LM 6&7: International Trade & Capital Flows

Question 1

What is the difference between gross domestic product and gross national product?

Answer 1

GDP looks at the value of goods and services produced within a country’s borders

GNP is the market value of goods and services produced by all citizens of a country—both domestically and abroad.

Question 2

What is the difference between imports and exports?

Answer 2

Imports are goods and services purchased from other countries.

Exports are goods and services sold to other countries.

Question 3

What is autarky?

Answer 3

closed economy; is a state in which a country does not trade with other countries.

Question 4

What is free trade?

Answer 4

Free trade occurs if countries impose no restrictions on foreign trading

Question 5

What are trade protections?

Answer 5

the economic policy of restricting imports from other countries through methods such as tariffs on imported goods, import quotas, and a variety of other government regulations.

Question 6

What is the difference between foreign direct investment (FDI) and foreign portfolio investment (FPI)?

Answer 6

FDI is an investment by companies in physical productive assets in foreign countries

FPI involves holding securities such as stocks or bonds issued by foreign companies or governments

Question 7

What are 5 arguments that support international trade? GGGIM

Answer 7

1. Gains from exchange
2. Greater economies of scale: lower production costs
3. Greater product variety for households
4. Increased competition
5. More efficient allocation of resources

Question 8

What are 2 arguments against international trade?

Answer 8

income inequality and job losses in developed countries due to competition from countries with lower-cost operations

Question 9

What is terms of trade?

Answer 9

ratio of the price of exports to the price of imports

Question 10

What is difference between absolute advantage and comparative advantage?

Answer 10

absolute advantage: if country can produce good at lower cost than its trading partner

comparative advantage: opportunity cost of producing as good is less than its trading partner

Question 11

What are 2 models of comparative advantage?

Answer 11

1. ricardian model (countries gain from trade only if they have absolute advantage)
2. heckscher ohlin model (countries gain from trade even if they only have a comparative advantage)

Question 12

What are trade restrictions?

Answer 12

measures that limit the free exchange of goods and services between countries

eg. tariffs, import quotas

Question 13

What are capital restrictions in international trade?

Answer 13

Capital restrictions impose limits on the ability of foreign investors to own domestic assets and the ability of domestic investors to own foreign assets.

Question 14

What are tariffs?

Answer 14

Tariffs are taxes levied on foreign goods, often to protect domestic industries

Question 15

What are quotas in international trade?

Answer 15

restrictions on quantity of good that can be imported for period of time

Question 16

What are export subsidies?

Answer 16

payments made by government to a domestic firm that exports a particular good

Question 17

Do tariffs increase or decrease price?

Answer 17

increase price per unit tariff of t. eg. an increase of 5% to 10% tax on oil makes oil price to increase

Question 18

What is producer surplus and where is it on the graph?

Answer 18

excess producer sells a good for, above amount willing to sell for.

Below price level and above domestic supply curve

Question 19

What is deadweight loss?

Answer 19

Tariffs are taxes levied on foreign goods, often to protect domestic industries

Question 20

Who benefits from quotas?

Answer 20

foreigners, since they can raise prices and generate greater profits

Question 21

What is a voluntary export restraint?

Answer 21

self-imposed limit on quantity of exports to other countries

Question 22

What is the goal of export subsidies?

Answer 22

to encourage exports with backup or subsidizes of the government

Question 23

What are regional trading block?

Answer 23

group of countries that attempts to reduce or eliminate trade barriers. eg. EU

Question 24

What are the 5 different levels of integration? FCCEM

Answer 24

1. Free trade areas
2. customs union
3. common market
4. economic union
5. monetary union

Question 25

What are free trade areas and customs union?

Answer 25

Free trade areas eliminate all barriers among member groups.

customs union extends the free trade area by having common policies against non-members.

Question 26

What is the common market and economic union?

Answer 26

takes the integration further by allowing free movement of production factors among the members.

economic union also coordinates economic policies among the members. eg. EU

Question 27

What is monetary union?

Answer 27

economic union with a common currency.

Question 28

What is the difference between trade creation and trade diversion?

Answer 28

Trade creation replaces higher-cost domestic production with lower-cost imports from member countries

Trade diversion substitutes lower-cost imports from non-member countries with higher-cost imports from member countries.

Question 29

What is spillover growth?

Answer 29

strong growth in one member can result in strong growth for other member countries

Question 30

What is balance of payments?

Answer 30

bookkeeping system that summarizes a country’s economic transactions with the rest of the world

Question 31

What is the difference between debit entries and credit entries?

Answer 31

Debits (increase asset / decrease liability)

Credits (decrease asset / increase liability)

Question 32

What 3 accounts are balance of payment composed of, describe them? CCF

Answer 32

1. current account (measures the flow of goods and services)
2. capital account (measures the transfer of capital)
3. financial account. (investment flows)

Question 33

What is the national income formula for close economy and open economy?

Answer 33

closed economy
Y=C+I+G

open economy
Y=C+I+G+(X−M)

C= private consumption
I = investment
G= government purchases
X = exports
M = imports

Question 34

What 3 things cause a current account deficit? LHA

Answer 34

current account deficit tends to result from

1. low private saving
2. high private investment
3. a government deficit