6 1 reading 19 international trade and capital flows pdf

LOS LOS Describe benefits and costs of international trade Costs of International Trade: • International competition can hurt domestic employment and income equality.. LOS LOS Disting

LOS

Economics

• Topics in Demand and Supply Analysis

• The Firm and Market Structures

• Aggregate Output, Prices, And Economic Growth

• Understanding Business Cycles

• Monetary and Fiscal Policy

• International Trade and Capital Flows

• Currency Exchange Rates

LOS LOS Compare gross domestic product and gross national

product

Gross Domestic Product (GDP) Gross National Product (GNP)

The market value of goods and

services in a country during a

specified period of time

The market value of all production

activities in a country during a

specified period of time

Measures income only within a

country

Includes income from foreign sources

Based on geographic area of

production

Based on location of ownership

= GDP + Net overseas property income

LOS LOS Describe benefits and costs of international trade

Benefits of International Trade:

• High-priced exports and lower-priced imports increases overall

economic welfare

• Trade liberalization increases real GDP through more efficient

allocation of resources

• Domestic productivity benefits from foreign innovation

• Global competition improves productivity of domestic firms

• Increased variety of goods through importation benefits consumers

• Increased competition reduces monopoly power

• Trade specialization encourages efficiency

LOS LOS Describe benefits and costs of international trade

Costs of International Trade:

• International competition can hurt domestic employment and income equality

• Less efficient firms exit the market and displace workers

• An increase in imports causes domestic industries to compete

with imports,

LOS LOS Distinguish between comparative advantage and absolute

advantage

• Absolute Advantage: country can produce goods at a lower cost

than trading partner

• Comparative Advantage: country can produce goods at a lower

relative opportunity cost

 Countries specializing in their comparative advantage goods and services benefits all trading partners through most efficient use of resources

Example >>

LOS LOS Distinguish between comparative advantage and absolute

advantage

Example

In any given week, Russia can produce, at maximum capacity, 30 million liters of beer and 6 million liters of vodka, while Ukraine can produce 35 million liters of beer and 21 million liters of vodka Which of the following statements is/are accurate?

i Ukraine has an absolute advantage in the production of both products

ii Ukraine has a comparative advantage in the production of beer

iii Ukraine is 3.5 times better at producing vodka than Russia

A i & ii only

B i & iii only

C ii & iii only

Solution

The correct answer is B

In this case, Ukraine has the absolute advantage in producing both products, but it has a comparative advantage in vodka because it is relatively better at producing it Ukraine is 3.5 times better at producing vodka, and only 1.17 times better at

producing beer

LOS LOS Distinguish between comparative advantage and absolute

advantage

Example

In any given week, Russia can produce, at maximum capacity, 30 million liters of beer and 6 million liters of vodka, while Ukraine can produce 35 million liters of beer and 21 million liters of vodka Which of the following statements is/are accurate?

i Ukraine has an absolute advantage in the production of both products

ii Ukraine has a comparative advantage in the production of beer

iii Ukraine is 3.5 times better at producing vodka than Russia

A i & ii only

B i & iii only

C ii & iii only

Solution

The correct answer is B

In this case, Ukraine has the absolute advantage in producing both products, but it has a comparative advantage in vodka because it is relatively better at producing it Ukraine is 3.5 times better at producing vodka, and only 1.17 times better at

producing beer

LOS LOS Explain the Ricardian and Heckscher–Ohlin models of trade

and the source(s) of comparative advantage in each model

• Ricardian Model: countries without absolute advantages benefit

from trade due to comparative advantages

Comparative advantage results from technology, rather than labor

General equilibrium model: assumes complete circular flow of

money between trading partners

• Heckscher-Ohlin Model: countries’ comparative advantages are

based on relative scarcity of resources

A country with lots of farmland but little labor will export food and import labor-intensive goods

LOS LOS Compare types of trade and capital restrictions and their

economic implications

• Trade Restrictions protect domestic producers from competition

against international competition

i Tariffs: a tax on imported goods

ii License: limited ability to import specific goods

iii Import Quotas: restriction on the amount of specific good that

can be imported

iv Voluntary Export Restraint: restrictions created by the

exporting nation

v Local Content Requirements: mandated use of domestic

inputs

You can write examples for these if you want

LOS LOS Compare types of trade and capital restrictions and their

economic implications

• Capital Restrictions control flow of investment capital between

countries

• They create similar effects as Trade Restrictions, used to protect domestic markets/industries, but:

i Restrictions can slow growth;

ii More restrictions can mean higher domestic prices for goods

 Trade restrictions affect goods and services

 Capital restrictions affect financial assets

LOS LOS Explain motivations for and advantages of trading blocs,

common markets, and economic unions

• Trading Bloc: number of nations that work together to guard

themselves against imports and non-members

Asia-Pacific Economic Corporation (APEC), Association of

Southeast Asian Nations (ASEAN)

• Common Markets: nations imposing few or no duties on trade with

one another

East African Common Market

• Economic Union: type of trade bloc utilizing common market with

customs unit

European Union (EU)

You can change my examples, but I was trying to cover most of the world

LOS LOS Explain motivations for and advantages of trading blocs,

common markets, and economic unions

• Motivations:

1 Getting into new markets: Countries that cooperate can

leverage each other’s expertise to expand into new trading markets

2 Sharing knowledge: Countries can learn from each other to

improve their domestic production efficiency

3 Increase Available Resources: Countries can share

resources through strategic alliances

4 Reducing Future Competition: Stronger competitive

positioning helps reduce risk of new competition from other countries

LOS LOS Explain motivations for and advantages of trading blocs,

common markets, and economic unions

• Advantages:

1 Free Trade: Unconstrained access to the markets of other

members

2 Economies of Scale: Increase in markets enable

manufacturers to produce more goods globally

3 Job Creation: More trade means increasing domestic

employment

4 Protection: Member countries are protected from cheaper

imports competing with domestic goods

LOS LOS Describe common objectives of capital restrictions imposed

by governments

• Developing countries want to ensure domestic producers are not acquired by foreigners

• Capital inflow can increase competition that forces domestic

producers out of the market

• The government needs to maintain control over financial assets for taxation purposes

• Capital restrictions can manage capital flow and prevent booms and busts

• Ensuring domestic savings are invested in domestic investments and maintaining domestic ownership of local companies

LOS LOS Describe the balance of payments accounts including their

components

Three components of balance of payments:

1 Current Account

• Inflow and outflow of goods and services

• Calculates the Balance of Trade for a country

• Totals exports and imports and determines trade deficit or surplus

2 Financial Account

• International money flows related to investments

• Includes all financial assets

• Assets owned by government, private assets held abroad, and foreign investments

3 Capital Account

• International capital transfers

• Acquiring or disposing of non-financial and non-produced assets required for production

LOS LOS Explain how decisions by consumers, firms, and

governments affect the balance of payments

• The balance of payments affects exchange rates between countries

Countries running a trade deficit (imports > exports) will see their currency depreciate

• Governments can intervene to affect balance of payments:

i Prohibitions on expensive imports;

ii Deflationary fiscal policies to reduce price and income levels

• Firms also impact the balance of payments when they decide

whether to invest domestically or in foreign countries to expand their business

LOS LOS Describe functions and objectives of the international

organizations that facilitate trade, including the World Bank, the International Monetary Fund, and the World Trade Organization

• International Monetary Fund

Lends foreign currencies to its member states during periods of crisis

Promotes exchange stability

Enables expansion and balanced growth of international trade

• World Trade Organization

Administrates individual trade agreements and solves disputes between member nations

Ensures transparency of trade policies

Acts of source of economic analysis and research

• World Bank Group

Provides funds for projects in developing countries

Helps create economic infrastructure significant to domestic financial markets

LOS

Economics

• Topics in Demand and Supply Analysis

• The Firm and Market Structures

• Aggregate Output, Prices, And Economic Growth

• Understanding Business Cycles

• Monetary and Fiscal Policy

• International Trade and Capital Flows

 Currency Exchange Rates