International Economics Flashcards
In the law of comparative advantage, the country which should produce a specific product is determined by?
Opportunity Cost. The country should specialize in the product the LOWER opportunity cost.
What are three reasons why a U.S. entity would engage in economic activity?
- Market diversification - Increase sales in foreign markets. Increases U.S. demand.
- Resource Acquisition - Resources not available in U.S. can be acquired elsewhere.
- Reduction of production costs - Either buy manufactured goods or move its production facilities abroad. Lower labor cost.
Define absolute advantage. Also, explain an example of what absolute advantage would look like.
Exists when a country or business can produce a particular good or service with fewer inputs and resources. Example: If China produces 100 TVs and 80 cars while U.S. produces 20 TVs and 60 cars for one unit, then China has AA for both products.
Define Opportunity cost.
Money value of benefits lost from the next best opportunity as the result of choosing another opportunity.
Define comparative advantage.
Exists when one entity or country has the ability to produce a good or service at a lower opportunity cost than the other entity.
Explain law of comparative advantage is important when two countries are producing the same products and how to determine who should produce what?
The law states that if a country can produce a product at a lower opportunity cost, then it should specialize in production for that product. However, if the other country has a lower opportunity cost for another product, then that country should specialize in production for that product. Basically, each country should produce the product with the lowest OC.
What type of economy does the U.S. have?
Open economy.
In which of the following situations would it be advantageous for a country to export a manufactured product?
The country has a comparative advantage in the production of the item.
The measurement of the benefit lost by using resources for a given purpose is?
Opportunity cost
When solving problems for opportunity costs, how do you calculate opportunity costs for each product?
Use the # of units of product/country as denominator. The numerator will be the # of units for the other product of that same country. Example, U.S. produces 20 TVs and 60 cars. The OC for TV is 3 (60/20).
The “current account” is used in balance of payment accounting. This account reports the dollar value of?
#1: The net of imports and exports of goods and services. #2: The net income from U.S. investments in foreign securities and real estate and foreign investments in U.S. securities and real estate. #2: net of other transfers out of and into the U.S., including government grants and charitable transfers. The sum of these items is the current account balance in the balance of payments statement.
The “capital account” is used in balance of payment accounting. This account reports the dollar value of?
#1: The net of U.S. purchases of foreign capital (or real) assets and foreign purchases of U.S. capital (or real) assets. #2: The net of U.S. purchases of foreign investment and other financial assets and foreign purchases of U.S. investments and other financial assets. The sum of these is the capital account balance in the balance of payments accounting.
The “financial account” is used in balance of payment accounting. This account reports the dollar value of?
#1: .S.-owned assets abroad, and #2: Foreign-owned assets in the U.S. The sum of these is the financial account balance in the balance of payments account.
What are the three accounts used by the U.S. to account for transactions and balances with other nations?
#1: Current account #2: Capital account #3: Financial account
What is an advantage of having the U.S. dollar fall in relation to other currencies?
A cheaper dollar helps U.S. exporters because it makes their products less expensive.
What does it mean when net exports are positive or negative?
Positive net exports: Exports > imports; net flow of goods from firms of domestic country to foreign countries
Negative net exports: Imports > exports; net flow of goods from firms in foreign countries to domestic country
Define tariffs, quotas, embargoes, and exchange controls.
Tariff - a tax on imports.
Quotas - Restrictions on the amounts of imports.
Embargo - total ban on certain types of imports (most restrictive)
Exchange controls - limits of the amount of foreign exchange that can be transacted or exchange rates.
Tariffs and import quotas provide the greatest direct benefit to domestic producers and suppliers. Why is that?
This is because these will lower or restrict the quantity of products brought into the country by foreigners. This will increase the demand for domestic goods. Tariffs will increase price of foreign goods which lowers demand. Domestic producers can sell more.
What is the difference between capital account and trade balance?
Trade balance: refers only to merchandise exports and imports.
Capital account: refers to the transactions related to the international movement of financial capital.
What is the main goal of trade protectionism?
Trade protectionism seeks to protect domestic producers by restricting, not increasing, the importation of foreign goods and services, generally through imposing tariffs or quotas.
What would cause a reduction in the balance of payment accounts for the U.S.?
The import of asset from foreign countries. This would transfer capital from the United States to sellers in foreign countries that would decrease the capital accounting, which would reduce the balance of payments for the United States.
What are some examples that would increase balance of payment accounts for the U.S.?
- Exports of services to residents in foreign nations (Increase current acct.)
- Loans to domestic entities by foreign commercial banks (Increase capital acct)
- Foreign purchases of assets in the U.S. (increase capital account)
Explain why imposing tariffs would increase domestic employment?
First, imposing tariffs would reduce the amount of foreign imports (due to higher prices) and would create a higher demand for products made by domestic producers. Therefore, higher demand in protected domestic industries. Also, when other countries impose higher tariffs (tariff war) on U.S. exports, export industry will suffer. Meaning there will be a reallocation of workers from export industries to protected domestic industry in long run.
What is dumping? Also, how do you know if firm is dumping?
“Dumping” is the sale of a product in a foreign market at a price that is either lower than is charged in the domestic market or lower than the firm’s production cost. In a problem look to see if foreign price is lower than domestic price of cost of production.
What is a currency exchange rate?
Price of one unit of a country’s currency expressed in units of another country’s currency.
How are exchange rates when they are free floating determined by?
Supply and demand in the foreign exchange market.
What is a direct exchange rate?
A direct exchange rate expresses the domestic price of one unit of foreign currency. For example, 1 euro costs $1.20 of domestic currency.
What is an indirect exchange rate?
An indirect exchange rate expresses the foreign price of one unit of the domestic currency. For example, one U.S. dollar equals .8333 euro.
What is the role of International Monetary Fund? (IMF)
The objective of the IMF is maintaining order in the international monetary system, largely by providing funds to economies in financial crises.
