Unit 3A: International Economics Flashcards
Tariff
- Tax put on goods imported from abroad
- Raises price of imported product
- Helps domestic producers of similar products sell them at higher prices
Quota
- 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
Embargo
Stops exports or imports of a product/group of products to or from another country
Licensing requirements: General info
- Requirements to import or export a good/group of goods
- Imports can be restricted by issuing few or no licenses
Licensing Requirements: Exports
Export licenses can be used to restrict trade with other countries or keep prices of domestic goods from rising
Subsidies
- Money given by governments to encourage exports
- Allows firms to charge less for their goods than foreign producers (thereby encouraging exports)
Protectionism: Excessive foreign spending
Causes reduced domestic GDP and higher unemployment due to high payments for imports and reduced domestic industry from foreign spending
Protectionism: Trade deficits
- Difference between revenue earned from exports and money paid for imports
- Causes need to borrow loans to pay for imports
Protectionism: Artificially low-price exports
Artificially low-price exports from “dumping”, that can harm consumers
Protectionism: Unequal trade terms and agreements
Unequal trade terms and agreements between countries (ex: amount of good country needs to export to receive x amount of imports)
Protectionism: Protecting developing industries
Protecting developing industries, especially in poorer countries, until they can compete without government help.
Protectionism: Strategic Industries
- Governments protect industries with high wages and high tech from foreign competition.
- They also protect domestic agriculture.
N. E. Protectionism: Limits in World Trade
Reduction in total number of goods and services produced
N. E. Protectionism: Workers earning reduced income
Workers from foreign countries earn reduced income due to less foreign revenue from protectionism
N. E. Protectionism: Shrinking Global Market
- Protectionism results in reduction of the global market for a good
- Results in reduced global economic growth and development
N. E. Protectionism: Retaliatory Tactics
Limits imposed by one country to a foreign country result in retaliatory trade limits from the foreign country
N. E. Protectionism: Reduced Exports
Foreigners may reduce imports from reduced export revenues, harming exporting industries and workers
N. E. Protectionism: Reduced Efficiency
With reduced competition from foreign producers, domestic producers may use less efficient production methods
Foreign Exchange Market
A global decentralized market where currencies are traded.
Locations of major currency markets
London, NYC, Tokyo, Hong Kong, Singapore
Economic agents involved in transaction of foreign exchange
- Central banks
- Commercial banks
- Governments
- Other institutional investors
Flexible (Floating) Exchange Rate System
Country allows its currency value to be determined by supply and demand in the foreign exchange market
Currency Appreciation
An increase in the value of currency
Currency Depreciation
A decrease in the value of the currency
Fixed (Pegged) Exchange Rate System
Country decides to fix the value of its currency in relation to some other nation’s currency
Currency Revaluation (Fixed ERS)
Country decides to raise the value of its currency
Currency Devaluation (Fixed ERS)
Country decides to reduce the value of its currency
Managed Flexible Exchange Rate (Dirty Float)
Country allows its currency to float within a specific range
Formula for converting one currency to another
- 1/Exchange rate
- Ex: $1.00 USD = $1.41 CAD
- $1.00 CAD = $0.709 USD
Trade Flows
↑D(CDN Exports) → ↑D($CDN)
Income of Importing Country
↑Y(US) → ↑D(CDN Exports) → ↑D($CDN)
Capital Flows
↑D(CDN Securities (financial deposits)) → ↑D($CDN)
Interest Rate Differentials
↑i-rate(CDN i-rate vs. US) → ↑D(CDN Securities (financial deposits)) → ↑D($CDN)
Canadian Goods
↓D(CDN Goods) → ↓D($CDN)
Domestic inflation rate
↑In(CDN vs. US) → ↓D(CDN Goods) → ↓D($CDN)
Currency Speculation: Higher Value
- ↑E($CDN) → ↑D($CDN )
- Investors will demand more $CDN
Currency Speculation: Lower Value
- ↓E($CDN) → ↑S($CDN)
- Investors will sell $CDN, increasing the supply of $CDN in the market
Central bank use of foreign currency reserves
Country’s reserves of gold and foreign currencies ($USD) are used to stabilize their domestic currency
Level. Integration 1
Preferential Trade Area
Level. Integration 2
Free Trade Area
Level. Integration 3
Customs Union
Level. Integration 4
Common Market
Level. Integration 5
Monetary Union
Level. Integration 6
Fiscal Union
Level. Integration 7
Political Union
Elimination of Tariffs and Quotas among members?
All: Yes
Common Tariffs and Quota System
- All except Free Trade system: Yes
- Free Trade system: No
Elimination of restrictions on factor movements
- Free Trade and Customs Union: No
- Common Market and Above: Yes
Harmonization/ Unification of Economic and Social Policies and Institutions
- All except Economic/Political Union: No
- Economic/Political Union: Yes
Trade Diversion
Trade switches from more efficient producer outside trade grouping to less efficient producer inside trade grouping (who enjoys preferential access)
Free Trade Agreement
Countries agree (with some exceptions) to allow unhindered movement of goods and services between each other.
Customs Union (Info)
Free trade area combined with agreement that members have identical tariffs for non-member states.
Customs Union (reason for identical tariffs)
No member can (through charging lower tariffs than other members) route disproportionate share of a group’s trade through itself
Common Market
Customs union combined with agreement providing free movement of factors of production between member states
Monetary Union
Common market combined with the adoption of a common currency and common monetary policy
Global Trade Diagram (Supply)
- Unitary Elastic Supply: S(Domestic Producers)
- Perfectly Elastic Supply: S(ROW)
Global Trade Diagram (P & Q)
- Two different quantities (where S(ROW) meets domestic supply and demand)
- Higher Domestic Price, Lower Global Price
Global Trade Diagram (Imports)
Imports are represented as gap between leftmost and rightmost quantity
Quota Diagram
- Domestic Supply increases
- Price of domestic suppliers decreases, allowing more production
