Week 9 - Exchange rates and trade

Question 1

what is an exchange rate?

Answer 1

The value of one currency in relation to another

Question 2

what determines the exchange rate?

Answer 2

The demand for goods and services between those 2 countries

Question 3

who influences exchange rate?

Answer 3

The fed and the US treasury

Question 4

what is the current and capital account?

Answer 4

A capital account - Ledger that records international transactions of purchase and sale of interest-bearing assets (e.g., bonds).

A current account - Ledger that records international trade of goods and services

Question 5

what is a trade deficit?

Answer 5

when a country’s imports exceed its exports - if saving decreases, spending increases, meaning we now consume more of everything including imports, creating a trade deficit.

Question 6

what is a trade surplus?

Answer 6

when a country’s exports exceed it’s imports; as savings increases, spending declines, which will lead to a trade surplus

Question 7

why do nations trade?

Answer 7

Why Do Nations Trade?
•Political benefits outweigh political costs
•Militaristic reasons
•Rent-seeking results
•Comparative advantage

Question 8

what is the concept of comparative advantage?

Answer 8

•Typically beneficial
•Sometimes negative for marginalized industries (i.e., those lacking international comparative advantage)
•Trade beneficial on macro scale
specializing and trading

e.g. bananas

Question 9

what is a tarrif?

Answer 9

Tax on an imported good - Always raises price of imported good to domestic buyers.

• Price of imported product goes up ◦Intention: To protect domestic industry
• Price of domestic product also rises
• Domestic industry benefits while hurting consumers

Question 10

what is a Quota?

Answer 10

Physical limitation on number of units to be imported - Indirectly influences price of imported product due to limited quantity

• Limitation on quantity of imports ◦Designed to protect domestic industry
• Foreign firm can’t sell as much, leaving room for domestic producer

Question 11

What is protectionism>

Answer 11

Concept of protecting your local and domestic businesses from international businesses

Question 12

what are isolations?

Answer 12

see pg 512

Question 13

what are the pros and cons of a common currency?

Answer 13

Pros:
•Eliminates exchange rates and risks
•Eliminates cost associated with currency exchange

Cons:
- you cannot have a monetary policy with common currency.
•Requires analysis of costs due to blending of fiscal and monetary policies
•Does not appeal to countries with great national pride in currency