International

Front 1

Trade as a source for foregin exchange

Back 1

Esspecially important for countries like Ghana thatdo not have a convertible currency

Front 2

Absolute advantage

Back 2

A country has _absolute advantage_ if it can produce a good using fewer resources than another

Front 3

Comparative advantage

Back 3

When a country can produce a good at with a lower oppertunity cost it has a comparative advantage in the production of that good

Front 4

Sources of comparative advantage

Back 4

-Endowments of factors of production:
labour, land? skilled, unskilled?

- Levels of technology

"The abundance of a particular factor will make the price of this factor relatively lower and than the price on other factors, and thereby allowing the opportunity cost of the goods and services using that factor be lower than it would be in other countries."

Front 5

The effect of high exchange rate

Back 5

High exchange rate:
Inflation: downward pressure b/c if the exchange rate is high the price on finished products will be relatively low
More imports can be bought as they will become relatively cheaper
Less exports and less domestic products bought
- Reduce economic growth
- More unemployment

Depending on how close the economy is to full employment

Front 6

Effect of low exchange rate

Back 6

Inflationary pressure due to higher final prices
High employment!!

Front 7

Appreciation and deprecation

Back 7

Floating: higher and lower value

Front 8

Revalueation and devaluation

Back 8

When a fixed exchange rate is changed from one level to another

Front 9

Fixed exchange rate

Back 9

a system in which the government over-rules the workings of the market and directs the central bank to fix the exchangerate at a particular value

Front 10

Managed float

Back 10

Somewhere b/w fixed and floating

Front 11

Expenditure switching

Back 11

Try to switch the domestic spenditure away from imports:
- try to depreciate or devalue the value of the currency
- protectionist measures

Front 12

Expenditure reducing

Back 12

reducing the over all expenditure (shifting AD to the left:

- deflationary fiscal policies: increase direct tax and reduce government spending
- delfationary monetary policies: increasing interest rates and reducing money supply. Will also attract foregin investers and offset the deficit in the current account. However, it is politically unpopular and also work as a disincentive for domestic producers and limit potential growth.

Front 13

Marshall-Lerner Condition

Back 13

Reducing the value of a currency will only be succecful if the total value of the price elasticities of exports and imports are larger than 1 (at least one of them is elastic)

Front 14

J-Curve

Back 14

Time is a important determinent for PED. If a government reduces their exchange rate of their currency in order to make imports relatively more expensive and exports relatively

Front 15

Preferential trade agreements

Back 15

an arrangement with no or low trade restrictions between the members e.g. tariffs

Front 16

Bilateral
Multilateral

Back 16

Two countries/groups of countries
Many countries

Front 17

Free trade area,
Custom union,
Custom market

Back 17

Free trade area: An agreement where the members are allowed to trade freely among themeselves but however they want with countries outside the area
Custom union: Trade freely within and adopt common external barriers for importation to the costume union
Common market: Like a costom union, but it does also allow free movement of the four factors of production (like labour) (and not only goods and services)

Front 18

Economic intergration

Back 18

a progcess whereby countries coordinate their economic policies

Front 19

Trade creation

Back 19

An increase in output using fewer resources due to trade. Occurs when production is transferred from a high-cost to a low cost producer

Front 20

Trade diversion

Back 20

Then joining a trade union (not a free trade union) leads to the production transferring from low-cost to high-cost production.

Front 21

Evaluate and compare and contrast tradingblocks

Back 21

Depends on the degree of intergration
- Being a part of a trading block leads to access to a greater market ---> allow some domestiv producers in member countries to gain economies of scale,
but some will suffer from the increased competition
- Enables greater political stability
- Enact discriminatory against non-members
- Spread of technology
- Comparative advantages

Front 22

Explain monetary union

Back 22

A common market with a common currency and a common central bank.
Implies a single monetary policy and political stance on inflation

Front 23

Pros w/ monetary unions

Back 23

Pros:
- Reduced exchange rate costs
- Reduced risks and uncertainties
- Price transparency: easy for costumers and firms to compare prices. Enhance competition and efficiency
---> benefits to constumers in terms of price, choice , quality and output
---> boost trade and expansion --> gain economies of scale
- Stable macro economic polices:

Front 24

Cons with monetary untions

Back 24

- Loss of economic policy independence: a common central bank means one common interest rates for all member countries, even though a single country could benifit from a boost in aggregate demand or so. Unable to close recessionary gap or control exhange rates to fix a persistent trade deficit.
- Also fiscal policies are restrained
- Transition costs: education costumers, changing labels, meanus, price lists, traning staffs, changing computer software and tills (kassaapparat)

Front 25

Terms of trade

Back 25

The rate at which exports will trade for imports, how many units of imports per unit of exports, but in practise the ratio of avarage export prices to avarage import prices.

Front 26

How are terms of trade measured

Back 26

Avarage price of exports
divided by
Average price of imports
times 100

The construction of these averages are done similarly to the construction of the consumer price index. A selection of main export goods are sorted according to importance (percentage of the total export expenditure) same is done to imports.

A base year with terms of trade = 100

Export prices rise with 8 percent and import prices with 4 percent

---> 108/104 = 103,85

---> terms of trade have improved

Front 27

Improvement vs a deterioation in the terms of trade

Back 27

Improvement: a given amount of exports can buy more imports

Deterioration: a given amount of exports can buy less exports

Front 28

Short term causes for changes in terms of trade

Back 28

- Changes in demand and supply
Supply can be due to global changes in supply inputs
- Change in relative inflation rates: If domestic inflation is relatively higher TOT will improve and vice versa
- Changes in relative exchange rates: apprectation --> TOT improves (almost sure)

Front 29

Long term causes for changes in terms of trade

Back 29

World income levels:
an overall increase in demand aswell as a change in demand patterns. An increase in income leads to an increase of demand of products that are income elastic (often secondary and teritroy products) Over time countries exporting primary goods will face deteriorating terms of trade

Changes in productivity within the country:
Productivity which is a measurement of output per unit of input. An increased productivity will lead to lower prices, and hence deteriorated terms of trade. However, it can improve competitiveness!

Improvement in technology:
leads to lower costs of production and increases supply, lowers prices. TOT will worsen but exports would become more competitive

Front 30

How can changes in terms of trade in long term result in a global redistribution of income?

Back 30

Can increse already existing inequality
- The proportion of the national income available to purchase factors inputs or increase productive capacity falls, which hinders economic development and growth.
- As they need to sell more exports to afford imports they will supply even more ---> lower the prices even further
- Harder to service debts
- Overuse of resources

No enough

Front 31

How can changes in terms of trade in long term effect the current account? using the concept of PED for exports and imports

Back 31

If PED for exports and imports are elastic, an improvement in the terms of trade will lead to a worsening of the current account,

(as exports will have a higher price and less will be demanded osv)

And vice versa

Front 32

Volatility

Back 32

Primary goods are often price inelastic both in demand and supply.
Primary industries are subjects to supply side shocks chocks (weather and agriculture).
---> wide price fluctuations
---> earnings from exports unpredictiable
---> difficult to plan ahead

Increase in price in both agricultural and minerals but LDC's often concentrate on only one so they cancel out

Bajs vet inte