LM7: International Trade and Capital Flows Flashcards
Define absolute advantage
Occurs when a country can produce a good with less resources or lower cost
Define Comparative advantage
Occurs when a country can produce a good at a lower opportunity cost than its trading partners
Describe the 3 main factors of the Ricardian model
Describe the 3 main factors of the Heckscher-Ohlin (HO) model
What is a Free trade area?
No barriers to flow of goods and services amongst members
What is a customs union?
FTA + common trade policy amongst non-members
What is a Common market?
CU + free movement of factors of production amongst members
What is an economic union?
CM + common economic institution and coordination of economic policies
What is a Monetary union?
EU + common currency
What is the Current account and what are its sub accounts?
Current account (CA): measures the flow of goods and services
Merchandise trade, services, income receipts, unilateral transfers
What is the Capital account and what are its sub accounts?
Capital account (KA): measures transfer of capital
Capital transfers, non-financial asset sales/purchases
What is the Financial account and what are its sub accounts?
Financial account (FA): records investment flows
Government-owned assets abroad, foreign-owned assets in the country
What is the equation for the Current account?
Current account (CA) = X – M = Y – (C+I+G)
What is the difference between GDP and GNP?
