International Trade Flashcards
Absolute Advantage
one country can produce a good at a lower cost than another country
Its based on costs of producing a certain amount of outputs - not on hourly wages
Comparative advantage
One country being able to produce a good at a lower relative cost than another country
This include the opportunity costs and the amount of other goods given up.
What does international trade theory show
Even if one country has an absolute advantage of all goods - Germany versus Haiti:
For every pair of countries and every pair of goods - if one country has a comparative advantage in the production of one good (germany makes cars) and the other company will have a comparative advantage in another good ( Haite making sugar) - both countries will be better off if each specializes in what they are better and trade with each other
what are barriers to international trade: natural barriers
transportation and information costs -
transportation means the costs to transport goods internationally can be prohibitive
Information costs - these are the costs of doing due diligence to see if you are getting the best deal. It might be too difficult or costly to research if you are getting the best deal internationally
What are barriers to international trade: Governments
Tariffs: taxes on imported goods:
What are the effect on:
Domestic Producers of protected goods: positive - the demand curve shifts to the right - higher wages and more goods sold at higher prices. I produce strawberries and sell in my own country - no imports allowed
Domestic Users - Negative - supply curve shifts to the left. You have to pay more for domestic goods. I have to pay more for the strawberries from my local producer
Domestic Producers of exported goods - negative effect - their goods cost more in their consumers markets. I sell oranges in Mexico - costs me more to sell them there
Foreign producers encountering protection elsewhere - Negative - result is lower sales and prices. I want sell oranges in Mexico, but the costs is too high
Foreign users of Protected goods . Positive - I want to sell oranges in Mexica - but costs too much so I have to sell more in the US so I will cut my prices - who is good for the consumers of oranges
What are the international trade organizations
WTO
NAFTA
EU
G-2-
What are example so non -tariff trade protection
import quotas embargoes foreign exchange control subsidies technical health and safety requirements
what are VER
voluntary export restraints - these are voluntary quotas
What are foreign exchange controls
These restrict the type of domestic parties that can use foreign currencies, their amount sand uses
What is dumping
a manufacturer who exports a product to a country at an unjustifiably low price - harming the domestic producers
What are export subsidies
these are various ways of encouraging the production and export of goods
If WTO finds that a country is doing this illegally - and that country wont stop - another country can do countervailing measures
What is Balance of Payments
Its a summary of a countries transactions with other countries during a period of time
It has a current account - the flow of goods and services
The capital account - the flow of investments
What is the balance of trade
The difference between goods exported and goods imported excluding services
If exports higher - trade surplus
If imports higher - trade deficit
What is the balance of Goods and Services
Same as balance of trade but includes services
What is net interest and dividends
This is the interest and dividends received within a country from outside a country
Net unilateral Transfers
This is foreign aid and other s - do affect trade deficit and surplus
What is the IMF
countries in crisis can get money from here
They will give money at relatively low interest rates
They will require countries to reduce their budget deficits and engaged in structural reforms
What is repatriation
It is the process of converting foreign currency into your own currency at the current exchange rate
What are the common factors that affect foreign exchange rates: inflation Interest Rates Balance of payments Government intervention Long term economic stability
Inflation - currencies with higher inflation rates will depreciate - demand for them will fall
interest Rates - currencies from countries with higher interest rates - people will want to shut their money there and their currency will rise
Balance of payments - currencies from a country that is a net exporter - appreciate - demand for them will rise
Government Intervention - governments will intervene to affect their own currency
Long term economic stability - countries which are thought to be more stable have fewer fluctuations - safe havens
What is the difference between floating fixed and Managed exchange rates
Floating - exchange rates - a country does not intervene in their own currency - exchange rates are set by supply and demand - rare
Fixed Exchange Rates - a country’s central bank will buy and sell its own constantly to maintain a fixed rate
Managed Exchange Rate: between floating and fixed . a central bank may buy and sell currency to minimize short term fluctuations
What are foreign exchange risks:
Translation risk
Matching Assets and Liabilities
Transaction Risk
Translation Risk - This is when you have operations in more thane country and need to create f/s for the whole company- need to use exchange rates to translate them to home currency - captured in OCI
Matching Assets and Liabilities - companies will want to manage their translation risk by matching assets and liabilities
Transaction risk - to manage transaction risk they will want to match as many revenues and costs as possible in the market where they operate (Example - Japanese company selling cars in US will match dollar dominated revenues to dollar dominated labor costs
What is interest rate risk
The risk that changes in economy -wide interest rate levels may affect earnings adversely
What is credit risk
Risk that you wont get paid
What is liquidity risk
though a financial institution may be solvent on a ling term basis - in a crisis there short term obligation s might outweigh their access to liquid funds
Forcing them to sell long term assets at the fire sale price
What is market risk
This is the risk that sales of the value of some assets may decline
What is country risk
If you operate over seas you have little control over the optical and financial risks associated with that country
What is FDI
Foreign Direct Investment - this is when developed countries have operations in developed and underdeveloped nations
What is GATT
This si the general agreement on Tariffs and trade
- It was set up to encourage international trade be eliminating tariffs, subsidiaries, import quotas, and other trade barriers
