Econ Mock review Flashcards
What is the definition of the balance of payments?
This is a systematic record of all economic transactions between one country and the rest of the world over a given period of time. This tracks the flow of goods, services, financial assets, and capital going in and out of the country. It can be split into 3 accounts…
If one account is in a current account deficit, the country can finance it through the financial or capital accounts.
What is the current account?
The current account is part of the balance of payments. This includes goods, services, income, and transfers.
Examples include…
tourism, exports and imports, dividends.
A current account deficit means that the country is importing more than it is exporting
A current account surplus is when it is exporting more than it is importing.
This helps measure the country’s trade balance and economic performance.
What is the financial account?
This is part of the BOP
It tracks, investments, liabilities, and financial assets.
Examples include…
Foreign Direct Investment, stocks, bonds, and central bank reserves
This affects the ownership of assets as well as international capital flows
Financial account deficit means less investment is going into the country
Surplus means more investment is going into the country
A capital account?
Has little to no affect on the balance of payments. Things like
What is a protective tariff? Draw and explain the diagram.
This is put when there is a free market and governments want to protect their domestic producers in a certain market from the lower and more efficient prices of foreign producers. The tariff makes foreign producers produce less because they have to give more money to the government of the country they are exporting to.
h represents the misallocation of resources as the less efficient domestic producers are in the market.
k represents a deadweight loss because some consumers can’t afford the higher price.
What is the protective subsidy? Draw and explain the diagram
This is a government policy placed upon the domestic producers to ensure that they can compete with the prices set by the foreign producers. This shifts the S curve outwards and it is called S domestic + subsidy.
f and g are the cost of the subsidy to the government with g being the deadweight loss due to misallocation of resources because the inefficient domestic producers are now producing and competing.
What is a protective quota? Draw and explain the diagram.
This is when a government puts a limit on the quantity of goods that can be sold in the market of a certain good in an economy. This ensures that domestic producers do not lose their jobs. However, there is a deadweight loss of l and a misallocation of resources due to less efficient domestic producers competing in the market: j and k
What is a natural monopoly?
This is when a single firm is more efficient at producing a good or service versus when a multitude of firms produce the same thing.
This can be caused because of economies of scale which makes it hard for other firms to compete with the already lower prices.
It can also be caused due to high fixed costs which are costs that don’t change as you produce more. Things such as having to install pipes or railway tracks or install water tanks cost a lot. Hence, it would be more efficient if one firm did all of this instead of a multitude of them.
What is rational consumer rationale? Why can’t this be true in real life?
This assumes that all consumers make decisions in order to maximize their utility of a good or service.
However, different factors affect this such as…
- trends and social pressure
- lack of perfect information as they don’t research or know all the benefits or downsides of a good/service
- impulse buying
- time constraints (you might just buy whatever because you don’t have time; this doesn’t allow consumers to make a fair and rational decision between products
- income limits
What is rational producer behavior? What are some limitations?
This assumes that all producers act to maximize profits and limit production costs as well as allocate their resources efficiently.
Limitations…
- Lack of perfect information of what consumers are looking for
- government regulations
What is market equilibrium? What are some assumptions behind it?
This says that the price of a good/service is reached when supply and demand of that good are equal.
Limitations:
- rationale producers and consumers
- homogenous goods/services
- no barriers to entry/exit
- free market
- prices are flexible
What is the law of demand? What are some assumptions behind it?
The quanitity of goods and services consumers are willing and able to buy at a certain price in a certain timeframe
Law of demand states that as prices increases, quantity demanded decreases and viceversa, ceteris paribus
Change in price leads to changes along the curve of demand
Assumptions/Limitations…
- ceteris paribus (assumes that only price changes)
- homogenous goods/services
- rational consumers
What is the law of supply? What are some assumptions/limitations behind it?
the quantitiy of goods that producers are willing and able to supply at a given price in a certain timeframe
This states that when prices increase, quantity supplied increases and viceversa, ceteris paribus
Change in price leads to changes along the curve of supply
Assumptions…
- ceteris paribus
- no barriers to entry nor exit
- rational producers
What is a fixed exchange rate and its implications as well as its advantages?
A fixed exchanged rate system is when the country’s value of their currency is pegged to another currency.
- Increases certainty in businesses incentivizing foreign investments –> reduce speculation of currency
- The government will do all it can to make sure inflation doesn’t arise
-
However,
- this can lead to a facade of the actual conditions of an economy
- inflation especially cost inflation can worsen if high inflation in economy is already present. This is because high inflation (too much demand) so supply decreases.
- countries need to have a high level of foreign currency reserves to buy or sell currencies to keep their exchange rate stable.
- Monetary tools such as increasing or decreasing interest rates to influence AD curve because this can devalue or revalue the country’s currency.
- Cause international disputes as this artificial way of stabalizing their currency allows them to have the upperhand as an importer or exporter in international trade
What is a floating system? What are some downsides to it
A floating exchange rate system is when the value of a currency is dependent on the demand and supply of it; no government intervention.
- This is good because it can allow the country to manipulate interest rates. This means that if there is a current account deficit or if theirs inflation or whatever in a country, the central bank can manipulate the interest rates without any worry because the economy will self-correct itself eventually.
- Governments do not have to worry about having a high level of foreign currency reserves
However,
- This causes uncertainty in investors as the value of the currency can decrease or increase at any point (lowers investment into the country)
- This doesn’t exist in reality as there will always be other factors that influence the currency’s value
What are non determinants of demand? What do they do to the demand curve? What are some examples of them?
They are other factors outside of price that affects the demand of products. This causes a shift in the demand curve.
Non determinants of demand:
- tastes and preferences
- Income (normal goods vs inferior goods)
- Prices of Related goods (substitute vs complementary goods)
- Population changes and changes in the overall life expectancy of the country
- Season changes make certain goods higher in demand for a period of time
What is nudging
Nudging is a way for producers to influence the decision making of consumers without changing the choices of the goods and services.
What is foreign direct investment?
This is when a firm from another country invests by setting up factories, companies, etc in another country.
Describe and draw out the diagram of how technological advancements can help economic growth.
AS curve shifts out and AD doesn’t shift out. Then, LRAS shifts to the right.
What is economic integration? What are some of the stages?
This is when countries lower trading barriers with each other to facilitate the trading of goods, services, capital, etc.
Preferential Trade Area (PTA): when countries lower tariffs on specific goods
Free Trading Area (FTA) : when there are no tariffs amongst members however each member can establish their own external tariffs.
