International Trade and Capital Flows

Question 1

Gross Domestic Product

Answer 1

Total value of goods and services produced within a countries borders

Question 2

Gross national product

Answer 2

measures the total value of goods and services produced by the labor and capital of a country’s citizens

Question 3

Benefits of international trade

Answer 3

• import substitute goods cheaper, while the exporting country increases employment, wages and profits.

Question 4

Cost of International trade

Answer 4

Country importing may lose jobs that made the good that is being substituted

Question 5

Absolute advantage

Answer 5

when producing a good, if it can produce the good at a lower cost in terms of resources than that of another country.

Question 6

Comparative advantage

Answer 6

When a country has an opportunity cost in terms of other goods that could be produced instead is lower than that of another country.

Question 7

In production possibility frontiers, the slope of the frontier is equal to the opportunity cost.

Answer 7

…

Question 8

Ricardian model of Trade

Answer 8

• has only 1 factor of production: labor

- the source of differences in production costs comes from the change in the labor productivity due to technology.

Question 9

Hecksher-Ohlin model

Answer 9

2 factors of production: capital and labor

• the source of comparative advantage is the differences in the relative amount of each factor.
• In H-O model, there is a redistribution of wealth within each country between labor and the owners of capital.

Question 10

Reasons for trade restrictions:

Answer 10

• infant industries: protection from foreign competition to give the new industry time to grow competitively on an international scale
• national security - in the event of conflict, having goods produced domestically creates safety and its availability

Question 11

Reasons for trade restrictions NOT supported by theory:

Answer 11

• protecting domestic jobs
• protecting domestic industries
• government collection of tariffs

Question 12

Types of trade restrictions

Answer 12

1. Tariffs: taxes on imported goods
2. Quotas: the amount of imports allowed over period X
3. Export subsidies: government pays firms that export
4. Minimum domestic content:
5. Voluntary export restraint: restricts amounts of goods to be exported to avoid tariffs and quotas.

Question 13

Effects of a tariff

Answer 13

An increase in domestic price, a decrease in quantity imported, increase in quantity supplied domestically, domestic producers gain, foreign exporters lose and domestic government gets tariffs.

Question 14

Effects of a Quota

Answer 14

Domestic producers gain, domestic consumers lose because prices increase, if domestic government selles import licenses, government revenue increases.

Question 15

Voluntary Export Restraint (VER)

Answer 15

Welfare loss to importing country equal to the equivalent quota.

Question 16

Export Subsidies

Answer 16

Benefits exporters, increases prices and reduces consumer surplus

Question 17

In general, trade restrictions:

Answer 17

• reduce imports, increasing price, decrease consumer surplus, increase the domestically-supplied quantity, and increases producer surplus

Question 18

Capital restrictions across borders…

Answer 18

decreases economic welfare,, but may blockout a huge inflow of foreign capital to responsibly grow the industry.

Question 19

Types of trading blocks

Answer 19

1. Free Trade Area = all barriers to imports and exports are removed
2. Customs Union = All barriers to imports and exports are removed AND all countries adopt a common set of trade restrictions with non-members
3. Common Market = All barriers to imports and exports are removed AND all countries adopt a common set of trade restrictions with non-members AND All barriers to the movement of labor and capital goods among member countries are removed.
4. Economic Union = All barriers to imports and exports are removed AND all countries adopt a common set of trade restrictions with non-members AND All barriers to the movement of labor and capital goods among member countries are removed AND Member countries establish common institutions and economic policy for the union.
5. Monetary Union = All barriers to imports and exports are removed AND all countries adopt a common set of trade restrictions with non-members AND All barriers to the movement of labor and capital goods among member countries are removed AND Member countries establish common institutions and economic policy for the union AND members adopt a single currency.

Question 20

The Balance of Payments (BoP) includes:

Answer 20

1. current account - flows of goods and services
2. capital account - capital transfers and acquisition of non-financial assets
3. Financial account - investment flows

Question 21

Items in the Current Account

Answer 21

• merchandise and services
• income receipts – foreign income from dividends and interest on debt securities
• Unilateral transfers – money received from those working abroad and direct foreign aid.

Question 22

Items in Capital Account

Answer 22

• Capital transfers– debt forgiveness and goods and financial assets migrants bring with them.
• sales and purchases of non-financial assets: not produced assets like rights to natural resources and intangible assets like patents, copyrights, trademarks, etc.

Question 23

Items in Financial Account

Answer 23

• Government owned assets abroad – gold, foreign currencies, LT assets, etc…
• Foreign owned assets in country…

Question 24

BOP = X - M = private savings + government savings - investment

Answer 24

Both sides must remain equal