Topic no. 14: International trade and finance Flashcards
Understand: - The Economic Basis for Trade - The Case for Free Trade - Two types of trade barriers: tariffs and quotas - The case for protectionism - The foreign exchange market - Determination of exchange rate - Factors that determine the equilibrium exchange rate of S$ - Exchange Rate Regimes - Balance of Payments
What is international trade?
Exchange of goods across national boundaries, involves exports and imports of good between nations.
Exports: Domestically produced goods purchased by other countries
Imports: Goods produced by other countries and are bought by the domestic country.
Why do nations trade?
Distribution of natural, human, and capital resources among nations is uneven; nations differ in their endowments of economic resources.
Efficient production of various goods requires different technologies, and not all nations have the same level of technological expertise.
Products differentiated as to quality and other attributes, and some people may prefer certain goods imported from abroad rather than similar goods produced domestically.
What is absolute and comparative advantage?
Specialisation and international trade increase productivity of a country’s resources and allow the country to obtain greater total output than otherwise would be possible.
Absolute advantage: Other producers of a product, if it can produce the product more efficiently. Can produce more product from any given amount of resource inputs than any other country.
Comparative advantage: Country produce product with lower opportunity cost than any other country.
What are examples of Two Isolated Nations?
- Absolute Advantage in only one good
- Absolute Advantage in both goods
[Look at opportunity cost ratio]
What is the specialisation based on comparative advantage?
Key determinant in whether or not nations can gain from specialization and trade.
What is the terms of trade?
Specialisation implies need to trade two goods.
What are trade barriers?
i) Tariffs
Tax imposed by nation and its imports.
a) Gainers
- Domestic producers
- Government
b) Lose
- Domestic consumers
- Foreign suppliers
ii) Quota
Specify maximum quantity of goods, which may be imported in any period.
What are the case for protectionism?
i) Infant industry argument
ii) To prevent dumping
iii) National security
iv) Diversification for stability
What is the foreign exchange market?
Market in which one country’s exchanged for the currency of another.
What is the exchange rate?
Exchange rate is price of one currency measured in terms of another country’s currency.
What determines the exchange rate?
i) Demand for S$
ii) Supply of S$
Factors that determine equilibrium exchange rate of S$?
i) Increase in the demand for exports at each price
ii) Reduction in the demand for goods by domestic
iii) A change in taste in favour
iv) Relative income changes
v) Relative price changes
vi) Relative interest rate changes
What is the exchange rate regimes?
a) Fixed exchange rate system
- Devaluation
- Revaluation
b) Flexible exchange rate system
- Clean float
- Dirty float
What is balance of payments?
Sum of all financial transactions take place between residents and residents of foreign nations.
