International Economics Flashcards
1
Q
7 Advantages of free trade (PCSAACF)
A
- Lower prices for consumers (due to better import prices)
- Greater choice for consumers
- The benifit of economies of scale for producers
- The ability to acquire needed resources, internationally
- A more effficient allocation of resources
- Increased competition
- Source of foreign exchange
2
Q
What is the World Trade Organisation?
A
The World Trade Organisation (WTO) is an international organisation that sets the rules for global trading and resolves disputes between its member countries.
3
Q
Functions of the WTO?
A
- Administer WTO trade agreements that the WTO has set up between countries. • Be a forum for trade negotiations and facilitate in setting up trade deals.
- Handle trade disputes among member states.
- Monitor national trade policies.
- Provide technical assistance and training for developing countries.
- Cooperate with other international organisations in order to increase trade.
4
Q
What happens to a market with free trade (graph)?
A
- There is a difference between domestic supply (DS) and world supply (WS), WS is a horizontal line
- Beyond Q1, the price of world production will be below the price of domestic production, Q1Q2 (II) will be imported.
5
Q
Market with a tarrif (graph)
A
- S_world will shift upwards, because foreign producers have to pay the tariff in order to sell their goods in the country.
- Domestic consumers will face a higher market price.
- Import is reduced from Q1Q2 to Q3Q4.
- Import is reduced from Q1Q2 to Q3Q4.
6
Q
Market with a subsidy (graph)
A
- The subsidy will increase the domestic production so SD will shift to the right to
S_(D+S).
- Domestic production increases from Q1 to Q3.
- Import decreases from Q1Q2 to Q3Q2.
- Wellfare loss (g)
7
Q
Market with a quota (graph)
A
- A quota is imposed at Q1Q3, meaning that the country can not import any further than point Q3.
- Domestic production will be 0Q1 and Q1Q3 will be imported.
- Beyond this point, the excess demand will cause domestic producers to be willing to produce more (at a higher price), SD will thus shift to the right.
Wellfare loss (j+k)
8
Q
Arguements for protectionism
A
- Domestic jobs are protected because domestic consumers are more dependent on domestic production.
- Protection can reduce dependence on international trade and can this way protect national security.
- Infant industries can freely develop when they do not face competition from foreign established producers.
- Maintenance of health, safety and environmental standards.
- Foreign producers can use the market of other countries to dump excess production at extremely low prices. Protectionism protects domestic producers for this kind of unfair competition.
- Protectionism limits imports, this way a balance of payments deficit can be overcome.
- The government can profit out of tariff revenues.
9
Q
Arguments against protectionism
A
- It raises prices because its limits free trade.
- Import is limited, which limits the diversity of goods being supplied on the domestic market, limiting consumer choice.
- Competition diminishes, which reduces the positive effects of competition such as improved quality and diversification of products.
- Foreign countries may retaliate with trade barriers of their own, harming the exporting companies of the domestic country (trade wars).
- Resources may not be used in the country that can make most efficient use of them: misallocation of resources
- Because governments can earn major sums of money by using tariffs there is great potential for corruption, especially in less developed countries.
- Domestic companies may focus more on the domestic market due to the barriers, thereby reducing their export competitiveness.
- Increased cost of imported factors of production, because tariffs and quota may also apply to these.
10
Q
Factors which influence exchange rates and how? (demand and supply of a currency)
A
- Foreign demand for exports: D (for exports)↑, D (for currency to buy exports)↑, Currency appreciates (and vice versa)
- Domestric demand for imports: D (for foreign products) ↑, Supply of local currency ↑, Currency depreciates
- Domestic interest reates reletive to foreign interest rates. When local interest rates ↑, foreign investors will bring their money into the country, and thus demand the currecny, causing appreciation.
All of this works vice versa
11
Q
How to construct an exchange rate graph?
A
12
Q
Demand affects on exhacnge rate (graph)
A
13
Q
Supply affects on exchange rate
A
14
Q
Affects of foreign investment on exchange rate?
A
When foreign investors invest more in domestic firms the demand for domestic currency will increase, because these investments must be made in the domestic currency.
15
Q
Consequences of appreciation
A
- Domestic products will be more expensive to buy for foreign nations so exports will decrease.
- This will result in decreased employment, because people producing goods for exports will be needed less, and less economic growth.
- Foreign products will be cheaper to buy for the domestic nations so imports will increase.
- This will result in less inflation due to decrease in price of imports (cost of production decreases).
- Because exports decrease and imports increase the current account balance(X−M) decreases.
