' + G' = Y' - v penalty v is loss of being excluded from financial markets in the future Current default: current period; C + G = Y --> as if in autarky future period; C' + G' = Y' - v

Question 56

how is default and lending chosen what constraint does this imply

Answer 56

lenders only lend if no default expected: only lend if B' <= v Countries future default chosen if B' > v Implies limited commitment constraint on borrowing: C + G <= Y - B + V/(1+r)

Question 57

Draw a case where no default occurs

Answer 57

Question 58

Draw a case where default is chosen

Answer 58

Question 59

factors affecting default decision

Answer 59

default more likely when: * Initial debt B is high * Losses or penalties v from default are small * If there is a negative shock to income Y * Interest rate r faced by country is high lenders can also lead to a self fufilling default

Question 60

nominal and real exchange rate

Answer 60

Nominal: e = exchange between domestic and foreign currencies, defined as domestic currency price of a unit of foreign currency Real: q = price of a unit of foreign goods in terms of domestic goods q = eP * / P

Question 61

If prices are fullyy flexible, what is the law of one price

Answer 61

Homogenous goods Unit of goods can be bought in foreign markets at price P * and imported at cost eP * in domestic currency Flexible domestic price P should adjust and exchange rate e satisfy P = eP * , implying a constant real exchange rate 'q=1' so PPP holds

Question 62

Assuming PPP holds, what is the equillibrium exchange rate

Answer 62

Real equilibrium independent of MP as prices flexible thus PPP for price level: P = eP * SOE: P * exogenous

Question 63

how is money demand and exchange rate linked

Answer 63

Question 64

draw the graph of exchange rate and money markets

Answer 64