International Trade and Finance Flashcards
Theory that countries should specialize in resources for which they have lower opportunity costs
Comparative Advantage
Author of Political Economy and Taxation who popularized Comparative Advantage
David Ricardo
Theory related to comparative advantage suggesting that countries export goods which require factors of production that they have an abundance of.
Heckscher-Ohlin Model (2x2x2 model)
Paradox rooted in the fact that America exports more labor intensive goods and imports products that are more capital intensive than its exports despite being the most capital abundant nation in the world.
Leontief’s Paradox
How many factor of productions a country has available before trade
Factor Endowment
Possible resolution to Leontief’s Paradox suggesting countries trade more with other countries that have similar demands (hence why developed nations trade with each other a lot).
Linder hypothesis
Model of trade developed by Jan Tinbergen based on both the size of two countries’ economies as well as the distance between them.
Gravity Model of Trade
Diagrams visualizing the results of the Heckscher Ohlin Model
Lerner Diagrams
Index for measuring intra-industry trade.
Grubel-Lloyd Index.
the fact that goods will tend to be produced in and exported from countries that have high domestic demand.
Home Market Effect
Trade theory focused on the implications of increasing returns to scale rather than assuming returns to scale are constant. Protectionist theory.
New Trade Theory.
How much of one currency one could buy with another currency
Exchange Rate
Prices are higher in developed countries than developing countries
Balassa-Samuelson Effect
Currency that is linked to the Dollar or Euro at a fixed rate in order to maintain stability.
Pegged Currency
When a currency’s exchange rate is fixed, but allowed to fluctuate within a certain band of values.
Crawling Peg
Concept that something will have the same value globally when some factors are accounted for.
Law of One Price
Way of calculating exchange rates through a basket of goods approach, in order to eliminate influence of currency manipulation and speculation.
Purchasing Power Parity
Term for the process of currency manipulation to offset effects of appreciation
Sterilization
Equation governing relationship between interest rates and exchange rates
Uncovered Interest Rate Parity
Arbitrage strategy focused on borrowing low interest rate currency to fund the buying of high interest rate currencies. Vulnerable to volatile exchange rates.
Carry Trade
Fact that a country can’t maintain independent monetary policy, free movement of capital, and fixed exchange rates. Only two of the three are possible.
Mundell Fleming Trilemma
