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Toby CFA > Economics: Economics in a Global Context > Flashcards

Economics: Economics in a Global Context Flashcards

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1
Q

Int’l Trade/Cap Flows: GNP & GDP

A
  • Gross Domestic Product (GDP): Value of goods and servies produced in a country
  • Gross National Product (GNP): Value of good and servies produced by a country’s citizens
  • Differences:
    • Income of citizens working abroad, non-citizens working in country
    • Income to capital owned by foreigners, foreign capital owned by citizens

GDP is better for measuring domestic activity

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2
Q

Int’l Trade/Cap Flows: Benefits/Costs of International Trade

A

Benefits:

  • Lower cost to consumers of imports
  • Higher employment, wages, and profits in export industries

Costs:

Displacement of workers and lost profit in industries competing with imported goods

Economists: Benefits outweigh costs

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3
Q

Int’l Trade/Cap Flows: Absolute vs. Comparative Advantage

A

Absolute advantage refers to lower cost in terms of resources used

Comparative advantage refers to lower opportunity cost to produce a product

Law of comparative advantage:

  • Trade makes all countries better off
  • Each country specializes in goods they produce most efficiently and trades for other goods
  • Outcome: Increased worldwide output and wealth with no country being worse off
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4
Q

Int’l Trade/Cap Flows: Absolute vs. Comparative Advantage - Example

A
  • Portugal has absolute advantage in both wine and cloth
  • England has comparative advantage in cloth, opportunity cost of 100/110 in terms of wind compared to 90/80 opportunity cost in Portugal
  • Portugal has comparative advantage in wine, opportunity cost of 80/90 units of cloth compared to 110/100 of cloth in England
  • If Portugal specialized in wine production and England specializes in cloth production, both can be better off
  • Trade can also product benefits from economies of scale and efficiences resulting from cross-border competition
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5
Q

Int’l Trade/Cap Flows: HO and Ricardian sources of comparative advantage

A

Ricardian model

  • trade is based on technological differences ⇒ results in differences in labour productivity (comp. adv.)
  • Assumptions: Labour is the only variable factor input and Technology varies across countries

Heckscher-Ohlin model

  • Trade is based on endowment of factors of production ⇒ comp. adv. lies in goods produced wit
  • Identical technologies within industries across countries Both L & K are variable factor inputs
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6
Q

Int’l Trade/Cap Flows: Heckscher-Ohlin Model

A
  • Under Heckscher-Ohlin model, there is a redistributio of wealth between two factors of production due to international trade
  • The price of more abundant resource will increase
  • Results in a wealth transfer within a country from scarce resource to abundant resource
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7
Q

Int’l Trade/Cap Flows: Trade Restrictions

A
  • Tariff is a tax impossed on imported goods
  • Quota is a limitation on the quantity of goods imported
  • Export subsidies are payments by government to domestic exporters
  • Minimum domestic content specifies required proportion of product content to be sourced domesticaly
  • Voluntary Export restraints (VERs) are agreements by exporting countries to limit the quantity of goods they will export to an importing country
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8
Q

Int’l Trade/Cap Flows: Effects of Tariffs and Quotas

A
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9
Q

Int’l Trade/Cap Flows: Reasons for Trade Restrictions

A

Two primary goals:

  1. Protecting domestic jobs
  2. Protecting domestic producers
  • Other reasons include countering foreign trade restrictions and export subsidies, anti-dumping, and revenues from tariff for domestic government
  • A large country could actually decrease the world price by imposing a quota or tariff
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10
Q

Int’l Trade/Cap Flows: Trade Restrictions effects

A
  • In case of quota, the distribution of gains between the domestic goverment and foreign exporter depends on the amount of quota rent collected by the domestic government
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11
Q

Int’l Trade/Cap Flows: Capital Restrictions tools, why countries do it and the consequences?

A

Tools

  • Outright prohibition
  • Punitive taxation
  • Restrictions on repatriation

Consequences

  • Restrictions decrease economic welfare
  • Short-term benefit for developing countries: reducing volatile capital inflows and outflows
  • Long-term costs of isolation from global capital markets

Why?

protect domestic industries

preserve domestic ownership

minimize the export of profit

control currency value ( especially if fixed currency)

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12
Q

Trade diversion and creation

A
  • Trade diversion is when lower cost imports from non-members are replaced with higher cost imports from members
  • Trade creation is when there is a replacement of higher cost domestic production for lower cost imports from member countries
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13
Q

FTA

Int’l Trade/Cap Flows: FTA, CU, CM, EUnion, MUnion

A

Free trade area (FTA)

  • Removes all barriers of trade between member countries
  • Example: NAFTA

Customs Union (CU):

  • FTA + common trade restricitons on non-members

Common Market (CM)

  • CU + removes barriers to movement of labor and capital among members

Economic Union

  • CM + members establish common institutions and economic policiy

Monetary Union

  • Economic union + members adopt a common currency (e.g., European Union)
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14
Q

Int’l Trade/Cap Flows: BOP Accounts

A
  • Current account

Merchandise/services purchases, dividends and interest, and unilateral transfers

  • Capital Account

Sales/purchases of physical assets, natural resources, intangible assets, debt forgiveness, death duties, and taxes

  • Financial Account

Domestic-owned financial assets abroad (official reserve, government, private) and foreign-owned domestic financial assets.

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15
Q

Int’l Trade/Cap Flows: BOP Influences

A

X - M or CA = private savings + government savings - investment

|CA| = |CapA+ FA|

*X - M is exports minus imports

  • An increase (decrease) in private or government savings would improve (worsen) the balance of trade
  • A trade deficit due to a decrease in private or government savings is less desirable than trade deficit due to high domestic investment
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16
Q

Int’l Trade/Cap Flows: IMF and World Bank and their roles

A
  • International Monetary Fund (IMF)
    1. Monetary cooperation
    2. Growth of trade
    3. Exchange stability
    4. Multilateral system of payments
    5. Overcome temporary BOP difficulties
  • World Bank
    1. Fight poverty
    2. Development and assistance
  • World Trade Organization
    1. Enforce global rules of trade
    2. Ensure trade flows smoothly and freely
    3. Dispute settlement process
    4. Multilateral trading system – agreements
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17
Q

Exchange Rates: ForEx Quotations and what is PPP?

A

PPP is that the same good will cost the same dollar adjusted amount in each country

and assumes 1:Homogenous g/s 2: no market frictions 3: no trade barriers

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18
Q

Exchange Rates: Example: Real Exchange Rate and how to read direct/indirect

A

USD/NZD means 1 NZD buys X.XX US dollars and would be a direct quote in NZ

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19
Q

Exchange Rates: Spot Market vs. Forward Market

A

Spot exchange rates: Exchange rates for immediate delivery

Forward contract: An agreement to buy or sell a specific amount of a foreign currency at a future date at the quotes forward exchange rate (e.g. 30, 60, 90 days in the future)

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20
Q

Exchange Rates: Market Participants: Hedgers and Speculators

A

Hedgers

Have an existing FC risk that they want to reduce/eliminate with forward FX contracts

Speculators

Have no existing FX risk

They take on FX risk with forward contracts with the expectation of earning profit

21
Q

Exchange Rates: Market Participants: Sell/ Buy Side

A

Sell side

Market makers: Large multinational banks

Buy side

  • Corporations
  • Investment accounts: Real money and leveraged
  • Governments, sovereign wealth funds, pension plans, central bans
  • Retail market: Househols (e.g., tourism)
22
Q

Exchange Rates: Currency Appreciation or Depreciation

A
23
Q

Exchange Rates: Cross Rates Example

A
24
Q

Exchange Rates: Forward Quotes - Point Basis

A
25
Q

Exchange Rates: Forward Quotes- Percentage Basis

A
26
Q

Exchange Rates: No-Arbitrage ForEx Rate

A
  • Follow the Numerator-Denominator rules: Given a quote A/B, use A’s interest rate in numerator and B’s interest rate in denomination
27
Q

Exchange Rates: No-Arbitrage Forward Rate - Example

A
28
Q

Exchange Rates: ForEx Rate - Problem

A
29
Q

Exchange Rates: Exchange Rate Regimes – No Sovereign Currency

A

Countries without sovereign currency

Formal dollarization: Uses other country’s currency

Monetary union: Several countries use a common currency

Country cannot have its own monetary policy

30
Q

Exchange Rates: Exchange Rate Regimes - Sovereign Currency

A

Countries with sovereign currency

  1. Currency board: Commits to a fixed rate of exchange of domestic for a foreign currency
  2. Convential fixed peg: Maintain at pegged rate (+/- 1%( via direct intervential in the FX markets or indirectly via monetary policy changes
  3. Target zone: Gives inflexibility to maintain the exchange rate within a wider range (e.g. +/- 2%)
  4. Crawling peg: Allows exchange rate to move slowly with changes in fundamentals
    1. Active: Announced and implemented
    2. Passive: Managed but not market driven
  5. Managed floating: Does not have a target exchange rate; influences exchange rate through direct intervention or monetary policy
  6. Independently floating: Market determines
31
Q

Exchange Rates: Exchange Rates, Trade, and Capital

A

(X - M) = (Private saving - investment) + (tax revenue - government spenging)

(X - M) > 0, trade surplus when private savings + government surplus exceeds domestic investment

(X - M) < 0, trade deficit when private saving - domestic investmnt is less than budget deficit

32
Q

Exchange Rates: Exchange Rate and Trade Deficit and marshall lerner condition

A
33
Q

Exchange Rates: Exchange Rate and Trade Deficit: J-Curve Effect

A

J-Curve Effect

In the short run, due to existing contracts, export and import demand are relatively inelastic

  • Currency depreciation initially leads to larger trade deficity

In the long run, elasticities increase

  • Currency depreciation leads to a reduction in the trade deficit
34
Q

Exchange Rates: Exchange Rate and Trade Deficit: Absorption Approach

A

The absorption approach includes the effect of currency depreciation on capital flows as well as trade flows

Exports - Imports = National Income - Expenditures

For depreciation to improve the balance of trade:

  • National income must incease relative to expenditures
  • National saving (private + government) must increase relative to domestic investment in physical capital.
35
Q

Exchange Rates: Currency Depreciation Effect - Problem

A
36
Q
A
  • risk associated with tensions or actions between actors that affect the normal and peaceful course of international relations
37
Q
A

State actors: national governments, political organizations, and country leaders that exert authority over a country’s national security and resources

Non-state actors: do not directly control national security or country resources e.g./ NGOs, multinational companies, charities, influential individuals

38
Q
A

Cooperation: Rules standardization, harmonization of tariffs, free movement across borders, permitted movement of goods and services, reciprocation, Tech exchnage

Non-cooperation: Inconsistent rules, arbitrary rule, restricted movement across borders, trade and capital controls, retaliation and lack of tech exhcnage

39
Q
A

National security or military interest, Economic interest (key resources, global expansion), Soft power (exerting influence with force), Cultural considerations (immigration patterns)

40
Q
A
  • Ranks from most essential to least, economic >Defense/militarily> cultural factors
41
Q
A

process of interaction and integration among people, companies, and governments worldwide (mainly economic and financial but has cultural spillovers)

Can be driven by financial contagion nationalism (domestic interests first) supply channel risk.

42
Q
A

1/ Increasing profits new markets ➞ increased sales - may involve foreign direct investment lower costs - cheaper labour, lower tax operating environments, supply chain efficiencies

2/ Access to resources and markets - talent or raw materials

3/ Intrinsic gain - information exchange, knowledge spillovers

Unequal accrual of economic and financial gains - winners and losers Lower environmental, social, and governance standards - will operate to local standards Political consequences - loser countries ➞ net job losses, out migration, capital outflows

Interdependence - over-reliance on the resources, or a key resource, from another, potentially, non-co-operative country

43
Q

What are geopol archetypes?

A
44
Q
A
45
Q
A

1/ Event risk - date specific e.g. elections, new legislation

2/ Exogenous risk - unanticipated risk that impacts either a country’s co-operative stance, ability of non-state actors to globalize, or both e.g. invasions, natural disasters

3/ Thematic risk - evolve and expand over a long period of time e.g. climate change, immigration patterns, populism

46
Q
A

Likelihood - probability that it will occur - mostly subjective

Velocity - pace at which geopolitical risk impacts on investor’s portfolios

Impact - high or low, discrete or broad (economy/market)

47
Q

Challenges to implementing trade agreements?

A

1) Cultural/historical differences ⇒ integration @ economic level will require some social/political integration (esp. common market)
2) higher levels of integration may result in loss of independent economic control - difficult to control relative prices level of imports

48
Q

Pros and cons of free flow of capital

A

Pros

  • investment can occur @ a rate higher than domestic savings - achieve higher economic growth rate - FDI may bring new technology, skills, processes - induce domestic firms to become more efficient

Cons

  • if investment is short-term in nature i.e. - indirect investing (stocks, bonds, etc…) may inflate local currency (overvaluation) - when hot money leaves ⇒ capital flight

Toby CFA (22 decks)

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