Issues at National Level Flashcards
What are socio-political issues?
International economic activity causes domestic social and economic problems
- increased domestic unemployment
- loss of domestic manufacturing capabilities
- loss of industries essential to defense
- lack of protection for domestic start-up companies
What is the response to socio-politic issues?
Import quotas- restrict the quantity of goods that can be imported
- Import tariffs- taxes on imported goods that increase cost in the domestic market
Are tariffs and import quotas good?
Not always, they can backfire
Better responses = policies that support domestic economic activity like:
- Training/retraining
- Research and development support
- Improved infrastructure
Define a currency exchange rate:
Price of one unit to another countries currency
How do currency exchange rates impact import and exports?
The LOWER THE COST in domestic currency, the cheaper the cost in the domestic currency
$1.10 =$1 Euro (Stronger) - It is cheaper to buy 1 Euro
$1.25 = 1 Euro (Weaker)
At $1.10 the US can buy more goods than $1.25 (this results in more imports rather than exports)
What is the balance of trade?
Difference between money value of of imports and exports
- Exports > Imports = Trade surplus
- Exports < Imports = Trade deficit
Element of the country’s balance of payments
Summary of accounting of US base transaction with other countries during a period of time
What are the three accounts for balance of payments?
1) Current account
2) Capital account
3) Financial account
What is a current account under balance of payments?
Net dollar value for a period of:
- Amounts earned from export and goods and services
- Amounts spend on imports for goods and services
- Net factor flows (income) from foreign investments- dividends and interest
- Net factor flow from foreign aid and grands
The sum = net balance
What is the capital account under the balance of payments?
- Net dollar value for the period of:
- Inflows from investments and loans by foreign entities
- Outflows from investments and loans by US entities
Reflects the change in foreign ownership of US assets and US ownership of foreign assets
Foreign investment is US > US investments abroad = surplus for that period
What is the financial account under the balance of payments?
Net dollar amount of:
- US Owned assets located abroad
- Foreign owned assets in the US
Shows the accumulated amount of investments includes
- Both government and private ownership
- Monetary and non-monetary assets
The balance of payments may results in a surplus or deficit?
TRUE
- Surplus- Sum of earnings and inflows exceeds the sum of spending and outflows
- Deficit- Sum of spending outflows exceeds sum of earnings and inflows
What are the consequences of balance of payments?
Imports and foreign investments by US entities > exports and investments by foreign entities in US
Greater demand for foreign currency than dollars
Require US companies to buy product in foreign currency rather than in the dollar. IT will take more dollars to buy foreign goods.
This causes the US dollar to weaken relative to the foreign currency
This will cause imports to decrease and exports increase causing import/export trend to reverse
Free-floating exchange rates help maintain the balance of payment equilbrium.
