Term
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Definition
-market value of all FINAL goods and services produced by factors of production located WITHIN a country/economy during a period of time
--> includes g&s produced by foreigners within the country
--> excludes g&s produced by citizens outside the country |
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Term
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Definition
-market value of all FINAL goods and services produced by factors of production supplied by the citizens of the country, regardless of whether production takes place within or outside of the country
--> includes g&s produced by citizens outside the country
--> excludes g&s produced by foreigners within the country |
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Term
| Benefits of International Trade |
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Definition
-countries gain from exchange and specialization
-efficient resource allocation
-domestic companies gain access to global markets and customers, which leads to increased exchange of ideas and greater awareness of changing consumer tastes and preferences
-capital intensive industries gain access to much larger markets, enabling them to reap benefits of economies of scale
-domestic households are able to choose from a wider variety of g&s'
-increased foreign competition reduces monopoly power of domestic firms and forces them to continuously strive to become more efficient
-trade liberalization can lead to higher inflation-adjusted GDP as a result of a more efficient allocation of resources, learning by doing, knowledge spillovers and improved productivity |
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Term
| Costs of International Trade |
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Definition
-Companies that are less efficient than international firms may go out of business if foreign firms are allowed to enter the market and will lead to higher structural unemployment
--> counter argument: despite the short and medium term costs and unemployment, these resources will eventually be reemployed in more efficient industries |
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Term
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Definition
| -country's ability to produce a particular good at a LOWER OPPORTUNITY COST than its trading partners |
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Term
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Definition
-country's ability to produce a good at a LOWER COST or using few resources than its trading partner
-even if a country does not have an AA in the production of a good or service, it (and its trading partners) can still gain from trade if it produces and exports goods in which it has a comparative advantage |
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Term
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Definition
-focuses on differences in technology
-assumes that labor is the only variable factor of production
-A country gains a CA in the production of a good based on differences in labor productivity, which reflect underlying differences in technology
-differences are a key source of comparative advantage
-even if country is small compared to size of trading partner, it will continue to produce the good that it holds a CA in, and trade some of it to obtain other goods
-Technological gaps between countries can decrease over time, leading to shifts in CA |
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Term
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Definition
-focuses on differences in factor endowments
-assumes that BOTH capital and labor are variable factors of production, so a good can be produced with varying combinations of the two
-technology is the same in each industry across countries, but it varies across different countries
-differences in factor endowments are primary source of CA
-a country has a CA in a good whose production requires intensive use of a factor w which it is relatively abundantly endowed
-allows for redistribution of income through trade as it assumes that more than one factor of production is variable
-Theoretically, free trade should eventually result in equal prices of g&s and equal prices of factors or production across countries
--> in real world, trade only results in a tendency for factor prices to converge in the LR
**remember: factors are "ohlin" (all in) to help specialize trade |
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Term
| Types of Trade Restrictions |
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Definition
| Tariffs, Quotas, Voluntary Export Restraints, Export Subsidies |
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Term
| Tariffs and Economic Implications |
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Definition
-taxes levied on imports
-prices rise, domestic demand falls, domestic supply rises and the volume of imports fall
-govt manages to lower trade defect and earn some revenue for itself
-increase in PS
-CS falls
-net decrease in welfare
**analysis for a small country that is a price taker. when a large country imposes a tariff, the exporting country may lower its price in order to retain tis hare of the market in the improving country. therefore, large country can increase its own welfare if the improvement in terms of trade from the imposition of the tariff outweighs the associated deadweight loss, and its trading partners do not retaliate |
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Term
| Quotas and Economic Implications |
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Definition
-restrictions on the quantity of a good that can be imported into a country for a specified period of time
-price after quota increases, and what was previously govt. rev w tariffs can be captured by exporting country so welfare loss to importing country is now larger |
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Term
| Voluntary Export Restraints |
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Definition
-restrictions on the quantity of a good that can be exported, imposed by the exporting country
-exporting country captures quota rent |
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Term
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Definition
-payments made by the govt. to domestic exporters of certain goods
-interfere w free market mechanism
-domestic producers would be more inclined to export their output rather than selling it in domestic market |
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Term
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Definition
-members of regional trading agreement (RTA) agree to eliminate barriers to trade and movement of factors of production among the members of the bloc. may or may not have similar policies regarding trade restrictions against non-member countries.
-different types of trading blocks
-FTA, Customs union, Common Market, economic union |
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Term
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Definition
| -similar to FTA but all member countries have similar policies regarding trade w non-member countries |
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Term
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Definition
| -incorporates all provisions of a custom union, and also allows free movement of factors of production among the member countries |
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Term
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Definition
| -eliminate almost all barriers to free trade w each other. each still maintains its own policies regarding trade w non-member countries |
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Term
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Definition
| -incorporates all the aspects of a common market and also requires common economic institutions and coordination of economic policies among member countries |
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Term
| Trade Blocs (Motivations for and advantages) |
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Definition
-regional integration is easier achieve, takes less time, prolifically less contentious
-reducing barriers to trade allow member countries to allocate resources more efficiently
Advantages:
all benefits of free trade apply to trade blocs plus:
-reduce potential for conflict among members
-give members greater bargaining power in the global economy as they form a united front
-offer new opportunities for trade and investment
-typically, growth in a member country tends to spill over into other members as well |
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Term
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Definition
| -double entry bookkeeping system that summarizes a country's economic transactions w the rest of the world over a period of time |
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Term
| Balance of Payments Components |
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Definition
1) Current Account sub-accounts
-merchandise trade, services, income receipts, unilateral transfers
2) Capital Account sub-accounts
-Capital transfers, sales and purchases of non-produced, non- financial assets
3) Financial Transfers sub-accounts
-financial assets abroad, foreign owned financial assets |
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Term
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Definition
-Merchandise Trade: consists of all commodities and manufactured goods bought, sold or given away
-Services: include tourism, transportation, engineering and business services
-Income Receipts: income from ownership of foreign assets
-Unilateral transfers: one way transfers of assets |
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Term
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Definition
-Capital transfers: debt forgiveness, migrants' transfers, transfer ownership of fixed assets, transfer of funds received for the sale or acquisition of fixed assets, gift and inheritance taxes, death duties, uninsured damage to fixed assets
-Sales and purchases of non-rpdouced, non financial assets: such as rights to natural resources, intangible assets |
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Term
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Definition
Financial assets abroad
-official reserve assets, govt. assets, private assets
Foreign Owned Financial Assets
-official assets
-other foreign assets |
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Term
| Consumer, Firm and Govt. decision effects on balance of pmts |
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Definition
-current account balance must be offset by an opposite balance in the capital and financial accounts
-CA deficit must be financed by foreign direct investment, loans by foreign banks, or the sale of domestic debt and equity securities to foreign investors
-CA surplus is used to finance the CA deficit of trading partners (through loans and investments in real and financial assets)
CA =(X-M)=Y-(C+I+G)
country can have a CA deficit if it is consuming more than it produces so it borrows the shortfall from foreigners
CA=Sp+Sg - I
-CA deficit results from low private savings, govt. deficit and high private investment |
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Term
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Definition
-in a closed economy, savings can only be used for domestic investment
-in an open economy, savings can be used for domestic and foreign investment |
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Term
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Definition
economy's private savings can be used for
-domestic investment
-foreign investment (purchasing assets from foreigners)
-purchasing government debt |
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Term
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Definition
CA deficit results from
-low private savings
-govt. deficit (Sg = T-G-R)
-high private investment |
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Term
| Functions and Objectives of World Bank Group |
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Definition
-objective: fight poverty and enhance environmentally sound economic growth
Functions:
-provide cheap loans and grants to countries that have limited or no access to international financial markets
-provide analysis, advice and information to countries to encourage social and economic development
-share knowledge and promote dialogue to increase the capabilities of their partners and members
-help members create the basic economic infrastructure thats is essential for the development of domestic financial markets |
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Term
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Definition
-objective: enhance and liberalize international trade
Functions:
-implementation, administration and operation of individual agreements, providing a platform for negotiations and settling trade disputes
-provides technical cooperation and training to developing, under developed and poor countries to poor countries to bring them in compliance with WTO rules
-reviews members' trade policies on a regular basis and ensures coherence and transparence of trade policies through surveillance
-major source of economic research and analysis
-framework of global trade trulls provides a major institutional and regulator base, w/o which large multinationals would not be ale to operate on such a large scale |
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Term
| International Monetary Fund |
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Definition
-main objective: ensure the stability of the international monetary system, the system of exchange rates, and international payments that enables countries to participate in international trade
Functions
-provide forum for cooperation on international monetary problems
-facilitates the growth of international trade, thereby promoting job creation, economic growth and poverty reduction
-promotes exchange rate stability and an open system of international payments
-lends foreign exchange to member countries when needed, on a temporary basis and under adequate safeguards to help tim address balance of payments problems
-monitor global, regional and country economies
-resolve global economic imbalances
-analyzing capital market developments
-assessing finical sector vulnerabilities
-working to cut poverty
INVESTOR PERSPECTIVE: helps to keep country-specific market risk and global systematic risk under control |
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