TRADE Flashcards
Define International Trade
Th transactions that takes place between economies on order to satisfy the demand for foreign goods and services. Payments for these goods and services are made in the suppliers currency.
Name reasons for trade
- differences in technology
- differences in resource endowments
- differences in demand
- the presence of economies of scale
- the presence of government policies
What is Absolute advantage?
It refers to the ability to produce more of a good or service than another entity using the same resources.
What is Comparative advantage?
It refers to the ability to produce a good or service at a lower opportunity cost than another entity.
Define Protectionism
Protectionism refers to government policies aimed at restricting international trade to favor domestic industries and protect local businesses.
Reasons for Protectionism
- Unemployent
- Balance of Payments
- Unfair Competition
- Infant Industries
- Economic Development
- Tariff Revenue
Methods of Protectionism
- Tariffs
- Import Quotas
- Subsidies
- Health, Safety & Technical Standards
- Exchane Controls & Exchange Rates
Terms of Trade Formula
It is the ratio o export prices to import prices.
Index of export prices/ index of import prices x100
Balance of Payments (BOP)
The BOP is a summary of a country’s international trade. It is an account which traces the inflows and outflows of monetary transactions between one country and its trading partners.
It has 3 parts:
- A current acccount
- A capital account
- Balancing item or official financing
Balance of Trade
Trade Surplus = X<M
Trade Deficit = X>M
Current Account - Trades in Goods and Services (Net Exports)
Difference between a nation’s exports of goods and services and its imports of goods and services.
Eg. Toys imported from China, U.S cars exported to Mexico
Current Account - Investment Income
Income from the factors of production including payments made to foreign investors.
Eg. Money earned by Japanese car producers in the US
Current Account - Net Transfers
Money flows from the private or public sectors .
Eg. Donations, aids and grants, official assistance, remittance
Financial (Capital) Account
The financial account measures the purchase and sale of financial assets abroad.
Financial Account Surplus = Inflow > Outflow
Financial Account Deficit = Inflow < Outflow
Equilibrium = (Inflow = Outflow)
Net Capital Outflow
The difference between the purchase of foreign assets and domestic assets purchased by foreigners.
Exchange Rate
The amount of money one country’s currency exchanges for another.
Types of Exchange Rate
- Freely Floating
- Fixed
- Managed
Exchange Rate - Freely Floating
Determined by market demand and supply for the currency in terms of a price in another currency . The currency can appreciate or depreciate.
Exchange Rate - Fixed
The government controls the rate of exchange at a desirable level by revaluing or devaluing the currency. It does so by controlling the supply of the currency.
What is Appreciation?
The increase of value of a country’s currency with respect to a foreign currency.
Exports decrease, Imports increase.
What is Depreciation?
The loss of value of a country’s currency with respect to a foreign currency.
Exports increase, Imports decrease
FOREX Shifters
- Changges in tastes
- Changes in relative imports (results in more imports)
- Changes in inflation
- Changes in interest rates (higher interest rates attract inflow from other countries
Define Economic Growth
Economic growth occurs when there is a rise in the production of goods and services for a certain period as compared with a previous one.
What are the 4 main factors of Economic Growth?
Land, labor, capital & entrepreneurship
What are the benefits of Economic Growth?
Higher living standards, job creation, increased government revenue, and opportunities for investment.
What are the costs of Economic Growth?
Increased pollution and resource depletion, widenin income inequality, potential trade deficits and the need for increased infrastructure and public services.
