Unit 5 Flashcards
Trade barriers
Tariff, Quota, Embargo, Subsidy
Tariff
Tax on imported goods
Protective tariff
Used to protect domestic industries
Revenue tariff
Used exclusively to generate gov revenue
Quota
Limit on the amount of goods that can be imported
Embargo
Gov order which completely blocks all trade with a particular country (political)
Subsidy
A direct payment to domestic industry designed to increase exports or to project that industry
Effects of tariffs and quotas
Increased price on imported goods
Reallocate resources to inefficient producers
Hinder innovation and technological improvements that lower costs
Free trade
Free flow of goods and services between countries without any restrictions or barriers
Free trade benefits
Access to more markets for exports
More variety of goods and services
Lower prices for consumers
Specialization: allows countries to focus resources on products in which they hold a competitive advantage
Raises real incomes of all trading partners
As free trade increases poverty decreases
Free trade costs
Increase competition and elimination of non-efficient firms
Shifts jobs to cheaper labor markets resulting in job loss or gains
Differences in standards among products
Changes in exchange rates
Increased supply of currency = decreased exchange rate
Decreased supply of currency= increased exchange rate
Increased demand for currency= increased exchange rate
Decreased demand for currency= decreased exchange rate
Appreciation
Currency has become more valuable compared to another
Increased exchange rate
Depreciation
Occurs when the exchange rate of a currency decreases
When one country appreciates the other depreciates
Is depreciation bad?
Not really If the US dollar depreciates foreign investment goes up Increased net exports Decreased imports Increased AD
FOREX Shifters
1)Change in tastes
Ex) British tourists flock to US
Dollar demand increase, Pounds supply decrease
2)Changes in relative incomes (results in more imports)
US buys more imports
US demand for pounds appreciates
3) Changes in relative PL (inflation) (more imports)
US prices increase, US demand for cheaper imports increase, US demand for pounds increase, US supply of dollar decrease
4) Changes in relative interest rates
US had a higher interest rates, British people want to put $ in US Banks, capital flow increase towards US, British demand for dollar appreciates, British supply of pounds depreciates
Fixed exchange rate
Gov actively manages the country’s currency
Floating exchange rate
US
The market determines the value of a country’s currency
Protectionism
Is the practice of limiting trade to protect domestic industries
Tariffs, import quotas
Low exchange rates =
More exports
Higher interest rates =
Exports low
Capital Account
Investments
Current account
Donations to other countries, sending money to friends in other countries
