International economics and growth Flashcards
Economic ______ is defined and measured as an increase in real GDP that occurs over time.
growth
Explanation
This can also be expressed as the increase in economic growth per capita. Economic growth is widely held as a goal because a growing economy is in a better position to meet new needs and address socioeconomic issues.
_____ factors of economic growth include the quantity and quality of a nation’s natural resources, human resources, capital stock, and technology.
Supply
Economic growth can be indicated in an outward shift of the __________ Possibilities curve.
Production
Explanation
The Production Possibilities Curve is usually referred to as the PPC Curve. Increases in the amount and quality of resources and technological improvement allow this shift to occur. This happens through saving and investment, growth of human capital, and discovery of new technologies.
Economic growth can be indicated in a _________ shift of the long-run aggregate supply curve.
rightward
Explanation
There is more long run supply and the economy adjusts its production demand to accommodate the increased supply.
An economy’s growth _________ cannot be reached unless aggregate demand increases and the new (additional) resources are employed efficiently.
potential
Explanation
The focus of growth is primarily on the supply side. Real GDP in any year relies on the output of labor multiplied by the productivity of labor.
The ____________ function is the relationship between real GDP per hour of work and capital per hour of work, holding technology constant.
productivity
Explanation
An increase in capital per hour of work brings a movement along the productivity function. An advance in technology shifts the productivity function. We divide the increase in real GDP per hour of work into a capital effect and a technological change effect by using the one-third rule.
The ______ rule states that an x percent increase in capital per hour of work brings a 1/3 of x percent increase in output per hour of work.
one-third
Explanation
The remaining increase in output per hour of work is attributed to technological change (and unidentified factors).
_____ accounting is the attempt to measure the contributions to growth of labor, capital, and technological change.
Growth
Explanation
In 1965, the productivity function was PF65. By 1973, the productivity function had shifted upward to PF73. The majority of this increase came from technological change as seen in the shift from PF65 to PF73. The additional increase came from capital accumulation (movement along PF73).
_________ growth theory is a theory of economic growth based on the view that population growth is determined by income per person.
Classical Figure
Explanation
(a) If income per person exceeds the subsistence level, the population will expand and Labor Supply (LS) increases. An increase in capital or a technological advance increases the marginal productivity of labor and increases the demand for labor (LD1 to LD2). Employment increases to 3 million and the real wage rate rises to 4 schillings.
Figure (b) The higher real wage rate stimulates population growth and this increased population increases the supply of labor (LS0 to LS1). The real wage rate then falls back to 2 schillings to accommodate the population growth. Classical Theory states that growth is always temporary and that population growth drives the real wage rate down to the subsistence level.
____________ growth theory is a theory of economic growth that believes growth is driven by technological change.
Neoclassical
Explanation
It focuses on the impact new technology has on the saving and investment functions and how that relates to the increase of capital stock.
___ growth theory is a theory of economic growth based on the idea that technological change results from people’s choices and pursuit of profit.
New
Explanation
In the pursuit of a higher profit, someone develops a new technology and it is then available to the public. Many people try to implement the new technology which causes competition amongst firms that may result in diminishing returns for one firm or another but not for the economy as a whole. The ever persistent pursuit of profit keeps growth going.
___________ growth policies increase aggregate demand during recession.
Demand side
Explanation
Low growth is often the result of inadequate demand. Strong AD keeps the current resources employed and it creates incentive for business to increase their productivity. Often interest rates are lowered to encourage investment, which leads to capital accumulation, which expands the economy’s productive capacity.
___________ growth policies work to achieve full production or capacity potentials.
Supply side
Explanation
The goal is to shift the long run and short run aggregate supply curves to the right. These policies are designed to stimulate saving, investment, and entrepreneurship.
Industrial growth policy advocates __________ taking an active role in the structure and composition of industry.
government
Explanation
Government may increase expenditures on research and development (stimulate technological progress) or education (improve worker quality and productivity), or boost high productivity industries (hasten expansion), or assist lower productivity industries (provide them with necessary resources).
International trade allows nations to __________ and increase the productivity of their resources to realize a larger total output.
specialize
Explanation
No one in the modern industrial world tries to make everything for themselves. People don’t have the expertise or the knowledge to be able to do everything so they find that they can obtain a much higher standard of living by specializing in producing a particular product or employment, and then trading for the other things they want. Trade involves exporting and importing goods and services.
_______ are the goods and services that we buy from other countries.
Imports
_______ are the goods and services that we sell to other countries.
Exports
Nations that have a large, well skilled workforce are better at producing _____-intensive commodities.
labor
Explanation
Japan for instance with a large and highly skilled labor force can produce cameras and stereo equipment at a low cost.
Nations that have a large amount of land can produce ___-intensive products very efficiently.
land
Explanation
Canada has a large amount of arable and fertile land; therefore, it can produce wheat and beef very efficiently.
Industrially advanced nations are able to produce _______ intensive goods most efficiently.
capital
Explanation
Nations with economies that facilitate investment and increasing capital stores are able to produce goods like automobiles and heavy equipment that require a great deal of infrastructure very efficiently.
The principle of ___________ advantage states that the total output will be greatest when each good is produced by that nation that has the lower opportunity cost.
comparative
Explanation
A country has a comparative advantage in producing a good if it can do so at a lower opportunity cost than any other country. A country has a comparative advantage in making a product when it can make more of a product than another country, using the same quantities of resources. (Think of these resources as something simple, like a day of labor.) Another way of saying this is that any country that can make a product using less resources as compared to another, has comparative advantage in the production of that product. You can also say that a country has an absolute advantage in the production of a good whenever it can get more output with the same level of inputs.
The opportunity cost of a good or service is what we _____ to get it.
give up
Explanation
Remember that in trying to produce more of one product, they will have to reduce the amount of resources used to produce the other product. The lost production is their opportunity cost.
International specialization is a result of ___________ advantage.
comparative
Explanation
Without the opportunity to trade, each country decides to produce some mix of both products. Americans make 20 units of wool and 60 units of grain. Australians choose to make 30 units of wool and 10 units of grain. The opportunity cost for each product is the slope of the PPF. In the US, 1 unit of grain will trade for 1 unit of wool, since the production of 1 unit of either product requires the same amount of resource. In Australia, 1 unit of grain will trade for 3 units of wool using the same logic. If these countries decide to trade, residents will notice that wool is really cheap in Australia compared to the US, while grain is relatively expensive.
A trading possibilities line shows the options one nation has by _________ in one product and trading another.
specializing
Explanation
Instead of being constrained by its own domestic production possibilities curve, a nation can specialize in one product and trade it for another. In this way it will increase the availability of both products without having to use any additional resources.
Trade in similar goods occurs because of diversity of taste and economies of _____.
scale
Explanation
As long as there is mutual advantage for nations to trade with one another they will choose to do so for any product that gives them a comparative advantage.
The absence of government-imposed barriers to trade among individuals and firms in different nations is called __________.
free trade
Explanation
Free Trade is characterized by unlimited access to the economies of the world. There are no penalties in place for trading your goods in foreign nations.
Excise taxes on imported goods are called _______.
tariffs
Explanation
There are two types of tariffs: Revenue tariffs and Protective tariffs.
_______ tariffs are applied to products not produced domestically.
Revenue
Explanation
These tariffs are usually quite small and are in place so the government can earn tax revenue.
__________ tariffs shield domestic producers from foreign competition.
Protective
Explanation
The government encourages local production and purchase of goods and services by placing an extra tax on foreign products. This tax is not unbearably large but it serves to create a competitive disadvantage for the foreign producer.
Import ______ specify maximum import levels for specific commodities.
quotas
Explanation
Quotas are often more effective than tariffs because consumers may be willing to pay the higher price for foreign products despite the tariff. With a quota in place, only a certain number of the good can be sold, period.
_______ barriers refer to licensing agreements, imposed product standards or levels of “red tape” that a foreign producer must meet or qualify for before being allowed to export it.
Non-tariff
Explanation
The government can keep close control of the amount and type of foreign product that is sold in their nation.
Protective tariffs increase the domestic price of a good and the increased revenue goes to the ________ government.
domestic
Explanation
The figure above shows the effect that a tariff will have on the domestic market for jeans. Without foreign imports, jeans sell for $20, at point c. With trade foreign importers are able to bring in jeans for $10 per pair and the demand would be 12 million pairs, shown as point e. Domestic producers would only make 4 million pairs of jeans at that price level
- (a) while foreigners would bring in 8 million pairs. There would be a drop of production and loss of jobs associated with jean production in the domestic nation.
Quotas increase the domestic price of a good and the increased revenue goes to the ______ exporter.
foreign
Explanation
Example: Blue jeans sell for $20 and domestic producers make 8 million pairs, shown as point c on the figure. Without any restrictions, foreign producers would import 8 million pairs and domestic producers would drop their production to 4 million pairs. The government orders a limit on the quantity of imports to 4 million pairs of jeans in order to protect domestic jobs and production. This will move the supply curve to the right by 4 million pairs at every price, creating a lower price for the consumer at $15 per pair (d). Domestic producers cut back their production to 6 million pairs (b).
The attempts of government to protect industries from _____________ will retain employment in those industries at the expense of other industries and consumers.
foreign trade
Explanation
Prices for the protected industry’s product will be higher. Employment in the protected industry will be higher. Other countries are likely to retaliate against protection. Protectionist policies will reduce the benefit of specialization and trade and by keeping the protected industry from adapting or dying, we can’t get the benefits of comparative advantage.
____ is a forum for negotiating reduction of tariff barriers on a multilateral level.
GATT
Explanation
GATT stands for General Agreement of Tariffs and Trade. GATT is an important force in international trade. It advocates nondiscriminatory treatment of all member nations, the reduction of tariffs by multilateral agreements, and the elimination of import quotas.
_______ create a foreign demand for domestic dollars.
Exports
Explanation
When foreign nations pay for the exports they provide the domestic nation with a supply of foreign currency. They have paid for their goods with their goods with foreign currency.
Imports create a ________ demand for foreign monies.
domestic
Explanation
When we buy goods from another country we pay for it with that nation’s currency and thus decrease our own supply of that currency.
As the value of a nation’s currency increases the exports of that nation will ________.
decrease
Explanation
If your currency value increases that means it is more expensive and thus other nation’s will not be able to afford as many of your goods.
The _______ of International Payments records all the transactions that take place between residents and foreign nations.
Balance
Explanation
This includes merchandise imports and exports, tourist expenditure, shipping services, financial or real estate assets purchased abroad, and so on.
The _______ account is a tracking of all export and import goods and services.
current
Explanation
Exports are indicated by a plus (+) sign as they represent cash inflows and imports are indicated by a minus (-) sign as they represent cash outflows.
The _______ account is a tracking of the investments made and loans extended to other countries.
capital
Explanation
In this account the exports are cash outflows (money lent or invested in another country) and the imports are cash inflows (foreign money received).
The Balance of Trade is the addition of all goods and services in the _______ Account.
Current
Explanation
It records whether a country took in more foreign dollars than it spent or not.
The foreign exchange market is a ______ market in which the currency of one country is exchanged for the currency of another country.
global
Explanation
The market functions 23 hours a day.
The foreign ________ rate is the price at which the currency of one country is exchanged for the currency of another country.
exchange
Explanation
It can be quoted as Nation A’s dollars per Nation B’s dollar or Nation B’s dollars per Nation A’s dollar (dollars per yen or yen per dollar).
If the number of Nation B’s dollars that a Nation A dollar buys _________, then Nation A’s dollar appreciates.
increases
Explanation
Currency appreciation means that it takes less units of one country’s currency to buy a single unit of another country’s currency.
If the number of Nation B’s dollars that a Nation A dollar buys decreases, then Nation A’s dollar __________.
depreciates
Explanation
Currency depreciation means that it takes more units of one country’s currency to buy a single unit of another country’s currency.
Like the market for most products, ________ rates are modeled using supply and demand curves.
exchange
Explanation
As demand for a currency increases its supply decreases. The lowered supply of a currency means that it’s value increases and the real dollar value of goods in that nation will increase.
The exchange rate is determined by demand and supply in the ___________ market.
foreign exchange
Explanation
The quantity of a nation’s dollar that traders plan to buy on the foreign exchange market depends on three main factors: the exchange rate, interest rates in that country and other countries, and the expected future exchange rate.
Other things remaining the same, the lower the exchange rate, the _______ is the quantity of a nation’s dollars that traders plan to buy.
greater
Explanation
The relationship between the quantity of dollars that traders plan to buy and the exchange rate is the demand for dollars. The law of demand applies to the demand for dollars.
A change in interest rates or a change in the expected future exchange rate changes the ______ for dollars.
demand
The relationship between the quantity of a nation’s dollars that traders plan to sell and the exchange rate is the ______ of dollars.
supply
Explanation
The law of supply applies to the supply of dollars. That is, other things remaining the same, the higher the exchange rate, the greater is the quantity of a nation’s dollars that traders plan to sell.
Other things remaining the same, a change in the exchange rate brings a change in the ________ of Canadian dollars that traders plan to sell.
quantity
A change in ______________ or a change in the expected future exchange rate changes the supply of dollars.
interest rates
The exchange rate adjusts to make the quantity of _______ demanded equals the quantity supplied.
dollars
Explanation
This adjustment takes place minute by minute throughout the trading day. Only if the exchange rate is 70 U.S. cents per $C, do buy orders equal sell orders. Now the price is constant at its equilibrium level.
The _______________ influences the exchange rate by influencing interest rates and direct intervention in the foreign exchange market.
Federal Reserve
Explanation
If the demand for dollars increases, the Fed can lower interest rates or sell dollars. Likewise, if the demand for dollars decreases the Fed can raise interest rates or buy dollars.
