Unit 3A: International Economics

Question 1

Tariff

Answer 1

• Tax put on goods imported from abroad
• Raises price of imported product
• Helps domestic producers of similar products sell them at higher prices

Question 2

Quota

Answer 2

• Limit on the amount of a good that can be imported.
• Creates shortage, causing price of good to rise
• Allows domestic producers to raise prices and expand production

Question 3

Embargo

Answer 3

Stops exports or imports of a product/group of products to or from another country

Question 4

Licensing requirements: General info

Answer 4

• Requirements to import or export a good/group of goods
• Imports can be restricted by issuing few or no licenses

Question 5

Licensing Requirements: Exports

Answer 5

Export licenses can be used to restrict trade with other countries or keep prices of domestic goods from rising

Question 6

Subsidies

Answer 6

• Money given by governments to encourage exports
• Allows firms to charge less for their goods than foreign producers (thereby encouraging exports)

Question 7

Protectionism: Excessive foreign spending

Answer 7

Causes reduced domestic GDP and higher unemployment due to high payments for imports and reduced domestic industry from foreign spending

Question 8

Protectionism: Trade deficits

Answer 8

• Difference between revenue earned from exports and money paid for imports
• Causes need to borrow loans to pay for imports

Question 9

Protectionism: Artificially low-price exports

Answer 9

Artificially low-price exports from “dumping”, that can harm consumers

Question 10

Protectionism: Unequal trade terms and agreements

Answer 10

Unequal trade terms and agreements between countries (ex: amount of good country needs to export to receive x amount of imports)

Question 11

Protectionism: Protecting developing industries

Answer 11

Protecting developing industries, especially in poorer countries, until they can compete without government help.

Question 12

Protectionism: Strategic Industries

Answer 12

• Governments protect industries with high wages and high tech from foreign competition.
• They also protect domestic agriculture.

Question 13

N. E. Protectionism: Limits in World Trade

Answer 13

Reduction in total number of goods and services produced

Question 14

N. E. Protectionism: Workers earning reduced income

Answer 14

Workers from foreign countries earn reduced income due to less foreign revenue from protectionism

Question 15

N. E. Protectionism: Shrinking Global Market

Answer 15

• Protectionism results in reduction of the global market for a good
• Results in reduced global economic growth and development

Question 16

N. E. Protectionism: Retaliatory Tactics

Answer 16

Limits imposed by one country to a foreign country result in retaliatory trade limits from the foreign country

Question 17

N. E. Protectionism: Reduced Exports

Answer 17

Foreigners may reduce imports from reduced export revenues, harming exporting industries and workers

Question 18

N. E. Protectionism: Reduced Efficiency

Answer 18

With reduced competition from foreign producers, domestic producers may use less efficient production methods

Question 19

Foreign Exchange Market

Answer 19

A global decentralized market where currencies are traded.

Question 20

Locations of major currency markets

Answer 20

London, NYC, Tokyo, Hong Kong, Singapore

Question 21

Economic agents involved in transaction of foreign exchange

Answer 21

• Central banks
• Commercial banks
• Governments
• Other institutional investors

Question 22

Flexible (Floating) Exchange Rate System

Answer 22

Country allows its currency value to be determined by supply and demand in the foreign exchange market

Question 23

Currency Appreciation

Answer 23

An increase in the value of currency

Question 24

Currency Depreciation

Answer 24

A decrease in the value of the currency

Question 25

Fixed (Pegged) Exchange Rate System

Answer 25

Country decides to fix the value of its currency in relation to some other nation’s currency

Question 26

Currency Revaluation (Fixed ERS)

Answer 26

Country decides to raise the value of its currency

Question 27

Currency Devaluation (Fixed ERS)

Answer 27

Country decides to reduce the value of its currency

Question 28

Managed Flexible Exchange Rate (Dirty Float)

Answer 28

Country allows its currency to float within a specific range

Question 29

Formula for converting one currency to another

Answer 29

- 1/Exchange rate - Ex: $1.00 USD = $1.41 CAD - $1.00 CAD = $0.709 USD

Question 30

Trade Flows

Answer 30

↑D(CDN Exports) → ↑D($CDN)

Question 31

Income of Importing Country

Answer 31

↑Y(US) → ↑D(CDN Exports) → ↑D($CDN)

Question 32

Capital Flows

Answer 32

↑D(CDN Securities (financial deposits)) → ↑D($CDN)

Question 33

Interest Rate Differentials

Answer 33

↑i-rate(CDN i-rate vs. US) → ↑D(CDN Securities (financial deposits)) → ↑D($CDN)

Question 34

Canadian Goods

Answer 34

↓D(CDN Goods) → ↓D($CDN)

Question 35

Domestic inflation rate

Answer 35

↑In(CDN vs. US) → ↓D(CDN Goods) → ↓D($CDN)

Question 36

Currency Speculation: Higher Value

Answer 36

- ↑E($CDN) → ↑D($CDN​ ) - Investors will demand more $CDN

Question 37

Currency Speculation: Lower Value

Answer 37

- ↓E($CDN) → ↑S($CDN​) - Investors will sell $CDN, increasing the supply of $CDN in the market

Question 38

Central bank use of foreign currency reserves

Answer 38

Country’s reserves of gold and foreign currencies ($USD) are used to stabilize their domestic currency

Question 39

Level. Integration 1

Answer 39

Preferential Trade Area

Question 40

Level. Integration 2

Answer 40

Free Trade Area

Question 41

Level. Integration 3

Answer 41

Customs Union

Question 42

Level. Integration 4

Answer 42

Common Market

Question 43

Level. Integration 5

Answer 43

Monetary Union

Question 44

Level. Integration 6

Answer 44

Fiscal Union

Question 45

Level. Integration 7

Answer 45

Political Union

Question 46

Elimination of Tariffs and Quotas among members?

Answer 46

All: Yes

Question 47

Common Tariffs and Quota System

Answer 47

- All except Free Trade system: Yes - Free Trade system: No

Question 48

Elimination of restrictions on factor movements

Answer 48

- Free Trade and Customs Union: No - Common Market and Above: Yes

Question 49

Harmonization/ Unification of Economic and Social Policies and Institutions

Answer 49

- All except Economic/Political Union: No - Economic/Political Union: Yes

Question 50

Trade Diversion

Answer 50

Trade switches from more efficient producer outside trade grouping to less efficient producer inside trade grouping (who enjoys preferential access)

Question 51

Free Trade Agreement

Answer 51

Countries agree (with some exceptions) to allow unhindered movement of goods and services between each other.

Question 52

Customs Union (Info)

Answer 52

Free trade area combined with agreement that members have identical tariffs for non-member states.

Question 53

Customs Union (reason for identical tariffs)

Answer 53

No member can (through charging lower tariffs than other members) route disproportionate share of a group’s trade through itself

Question 54

Common Market

Answer 54

Customs union combined with agreement providing free movement of factors of production between member states

Question 55

Monetary Union

Answer 55

Common market combined with the adoption of a common currency and common monetary policy

Question 56

Global Trade Diagram (Supply)

Answer 56

- Unitary Elastic Supply: S(Domestic Producers) - Perfectly Elastic Supply: S(ROW)

Question 57

Global Trade Diagram (P & Q)

Answer 57

- Two different quantities (where S(ROW) meets domestic supply and demand) - Higher Domestic Price, Lower Global Price

Question 58

Global Trade Diagram (Imports)

Answer 58

Imports are represented as gap between leftmost and rightmost quantity

Question 59

Quota Diagram

Answer 59

- Domestic Supply increases - Price of domestic suppliers decreases, allowing more production