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24 Cards in this Set
- Front
- Back
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What are assumptinos in International Trade
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• Perfect Competition • Constant Returns to Scale • No Externalities • Fixed Tech
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What is Absolute Advantage
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Country is able to produce cheaper in absolute terms
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What is Comparative Advantage
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Country can produce a good cheaper relative to another good produced domestically in another country
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Problems with Theories and Assumptions in Int'l Trade
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• Overspecialization can limit range of goods / services • Factors of Production can be very different • Countries may produce good that they are not efficient at producting • Intervention may be needed to subsidize or restrict certain goods / services
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What is Terms of Trade Index
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• Measures rate of exchange between two countries • LDC's could have a comparative advantage, but can have long-term decline in export earnings because they have to continualy produce more of a product •Avg. Export Index / Average Import Index * 100
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How is a Fixed Exchange Rate Regime Managed
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• Govt intevenes to keep ER at a target rate • Govt will print money and buy foreign reserves and vice versa to manage rate
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What are the advantages of Fixed Exchange Rates
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• Provide Certainty for importers / exporteres • Promotes Cost Control within the country • Govt can control capital inflows and outflows •
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What are the four Exchange Rate Strategies
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•Free Floating • Managed Floating • Semi-Fixed • Fully Fixed
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Characteristics of Free Floating
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• Value determined by market • Trade Flows are main factors in value • Macro Competitiveness • •••••••
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Characteristics of Managed Floating
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• Interest Rate management used to manage ER • Most Common •••••••••
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Characteristics of Semi-Fixed Floating
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• ER has a specific target range • Usually a band the ER can fluctuate around • Interest Rates are set to meet the target • Revaluations possible, but attempts are made to avoid•••••••
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Characteristics of Fully Fixed
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• Commitment to fixed rate • Achieves ER stability but not individual domestic economies •••••••••
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Advantages of Floating Exchange Rates
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• Automatic adjustments to Balance of Payments • As long as Price Elasticity of Demand is high for imports and exports, BOP's are stable • Gov't has flexibility in determining Interest Rates • •••••••
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Advantages of Strong Currency
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• Lower Import Prices • Controls Inflation by increasing competitiveness domestically •••••••••
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Disadvantages of Strong Currency
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• Increases Imports which leads to increased deficit • Hurts Exporters bc expensive elsewhere • ••••••••
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How to mitigate Disads of Strong Currency
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• Cut Export Prices • Outsourcing Raw Materials / Services • Seek efficiency gains • Move Production overseas • Invest in new product lines ••••••
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How does the J Curve Effect work?
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• Import Contracts don't expire, so there is a quick drop in BOP. As cheaper alternatives are sought out and exports bounce back up, the deficit shrinks more ••••••••••
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Effects of Exchange rate Depreciation
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• Cost-Push Inflation • Exporters begin to benefit bc cheaper internationally • Imports demand falls bc Imports are more expensive • Wages Rise, except possibly in high unemployment • GDP Growth - BOP becomes positive ••••••
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Difference between Real and Nominal Interest Rate
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• Real includes effects of inflation, Nominal does not • Real = Fisher equation •••••••••
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Equation for Real Rate of Interest
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• Nominal rate - Expected Inflation = Real Rate ••••••••••
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Advantage of Low Real Rate
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• More Borrowing, less saving ••••••••••
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Tax Adjusted Real Rate of Interest
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• Nominal Rate of Interest * (1 - T) - Expected Inflation = Real Rate ••••••••••
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What effect does Monetary Policy have on ER
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• Uncertainty impedes capital flows and deflects potential cross border transactions and investments • High interest rates discourage domestic credit expansion and attracts foreign investment • Low IR and rapid credit growth encourages exporting discourages investments ••••••••
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What is Purchasing Power Parity (PPP)
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• Theory that in long-run purchasing power is essentially the same in all currencies • Differences in exchange rate are implied differences in inflation • Expected Spot rate = Current Spot Rate plus expected difference in inflation • •••••••
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