Test 2 Flashcards
Top 3 countries in merchandise exports
China
US
Germany
Top 3 in merchandise imports
US
China
Germany
Top 3 in service exports
US
Britain
Germany
Top 3 in service imports
US
Germany
China
Mercantilism (Classical theory)
- Wealth is fixed in the world so you should export more and import less
- Modern day: Protectionism (government should actively protect domestic industries
Absolute Advantage (Classical theory)
- economic advantage one nation enjoys that is absolutely superior to other nations
- Free trade (Laissez faire)
2 insights of Absolute Advantage
- By specializing, countries produce more
2. by trading, countries can benefit
Comparative advantage (Classical theory)
- If no absolute exist, then focus on the things you are comparatively more efficient in
- Focus is on opportunity cost
Product Life Cycle (modern theory)
- Accounts for changes in patterns of trade over time (1st dynamic theory)
- 3 Types of countries: lead innovation, other developed nations, developing nations
- 3 product life cycle stages: new, maturing, standardized
- new product comes from lead innovation, maturing product goes to other developed nations, standardized product goes to develop nations for production and export.
- Assumes US is always the lead innovation nation.
Strategic Trade (modern theory)
- governments intervene in strategic, capital intensive, high entry-barrier, heavy first mover advantage industries to enhance their odds for international success
- issues with defining what is a strategic and non strategic industry. A lot of trust in governments
National Competitive Advantage or Diamond theory (modern theory) (EDD DS RS)
- Competitive advantage depends on 4 aspects:
1. endowments (human and natural resources)
2. Domestic demand propels firms to scale new heights
3. Domestic firm strategy, structure, and rivalry in one industry play a huge role behind its internal success/failure.
4. Related and supporting industries provide the foundation upon which key industries can excel.
Nontariff Barriers (IA SEAL)
- Import quotas
- Administrative policies
- Subsidy
- Export restraints
- Anti dumping duties
- Local content requirements
Government payment to domestic firms
Subsidy
Restrictions on the quantity of imports
Import quotas
An international agreement that shows that exporting countries voluntarily agree to restrict their exports
Export restraints
A requirement stipulating that a certain proportion of the value of the goods made in one country must originate from that country
Local content requirements
Bureaucratic rule that make it harder to import foreign goods
Administrative policies
Tariffs levied on imports that have been sold below costs to “unfairly” drive domestic firms out of business
Antidumping duties
When a nation imports more than it exports
Trade deficit
When a nation exports more than it imports
Trade surplus
Whether a country has a trade surplus or deficit
Balance of trade
Extent to which different countries possess various factors of production such as labor, land, and technology
Factor endowment (Source of comparative advantages)
Nations will develop comparative advantages based on their locally abundant factors
Factor endowment theory (Heckscher-Ohlin theory)
5 Building blocks for Currency Exchange Rates (I RIPE)
- Interest rates and monetary supply
- Relative price differences
- Investor psychology
- Productivity and balance of payments
- Exchange rate policies
- Purchasing power parity (PPP): Law of one price, in the absence of trade barriers the price for identical products sold in different countries must be the same
- PPP suggest exchange rates may move in the long run
Relative price difference
- Exchange rate is very sensitive to this factor
- high interest rate = country will attract foreign funds
- inflation rate affects ability to attract foreign funds
Interest rates and monetary supply
- increased productivity attracts investors
- balance of payments: a countries international transaction statement, which includes merchandise trade, service trade, and capital movement.
- account surplus = currency appreciation
- account deficit = currency depreciation
Productivity and balance of payments
- Floating (flexible) exchange rate policy: a government policy to let supply and demand conditions determine exchange rates
- Clean: pure market solution
- dirty: uses selective government intervention (most countries). Goal is to prevent huge fluctuations that may trigger macroeconomic turbulence. level of intervention varies
Exchange rate Policies
specified upper and lower bounds within which an exchange rate allowed to fluctuate
target exchange rate (crawling band)
a government policy to set the exchange rate of a currency relative to other currencies.
fixed exchange rate policy
a stabilizing policy of linking a developing country’s currency to a key currency
- benefit of stabilizing the import and export prices
- benefit of restraining domestic inflation
Peg (to another currency)
Largely determines short term movements
Investor Psychology
balance of trade + net factor income from abroad + net unilateral transfers from abroad
= Current account
System in which the value of most major currencies was maintained by fixing their prices in terms of gold
Gold Standard
Currency or commodity to which the value of all currencies are pegged
Common denominator
System in which all currencies were pegged at a fixed rate to US dollar
Bretton Woods system
System of flexible exchange rate regimes with no official common denominator
Post-Bretton Woods system
Weight a member country carries within the IMF, which determines the amount of its financial contribution (its “subscription”), and its capacity to borrow from the IMF, and its voting power
Quota
Typical IMF conditions for loan recipients
- Balance budget by slashing government spending (often cutting social welfare)
- Raise interest rate to slow monetary growth and inflation
IMF 2.0
- Expand fiscal spending by stimulating more economic activity
- Ease money supply and reduce interest rates to combat deflation and recession
Classic single-shot exchange of one currency for another
Spot Transaction
Foreign exchange transaction in which participants buy and sell currencies now for future delivery
Forward Trasnaction
Transaction that protects traders and investors from exposure to the fluctuations of the spot rate
Currency hedging
Condition under which the forward rate of one currency relative to another currency is higher than the spot rate
Forward discount
Condition under which the forward rate of one currency relative to another currency is lower than the spot rate
Forward premium
Foreign exchange transaction between two firms in which one currency is converted into another at Time 1, with an agreement to revert it back to the original currency at a specified Time 2 in the future
Currency swap
Potential for loss associated with fluctuations in the foreign exchange market
Currency risk
Spreading out activities in a number of countries in different currency zones to offset any currency losses in one region through gains in other regions
Strategic hedging
An international organization established to promote international monetary cooperation, exchange stability, and orderly exchange arrangements
International Monetary Fund (IMF)
Advantages of a strong Dollar
- US consumers benefit from low prices on imports
- Lower prices on foreign goods help keep US prices level and inflation level low
- US tourists enjoy lower price abroad
- US firms find it easier to acquire foreign targets
- US exporters find it easier to compete on price abroad
- us firms face less competitive pressure to keep prices low
- foreign tourists enjoy lower prices in the US
- foreign firms find it easier to acquire US targets
- the US can print more dollars to export its problems to the rest of the world
Advantages of a weak Dollar
Disadvantages of a strong Dollar
- US exporters have a hard time to compete on price abroad
- US firms in import-competing industries have a hard time competing with low-cost imports
- foreign tourist find it more expensive when visiting the US
-US consumers face higher prices on imports
-Higher prices on imports contribute to higher price level and inflation level in the US
US tourists find it more expensive when traveling abroad
-governments, firms, and individuals outside the US holding dollar-denominated assets suffer from value loss of their assets.
Disadvantages of a weak Dollar
Political benefits of economic integration
- promote peace by promoting trade and
- build confidence in a multilateral trading system
Economic benefits of economic integration
- disputes are handled constructively
- rules make life easier, and discrimination impossible, for all participating countries
- free trade and investment raise incomes and stimulate economic growth
Main reason for establishing the WTO
To strengthen the trade dispute settlement mechanisms
WTO functions
- sets time limits for a panel, consisting of 3 neutral countries, to reach a judgment
- Removes the power of the accused countries to block any unfavorable decision
- No real enforcement capability. Recommends laws/practices changes and authorizes the winning countries to tariff retaliation to compel the offending countries to comply with the WTO ruling
Types of regional economic integration
- Free Trade Area
- Custom Union
- Common market
- Economic Union
- Political Union
Free Trade Area
group of countries that remove trade barriers amount themselves. Each still maintains different external policies regarding non-members (ex NAFTA)
Economic Union
Common market + members also coordinate and harmonize economic policies in order to blend their economies into a single economic entity (ex The EU)
Benefits of the EU
- Reduce currency conversion costs
- facilitate direct price comparison
- impose monetary discipline on governments
Costs of the EU
- Unable to implement independent monetary policy
2. Limit the flexibility in fiscal policy (IE deficit spending)
EU’s Challenges
- Determining weather to become a political union
- Voting powers
- Growth and expansion
- Labor and immigration
- Financial rises and recession
