LM 6&7: International Trade & Capital Flows Flashcards
What is the difference between gross domestic product and gross national product?
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.
What is the difference between imports and exports?
Imports are goods and services purchased from other countries.
Exports are goods and services sold to other countries.
What is autarky?
closed economy; is a state in which a country does not trade with other countries.
What is free trade?
Free trade occurs if countries impose no restrictions on foreign trading
What are trade protections?
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.
What is the difference between foreign direct investment (FDI) and foreign portfolio investment (FPI)?
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
What are 5 arguments that support international trade? GGGIM
- Gains from exchange
- Greater economies of scale: lower production costs
- Greater product variety for households
- Increased competition
- More efficient allocation of resources
What are 2 arguments against international trade?
income inequality and job losses in developed countries due to competition from countries with lower-cost operations
What is terms of trade?
ratio of the price of exports to the price of imports
What is difference between absolute advantage and comparative advantage?
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
What are 2 models of comparative advantage?
- ricardian model (countries gain from trade only if they have absolute advantage)
- heckscher ohlin model (countries gain from trade even if they only have a comparative advantage)
What are trade restrictions?
measures that limit the free exchange of goods and services between countries
eg. tariffs, import quotas
What are capital restrictions in international trade?
Capital restrictions impose limits on the ability of foreign investors to own domestic assets and the ability of domestic investors to own foreign assets.
What are tariffs?
Tariffs are taxes levied on foreign goods, often to protect domestic industries
What are quotas in international trade?
restrictions on quantity of good that can be imported for period of time
What are export subsidies?
payments made by government to a domestic firm that exports a particular good
Do tariffs increase or decrease price?
increase price per unit tariff of t. eg. an increase of 5% to 10% tax on oil makes oil price to increase
What is producer surplus and where is it on the graph?
excess producer sells a good for, above amount willing to sell for.
Below price level and above domestic supply curve
What is deadweight loss?
Tariffs are taxes levied on foreign goods, often to protect domestic industries
Who benefits from quotas?
foreigners, since they can raise prices and generate greater profits
What is a voluntary export restraint?
self-imposed limit on quantity of exports to other countries
What is the goal of export subsidies?
to encourage exports with backup or subsidizes of the government
What are regional trading block?
group of countries that attempts to reduce or eliminate trade barriers. eg. EU
What are the 5 different levels of integration? FCCEM
- Free trade areas
- customs union
- common market
- economic union
- monetary union
What are free trade areas and customs union?
Free trade areas eliminate all barriers among member groups.
customs union extends the free trade area by having common policies against non-members.
What is the common market and economic union?
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
What is monetary union?
economic union with a common currency.
What is the difference between trade creation and trade diversion?
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.
What is spillover growth?
strong growth in one member can result in strong growth for other member countries
What is balance of payments?
bookkeeping system that summarizes a country’s economic transactions with the rest of the world
What is the difference between debit entries and credit entries?
Debits (increase asset / decrease liability)
Credits (decrease asset / increase liability)
What 3 accounts are balance of payment composed of, describe them? CCF
- current account (measures the flow of goods and services)
- capital account (measures the transfer of capital)
- financial account. (investment flows)
What is the national income formula for close economy and open economy?
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
What 3 things cause a current account deficit? LHA
current account deficit tends to result from
- low private saving
- high private investment
- a government deficit
