Exam-1 Chapter -5 Global Economics Flashcards
Exchange rates
Are the price of one currency stated in terms of another currency. (1 euro= 90cents)
Floating exchange rates
Exchange rates set by the market
What makes the value of a currency increase
Exports
What makes the value of currency decrease
Imports
What effects the price of goods offered for sale in international markets
Exchange rates
The balance of payments account
Is the value on international transactions
Types of balance of payments accounts
Current account
Capital account
Financial account
The current account includes
Goods and services, exports and imports, plus certain money flows
The capital account and financial account includes
Changes in foreign owned assets, including government assets.
The 2 accounts plus statistical discrepancy, always sum to
Zero
Countries try to manipulate the terms of trade
To their advantage
In order to manipulate the terms of trade to their advantage, countries use
Tariffs ( taxes on imports), quotas, health and quality standards, and licensing requirements to block imports.
What can be used to encourage exports
Subsidies
What 2 organizations have dramatically lowered the tariffs and other trade barriers around the world
The General Agreement on Tariffs and Trade( GATT) and its successor World Trade Organization (WTO)
Exports
Any international transaction that causes money to flow into a country
Example- for the US, an export would be sale of oranges to Japan
Or sale of banking service by US bank to a European client.
Or the pay check that comes from Italy to a employee of a shoe company who works in the US.
Import
And import is in any international transaction that causes money to flow out of the country.
Example-for the US, import would be purchase of coffee from Ecuador
Or sale of an insurance policy by Lloyds of London to a US company
Or the pay check that goes from Wynn resorts in Las Vegas to an employee who works in Macao.
Exchange rate
Is the price of a Currency, always expressed in some the Currency
Foreign exchange
Is the technical word he used to mean the money for the countries
Balance of payments
Each country keeps track of its international transactions using an accounting system that we call balance of payments
The balance of payments tells us much
About the state of about economy and about our indebtedness to others and theirs to us
When a transaction causes money to flow into a country
It is a credit (+) in the balance of payments
When a transaction causes money To flow out
It is called a debit (-) in the balance of payments
Note that every transaction
Is going to be a credit (+) for one country and a debit (-) for the other.
The debits and credits will
Balance for the world as a whole.
Technically, the US has a set of accounts referred to as
International Economic Accounts. These accounts are then subdivided into the :
International Investment Position IIP and
International Transactions Account ITA
Contents of current account
- Exports and imports of goods and services (e.g. Cars, oil, tourism, banking services]
- Primary income example interest on government bonds owned by foreigners, wages paid by companies to workers in other countries
- Secondary income example money sent to someone in another country
When a commentator says we have a trade deficit
They are either saying we have a deficit ( negative balance) on the exports and imports part of the current account, or on the account as a whole.
The US typically has a trade deficit that means
Many countries with which we trade, such as china and Japan, have trade surpluses.
The US, while having a overall trade deficit actually has
A deficit with physical goods, and a surplus with services, though the plus on services is much smaller than the minus on physical goods.
The plus on services comes about
Because people all over the world purchase financial services from US companies and they travel to the US as tourists.
Capital account contents
Capital transfers e.g. Payments from foreign insurance companies to pay for damage caused by a hurricane, mineral rights payment, some borrowing and lending between people in different countries, payment to use a trademark, certain type of leases or licenses
Capital account is relatively
A small account
Financial account contents
- Net acquisition of financial assets ( Ford builds a factory in Mexico)
- Net incurrence of liabilities ( Sony buys a movie studio in the US)
- Financial derivatives
Financial account category is
Primarily the purchase of physical assets such as businesses, land, or houses and the purchase of stocks and bonds
Derivatives
Are financial instruments created from other financial instruments, such as a bond backed by a mortgage, these are routinely bought and sold between countries
The sum of the values in these three accounts
Should add to zero.
In reality there are data problems that will prevent this from happening
Values
The government adds a category called the Statistical Discrepancy, which is always equal to the difference between the accounts and makes them add up to zero
The United States mostly has trade deficits with nations
Because we buy more goods from them than they buy from us
Because exchange rates are related to prices, and because exchange rates are related to imports and exports so
The trade deficit should be related to our exchange rates.
Just as goods trade for money, money can be traded for
Money. This does not mean changing a $20 bill for a $10 and two fives, but rather changing dollars into Yen or euros.
Each currency in the world
Has a price, actually many prices, each measured in terms of the other currency
What is one of the links in the chain of international trade
Exchange rates
Exchange rates are always
Opposite’s. If One dollar= 100 yen , then one yen is 1/100 dollars or one cent.
Floating exchanges rates
Exchanges rates derailed by market forces are referred to as floating exchange rates
Fixed exchange rates
When the government control the exchange rates, they are said to be fixed.
Another name for fixed exchange rates is
Pegged
While countries have generally floating exchange rates
All exercise some control over the value of their currency
What determines the price of the dollar and the currencies of other countries
Supply and demand.
When we buy goods from them
We need their money (increased demand).
We buy their money
With ours so their is increase supply
In the international markets the dollar has become
More scarce, and therefore, more valuable.
The euro has become
More plentiful, and therefore, less valuable.
When the dollar increases in value through the market,
We say that it has appreciated.
When a currency falls in value through the market,
It depreciates
When we the government controls the words are
Revalue and devalue
So, every time the U.S sells goods to other countries,
It makes the dollar more valuable.
Every time U.S consumers buy goods made in other countries
The value of the dollar falls
The ability of people to buy goods made in other countries, and the ability of companies to sell goods in people who live in other countries depends
In large part on the exchange rate.
Financial crisis
Means that the value of their currency is falling, making it difficult or impossible for them to buy goods from other countries, sometimes including food, oil or other necessities of life.
Appreciation:
Supply and demand (the market) cause a currency to rise in value.
Depreciation:
Supply and demand (the market) cause a currency to fall in value.
Revaluation
The government causes a currency to rise in value
Devaluation
The government causes a currency to fall in value.
Bretton Woods
A monetary policy that focuses on fixed exchange rates to ensure political and economic stability. It is important because the Bretton Woods Agreement allowed for the U.S. to adopt the gold standard and allowed other countries to peg their currencies to the U.S. dollar, which was effective until the U.S. dropped out of Bretton Woods.
Prior to Bretton Woods which currency ruled the world:
British pound
All countries’ international transaction were built around what?
Gold
By changing their exchange rates, othe countries could
Effectively change the prices of the goods they exported and imported.
Bretton Woods made the United States dollar
The center of the world financial system, but Britain opposed since it made the British pound less important.
What was the primarily concern of Bretton Woods
To create a system that would help rebuild the world, and in the process, make another world war less likely.
In 1971, President Nixon
Pulled the US out of Bretton Woods by cutting the tie between the dollar and gold.
By 1973, the world had shifted to what system ?
Market based system
A trade deficits with China means what?
That we import more from them than we export.
Trade deficits and trade surpluses should go away autoamatically
If the markets are working correctly.
The gains from trade are often small and require what?
The cooperation of both trading partners to be fully realized.
Trade Manipulation
Some countries attempt to manipulate their trade relations to shift benefits away from their partners and on to themselves. These nations are the modern Mercantilists.
Modern Mercantilist leaders are focusing on doing what?
Increasing the economic power of the nation without regard to its impact on their partners. In fact, they may view trade as a “war,” with winners and losers.
What would a mercantilist country try to do?
Sell its products to others, and not buy goods from other countries
How do countries manipulate trade?
- The country can manipulate the value of its currency, the exchange rate, to make it easier for people from other countries to buy its goods.
- They erect barriers to trade. These are mechanisms that make it difficult for goods from other countries to enter.
In a money economy where buying and selling are separate activities
Terms of trade may emerge in the short term that are detrimental to the country. In other words, i buy from you thinking that you will buy from me too, but you take my money and your money and walk away.
Ways to manipulate trade:
- Tariffs
- Quotas.
- Licensing Requirements
- Health and Quality Standards
- Subsidies
T Q L H S
Tariffs
A tariffs is a tax that applies only to goods entering a country. It is exactly like the sales tax usually charged to purchase goods inside a country, except that is into charged against domestic goods.
Quotas:
A quota is a physical limitation on the quantity of a good. For example, The U.S. Might limit beef shipments from Argentina to 500,000 pounds per year.
Licensing Requirements.
A country may require businesses to have a license or permit to sell products within its borders.
By making licenses difficult, expensive, and time consuming to obtain,
Foreign sellers may decide the effort to obtain a license is not worth it and simply not sell products in that country.
Health and Quality standards
Countries may limit products from other countries by setting high standards for health concerns or minimum standards for the quality of products that enter (consumer safety). Example ban on beef shipment because of mad cow disease.
Subsidies:
This is the “positive” way, where the other four try to stop imports, subsidies are used to encourage exports.
Subsidies
Means a pavement from the government to a business when that business exports
From the point of view the Mercantilist country, trade barriers may allow
Their country to sell to others without having to buy, and thereby becoming richer at the expense of others.
What economist think about Mercantilist countries?
- Both countries would be better off if they cooperated.
- Consumers will be hurt because they will have a smaller selection of goods to buy.
- IF two countries, say the U.S and Japan, both erect trade barriers, neither will buy from the other, which means that neither will sell to the other, and both will be damaged by the barriers.
Hayley-Smoot tariffs
1930-highest tariff in U.S. history. It raised duties on agricultural and manufactured imports. It may have contributed to the spread of international economic depression
With a few years after the end of World War 2 (1947), most of the coutnries in the world gore together and created the
General Agreement on Tariffs and Trade, or GATT. GATT markedly lowered tariffs and trade barriers around the world
The United States has negotiated specific treaties with most of the world countries in which we trade
low tariffs on goods we want to export for low tariffs on goods they want to import
Coupled with treaties such as the North American Free Trade Agreement
Which removed all tariffs with Mexico and Canada, the US has adopted a strong free trade position.
Most Republican and Democrats in Congress
have favored free trade
Liberals and conservatives have
Opposed free trade
What do the conservative Republicans, who tend to be Mercantilist believe?
That such agreements weakened the country and oppose them. T
The liberal Democrats believe that
Such agreements are bad for American labor by moving jobs to other countries and oppose them.
Business are equally
Divided on free trade.
Dumping
Selling below the cost of manufacture is called “dumping”
The US have antidumping laws
Which allow the imposition of tariffs to counter the dumping.
During the Kennedy Round and Tokyo Round
Trade barriers of all kinds were lowered, though more so for the developed world and less in the developing countries.
In 1994, GATT was replaced by what?
The World Trade Organization (WTO). Which went beyond GATT by creating what amounts to a world trade court.
Today a web search on the WTO finds
Numerous websites and articles arguing either that the WTO increases world trade and equalize things for everyone, or that the WTO is a pawn for the big countries and takes advantages of the small.
