Reading 17: International Trade and Capital Flows Flashcards
List the benefits of international trade.
Countries receive higher prices for exports with a competitive advantage and pay lower prices for imports with a disadvantage.
Domestic companies gain access to global markets and customers.
Domestic households access more goods and services. Increased foreign competition reduces monopoly power of domestic firms.
Describe welfare effects of a tariff.
Producers gain surplus because they can charge a higher price.
Consumers lose surplus due to the higher price.
Government gains tariff revenue.
Differentiate between a regional trading agreement (RTA) and a free trade area (FTA).
RTA members reduce and gradually eliminate barriers to trade/movement of factors of production among members. Members may or may not have similar policies regarding trade restrictions against nonmember countries.
FTA members eliminate almost all barriers to free trade with one another but maintain their own policies regarding trade with nonmember countries.
Describe the World Bank’s main objectives.
Loans and grants to countries with limited or no access to international financial markets.
Provide analysis, advice, and information to countries for social/economic development.
Share knowledge to increase the capabilities of their partners and members.
Help members create essential infrastructure to develop domestic financial markets.
Describe the benefits of free movement of financial capital.
Allows capital to seek its highest return, thus flowing to where it is needed most.
Productive capacity can grow at a higher rate than based on domestic savings alone.
Foreign firms may enter domestic industries, bringing competition to local firms.
Differentiate between comparative advantage and absolute advantage.
Absolute advantage refers to producing a good at a lower cost or using fewer resources. Comparative advantage refers to producing a good at a lower opportunity cost.
Identify what causes a current account deficit.
Low private savings.
A government deficit.
High private investment.
Name the forms of capital controls.
Taxes
Price controls
Quantity controls
Outright prohibition on international trade in assets
Explain the Ricardian and Heckscher–Ohlin models of trade.
The Ricardian Model and the Heckscher–Ohlin Model attempt to explain the sources of comparative advantage for countries. The Ricardian Model focuses on differences in technology across countries, while the Heckscher–Ohlin Model focuses on differences in factor endowments.
Give the arguments for trade restrictions.
Protection of established domestic industries from foreign competition.
Protection of new (infant) industries from foreign competition until they mature.
Protection of employment in the country.
Generation of revenue from tariffs.
Retaliation against trade restrictions imposed by trading partners.
Describe customs union, common market, and economic union.
Customs union – Like an FTA, but common trade restrictions with nonmember countries.
Common market – Like a customs union, but allows free movement of factors of production among the member countries.
Economic union – Like a common market but also requires common economic institutions and coordination of economic policies among member countries.
How can an economy’s private savings be used?
Domestic investment.
Foreign investment (purchasing assets from foreigners).
Purchasing government debt.
Describe gross national product (GNP) and explain why analysts prefer to use GDP over GNP.
GNP is the market value of all final goods and services produced by factors of production supplied by citizens, regardless of whether production takes place within or outside of the country.
GDP is preferred as goods and services produced within the country have an impact on employment, growth, and the investment environment in the domestic economy.
Identify the three main accounts of a country’s balance of payments.
Current account – Trade in goods and services.
Capital account – Capital transfers and net sales of nonproduced, nonfinancial assets.
Financial account – Net capital flows; that is, sales and purchases of domestic and foreign financial assets.
Describe how a current account balance must be offset by an opposite balance in the capital and financial accounts.
A current account deficit must be financed by foreign direct investment, loans by foreign banks, or the sale of domestic debt and equity securities to foreign investors.
A current account surplus is used to finance the current account deficit of trading partners (through loans and investments in real and financial assets).
