6 1 reading 19 international trade and capital flows pdf

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 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 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: Getting into new markets: Countries that cooperate can leverage each other’s expertise to expand into new trading markets Sharing knowledge: Countries can learn from each other to improve their domestic production efficiency Increase Available Resources: Countries can share resources through strategic alliances 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: Free Trade: Unconstrained access to the markets of other members Economies of Scale: Increase in markets enable manufacturers to produce more goods globally Job Creation: More trade means increasing domestic employment 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: 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 Financial Account • International money flows related to investments • Includes all financial assets • Assets owned by government, private assets held abroad, and foreign investments 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 ... 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. .. Trade specialization encourages efficiency LOS LOS Describe benefits and costs of international trade Costs of International Trade: • International competition can hurt domestic employment and. .. 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