Ib Economics: International Trade

Front 1

International Trade

Back 1

The exchange of goods and services between countries.

Front 2

Why do countries trade?

Back 2

-Lower prices
-Greater Choice
-Differences in Resources
-Economies of Scale
-Increased Competition

Front 3

Free Trade

Back 3

takes place between countries where there are no barriers to trade put in place by governments or international organizations.

Front 4

sunset industry

Back 4

industry in decline.

Front 5

sunrise industry

Back 5

new or infant industry

Front 6

Dumping

Back 6

the selling by a country of large quantities of a commodity at a price lower than its production cost in another country--ruins domestic producers.

Front 7

Arguments for Protectionism

Back 7

-protecting domestic employment
-protection the economy from low cost labor
-protecting an infant industry
-to prevent dumping
-avoid risks of overspecialization
-strategic reasons
-to protect production standards
-raise government revenue
-correct a balance of payments deficit.

Front 8

Arguments against protectionism

Back 8

-may raise prices to consumers and producers of imports that they buy.
-less choice
-competition diminishes -- less incentive to lower prices
-distorts comparative advantage.

Front 9

Tariff

Back 9

A tax that is charged on imported goods.

Front 10

Subsidy

Back 10

an amount paid by the government to a firm, per unit of output.

Front 11

Quota

Back 11

physical limit on the numbers or value of goods that can be imported into a country.

Front 12

Voluntary Export Restraints

Back 12

agreements between exporting and importing countries in which the exporting country agrees to limit the quantity of exports of a specific good below a certain level.

Front 13

Administrative Barriers

Back 13

Red Tape--certain processes that have to take place

Front 14

Health and Safety Standards

Back 14

may restrict import entry if it is lengthy to carry out proof that they are not violating these codes.

Front 15

Embargo

Back 15

an extreme quota or complete ban on imports and is usually put in place as a form of political punishment

Front 16

Nationalistic Campaigns

Back 16

governments will sometimes run marketing campaigns to encourage people to buy domestic instead of foreign goods.

Front 17

WTO

Back 17

World Trade Organization: an international organization that sets the rules for global trading and resolves disputs between its member countries.

Front 18

Aims of WTO

Back 18

-administer WTO agreements
-be a forum for trade negotiations
-handle trade disputes among member countries
-monitor national trade policies
-provide technical assistance and training for developing countries.
-cooperate with other international organizations

Front 19

Pro-WTO

Back 19

-promotes peace (diplomacy)
-disputes handled constructively
-rules make life easier.
-cuts cost of living for consumers
-provides more choice of products
-raises incomes and stimulates economic growth
-encourages good govt

Front 20

Anti-WTO

Back 20

-important decisions made between small groups of wealthier nations
-developing countries can't afford to go to all negotiations/have representatives
-WTOs includes long list of services that should be privatized
-Free trade does not lead the common man to be better off (rich get richer)
-WTO treaties biased towards MNCs and rich countries (allowed higher import duties and quotas in certain products, highly protected agriculture in developed countries)

Front 21

Globalization

Back 21

the increased integration of national economies into global, rather than national, markets prompted by liberalized cash flows, liberalized trade flows, significant advances in information technology, and marked decreases in the costs of international transport.

Front 22

Trading Bloc

Back 22

a group of countries that join together in some form of agreement in order to increase trade between themselves and to gain economic benefits from cooperation on some level.

Front 23

Preferential Trading Areas

Back 23

trading bloc that gives preferential access to certain products from certain countries

Front 24

Free Trade Areas

Back 24

a n agreement made between countries that agree to trade freely among themselves, but are allowed to trade with other countries if they wish.

Front 25

Customs Union

Back 25

agreement between countries, where the countries agree to trade freely among themselves, adopt common external barriers against any nations attempting to import into the union.

Front 26

Common Markets

Back 26

a customs union with common policies on product regulation, free movement of goods, services, capital, labor.

Front 27

Economic and Monetary Union

Back 27

a common market with a common currency.

Front 28

Complete economic integration

Back 28

individual countries would have no control of economic policy full monetary union, and complete harmonization of fiscal policy.

Front 29

Exchange Rates

Back 29

the value of one currency expressed in terms of another currency

Front 30

Fixed exchange rate

Back 30

an exchange rate regime where the value of the currency is fixed to the value of another currency or to the average value of a selection of currencies, or to value of some other commodity.

Front 31

Floating Exchange Rate

Back 31

the value of a currency is allowed to be determined solely by demand for and supply of the currency on the foreign exchange market.

Front 32

What causes the value of a country's currency to increase?

Back 32

increase in demand for US goods and services, US inflation rates lower than GB inflation rates (makes their goods slightly less expensive), increase in EU incomes, change in tastes, US investment prospects improve, interest rates increase (save there), speculators think it will go up.

Front 33

What causes its value to decrease?

Back 33

americans increase demand for EU goods and services (US inflation higher--more expensive), incomes in US increase, change in tastes, eu investment prospects improve, rise in EU interest rates, speculation.

Front 34

Advantage of high exchange rate

Back 34

-downward pressure on inflation (high ER, price of finished imported goods will be low--reduces cost of production for firms --> lower prices for consumers)
-more imports can be bought= high ER= each unit of currency will buy more foreign currencies and thus more foreign goods.
-high value forces domestic producer sto improve efficiency--> high ER threatens international competitiveness

Front 35

Disadvantages of high exchange rate

Back 35

-damages import industries --> might be difficult to sell goods abroad = unemployment.
-damage to domestic industries--> more imports are purchased (less expensive).

Front 36

advantages of a low exchange rate:

Back 36

-greater employment in export industries.
-greater employment in domestic industries = makes imports more expensive -- encourages domestic consumers to buy domestic products.

Front 37

disadvantage of low exchange rate

Back 37

inflation --makes imported final goods more expensive.

Front 38

Government intervenes to:

Back 38

-lower exchange rate to increase employment
-raise exchange rate to fight inflation
-maintain fixed exchange rate
-avoid fluctuations
-achieve ER stability--improves business confidence.
-improve current account deficit.

Front 39

Balance of Payments

Back 39

a record of the value of all transactions between the residents of one country with the residents of all other countries in the world over a given period of time

Front 40

Current Account

Back 40

the measure of flow of funds from trade in goods and services, plus other income flows.

Front 41

Net Investment Incomes

Back 41

measure of the net monetary movement of profit, interest, and dividends moving into and out of the country over a given period of time as a result of financial investment abroad.

Front 42

Net transfers of money

Back 42

payments made between countries when no services or goods change hands.

Front 43

Capital Account

Back 43

a measure of the buying and selling of assets between countries

Front 44

Assets

Back 44

include anything that can be owned and has value (land, real estate, companies, stocks, shares, government bonds)

Front 45

Expenditure Switching Policies

Back 45

any policies implemented by the government that attempt to switch the expenditure of domestic consumers away from imports towards domestically produced goods and services

Front 46

Expenditure Reducing Policies

Back 46

any policies that reduce overall expenditure in the economy (AD-- left)

Front 47

limitations of theory of comp adv 6

Back 47

may lead to excessive specialisation

factors op are in real Life not immobile and fixed.

technology is not fect

there is rarely perfect comp

there is rarely full employment of all resouces

transport COSTs can be considerable

barriers to trade

Front 48

infant industry argument

Back 48

industries need protection in order to grow up and be able to face international competition. infant industry has not had tuime to establish itself and achieve efficiencies in production.

limitation: which industry + gov might continue to protect it for too long

Front 49

strategic trade argument

Back 49

most countries wish to have a minimum level of domestic prduction of some strategic industries (Telecommunications, computers...)that are important to the future growth of an economy.

however: difficult to indentify the industries that should be protected + selecting appropriate protective policies

Front 50

national security argument

Back 50

certain industries are essential for national defence (weapons, etc) and should be protected so that a country can produce them itself. in times of war or a national emergency should not have to depend on imports.

non-economic arguments.

Front 51

some more short-term temporary solutions to problems. protectionism 4

Back 51

1. tariffs as a source of gov Revenue

2. means to overcome BoP deficit

(lower import spending, increase export Revenues)

3. anti-dumping argument.

(if a country suspects that a trading partner is practising dumping, should have the right to impose tariffs or quotas to limit omports of the dumped good)

however: difficult to prove

4. protection of domestic jobs

Front 52

dumping

Back 52

the practice of Selling a good in international markets at a price that is below the cost of producing it. illegal

Front 53

arguments against protectionism 7

Back 53

1. inefficiencyt and misallocation of Resources. society :(

2. higher costs of production

3. consumers lose in most cases, higher prices

4. Costs of long-run Reliance on protectionist methods- disincentives to become more efficient

5. may give rise to trade wars

6. may have negative effects on a country's export competitiveness

(if using imports as input in production)

7. income distribution worsens in most cases

Front 54

supply of a domestic currency

Back 54

shows how much of the domestic currency is available in Exchange offices around the worls

Front 55

as demand for a country's exports increases, its currency..... (in floating Exchange rate)

imports increase --> currency ...

Back 55

appreciates, depreciates

Front 56

a country's interest rates and the value of its currency...... (

Back 56

change in the same direction

Front 57

causes of change in Exchange rates 8

Back 57

1. exports

2. imports.

3. relative interest rate Changes

4. relative rates of inflation

5. investment from abroad

6. Changes in income

7. speculation

8. use of foreign currency reserves

Front 58

higher inflation in a country relative to other countries lead to a currency ..... (free floa)

Back 58

depreciation

(since demand for exports falls as other countries now find them too expensive, imports with lower inflation rates are chepeer) so fall in demand for currency increase in imports.

Front 59

a country's level of income relative to toher countries and the value of its currency change in..

Back 59

opposite direction

Front 60

speculation

Back 60

buying and Selling currencies in order to make a profit from Changes in Exchange rates

Front 61

in which ways can Exchange rate affect inflation?

Back 61

1. cost-push inflation

depreciation --> imports more expensive --> if domestic prodeucers are heavily dependend on imported FoP --> cost of production increase --> leftwards shift of the SRAS curve. the more inelastic the demand for the important input the greater the cost-push inflation

appretiation -> imports less expensive --> lowering inflationary pressures on the economy

2. demand-pull inflation

Front 62

how can Exchange rate affect demand-pull inflation

Back 62

affect AD by influencing net exports (X-M). c

urrency depreciation --> exports cheaper imports expensive --> increases net exports. --> rightward shift of the AD (increase) using the keynesian as-as model causes demand-pull inflation depending on where the economy is in the business cycle.

appretiation: reduce demand-pull inflationary pressures due to a drecrease in net exports

Front 63

Exchange rate: effect on employment

Back 63

currency depreciation: increase in AD --> fall in cyclical unemp. if the economy is in a recessionary gap, if it is at or Close to potential GDP, the increase in AD may cause a temporary decrease in natural unem. (come with strong demand-pull inflatio pressures)

appreciation: create a recessionary gap, lead to cyclical unemp.

Front 64

Exchange rate: effect on economic growth

Back 64

depreciation: increaes net exports increasing AD --> increase in real GDP produced. (however may be s-t benefits bc of the inflationary impacts)

appreciation: dampening effect on the growht of real gdp (however might have a positive indirect effect since impoorts cheaper --> increased imports of FoP that can be used

Front 65

Exchange rate: effect on current account balance

Back 65

major differences between the value of exp and imports considered undesirable (especially l-t).

depreciation: if a country has trade deficit, likely to become smaller after a period of time.

if trade surplus --> larger.

appreciation has the opposite effect

Front 66

Exchange rate: effects on foreign debt

Back 66

depreciation: lowers the value of the domestic currency causing the value of foreign debt to increaee.

(problem faced by many developing countries)

Front 67

fixed Exchange rate system

Back 67

Exchange rates are fixed by the cb and are not permitted to change in repsonse to Changes in currency supply and demand. requires constant intervention (takes form of buying and Selling currencies or other adjustments in dom. economy)

Front 68

4 advantages of fixed Exchange rate

Back 68

predictability

Exchange rate stability

fiscal/monetary discipline

less speculative risk

Front 69

3 disadv. of fixed exc rate

Back 69

1. gives up domestic monetary politicy and perhaps a degree of fiscal policy freedom aswell

2. need for large foreign reserves

3. possibility of increased unem

Front 70

advantages of floating 5

Back 70

the BoP automatically adjusts

no war retaliation

freedom of mon/fiscal policy

less risk of importing inflation

Front 71

disad. of floa 3

Back 71

lack of predictability

lack of fiscal/monetary caution

speculations can destabilise

Front 72

advantage of a single currency (euro ex.)

Back 72

trade Creation highly likely

greater competition, lower COSTs, benefits of scale, lower prices

lower transaction consts for firms

better resource allocation

encourages price transparency

Front 73

disadvantages of a single currency (Euro)

Back 73

far reacing increases in economic/political integration: can put strain on relationship.

problem of economic asymmetry and "one size fits all" monetary/fiscal policies

could in some regions create unem. low growth

loss of excahnge rate as a mechanism for adjustement

Front 74

overvalued currency

Back 74

one that has a vlue that is too high relative to its equi. free market value.

Front 75

undervalued currency

Back 75

value is too low relative to its eq. free market value

Front 76

balanc eof payments

Back 76

record of all transactions between the residents of the country and the residents of all other countries.

Front 77

credits create a .... for the country's currency

Back 77

foreign demand

Front 78

debits create a .... for the domestic currency

Back 78

supply

Front 79

deficit

Back 79

occurs whenever a blanace has a negative value. debits are largen than credits

Front 80

current account

Back 80

sum of balance of trade in goods and service, net income and net transfers

Front 81

capital account

Back 81

net capital transfers

and net transactions

Front 82

financial account

Back 82

consist of inflows minus outflows of funds for

direct investment, portfolio investment and reserve assets

Front 83

how is current account and financial account interdependent

Back 83

surplus current account: buys assets abroad (foreign account) so is matched by a deficit in the financial account.

if ca deficit, the financial account is a reflection of the need to finance the deficit.

Front 84

epansionary monetary policy and the trade balance

Back 84

intended to increase AD --> lowers interest rates --> depreciates the currency --> increasing X and decreasing M --> if the economy has a trade deficit it improves it, however if a trade surplus it grows larger (worsens)

Front 85

contractionary monetary policy and the trade balance

Back 85

worsens a trade deficit but improves a trade surplus

Front 86

preventing currency speculation

Back 86

if an economy is concerned that speculators may "attack" its currency it may raise interest rates to make it more attractive.

Front 87

some consequences of persistent current account deficit 8

Back 87

1. financed by loans

--> possibnle need for higher interest rates to attract foreign financial investments, leading to recession

2. high indebtedness

3. depreciating Exchange rate

4. poor international credit ratings.

5. painful demand management policies

6. cost of paying interest on loans

7. possibility of lower economic growth

8. lower standard of living in the future

Front 88

methods a gov. can use to correct a persistent curent account deficit3

Back 88

1. expenditure-reducing policies

increase exports decrease imports

by using contractionary fiscal and monetary policies to reduce ad. (might create recession, also risk that higher interest rates --> currenc ap --> discouraging X and encour M --> partly cancelling out)

2. Expenditure-switching policies

increased trade protection.

depreciation

(perhaps higher domestic inflation, some firms higher COSTs of production --> cost-push inflation)

3. supply-side policies to increase competitiveness

market-oriented: lower COSTs of production for firms. shifting the sras and lras curves to the right --> lower rates of inflation.

other policies such as increasing competition etc could make firms more competitive in global markets. lower rates of inflation may over l periods increase X.

interventionist: promotes industries that produce for X

(however, normally takes a long time)

Front 89

marshall Lerner condition

Back 89

if the sum of the PEDs for imports and exports is greater than 1 (pedm+pedx>1) devaluation/depreciation will improve the trade balance (smaller trade deficit). if the sum is less than one --> worsen.

equal to 1: unchanged

Front 90

consequences of persistent current account surpluses

Back 90

1. low domestic consumption

2. insufficient domestic investment

(financial account deefifcit means that funds are leaving the country --> limiting economic growth prospects)

3. appreciation of the domestic currency

4. reduced export competitiveness

Front 91

2examples of free trade areas

Back 91

Nafta (Canada mexico us)

asean

Front 92

example of custums unions

Back 92

PARTA

Front 93

possible disad of trading blocs 3

Back 93

1. may not be the best way to achieve trade liberalisation

2. may create obstacles to the achievement of free trade on a global scale

3. unequal distribution of gains and possible losses

Front 94

trade creation

Back 94

refers to the situation where higher cost Products are replaced by lower cost imports after the formation of a trading bloc. trade diversion is the opposite

Front 95

terms of trade

Back 95

average price of exports/average price of imports *100

Front 96

improvement in the terms of trade

Back 96

increase in the value of the ratio of avg. export prices to average import prices (a fall in the OC of imports)

Front 97

causes of change in terms of trade in the short term 4

Back 97

changed in global demand

Changes in global supply

Changes in relative inflation rates

change sin relative Exchange rates

Front 98

causes of Changes in l-t 4

Back 98

1. growth in World income levels, affecting global demand

2. Changes in proeductivity

3. technological advances

4. trade protection

Front 99

Changes in the terms of trade in the l-t may result in a global redistribution of income since

Back 99

improvement: a country can purchase a larger quantity of imports with the same quantity of exports.

deterioration: suffer a transfer of output and income away from the domestic economy since they are forced to export increasing quantities of exports in order to maintain a particular quantity of imports.

Front 100

Changes in global supply and its effect on terms of trade

Back 100

for eaxmple, decrease in supply of oil. inealstic demand: improvement in the balance of trade and terms of trade of the oil-exporting countries

Another example: a computer exporting country pedx>1 elastic. due to major productivity increases --> global supply increases --> however since elastic --> the country's deteriorating terms of trade result in an imp. in its trade balance

Front 101

given a change in global supply that causes a change in a country's tot, when pedx<1 (inelastic) or pedm<1 the terms of trade and balance move in ... . whereas when pedx and pedm is elastic move in....

Back 101

the same

opposite direction