Reading 19: International Trade and Capital Flows

Question 1

Compare GDP and GNP.

Answer 1

Gross Domestic Product (GDP)- is also known as a home; represents the sum of all the goods and services produced in the USA.

Gross National Product (GNP)- represents the sum of all home-grown country labeled goods and services in the USA and those created in MNCs outside the USA.

Question 2

Describe the benefits and costs of International Trade.

Answer 2

Benefits of Trade:

• It’s good for the economy
• we have MNCs that help control loss of jobs/loss of companies

Costs of International Trade:

• we are always in competition for our industries
• we will lose jobs/ lose companies
• especially infant industries will lose to foreign industries

Question 3

Distinguish between comparative advantage and absolute advantage.

Answer 3

Absolute advantage- is being able to produce more of a product in a given time over someone else.

Comparative Advantage- is a country leveraging its opportunity cost of producing the best alternative good to see if it is better or worse to just trade with another nation.

**You have to find the lowest opportunity cost for 2 country’s production of a goods!!!!*

Questions to Ask:

1.) Who has the lowest opportunity costs?
2.) This will determine who should produce what between the 2 countries.
EX: IF India opportunity cost is 2 clothes/machine and UK opportunity cost is 4 clothes/machine–> then India should produce machines because it is giving up less clothes

3.) The reason is for other trade purposes. What if UK is trade clothes with other EU members, then they want to make most profit? Right?

Question 4

Explain motivation for and advantages of trading blocs, common markets, and economic unions.

Answer 4

Trading Blocs are arrangements made between countries to establish trade agreements; these trading blocks can range in complexity from common markets to economic unions.

Question 5

Describe common objectives of capital restrictions imposed by governments.

Answer 5

Trade Restrictions used to: 
Protect infant industries
Protect jobs
Increase Tariffs and make profit
Restrict trade for punishment reasons
Protection against dumping
Improve current account deficit

Question 6

Describe the balance of payments accounts including their components.

Answer 6

BALANCE OF PAYMENTS->

Current Accounts = Exports , Income Receipts for money that will be received by US investors, Imports, income payments (money owed to foreign investors)

Capital Accounts= transfer of payments that are due to changes in ownership of assets

Question 7

Explain how decisions by consumers, firms, and governments affect the balance of payments.

Answer 7

Consumers change exports/imports for current account of balance of payments; governments invest in other foreign markets and because of that they have income receipts which is part of account balance; FIRMS produce the money from exports on the accounts section of balance of payments.