Study your flashcards anywhere!

Download the official Cram app for free >

  • Shuffle
    Toggle On
    Toggle Off
  • Alphabetize
    Toggle On
    Toggle Off
  • Front First
    Toggle On
    Toggle Off
  • Both Sides
    Toggle On
    Toggle Off
  • Read
    Toggle On
    Toggle Off

How to study your flashcards.

Right/Left arrow keys: Navigate between flashcards.right arrow keyleft arrow key

Up/Down arrow keys: Flip the card between the front and back.down keyup key

H key: Show hint (3rd side).h key

A key: Read text to speech.a key


Play button


Play button




Click to flip

101 Cards in this Set

  • Front
  • Back
International Trade
The exchange of goods and services between countries.
Why do countries trade?
-Lower prices
-Greater Choice
-Differences in Resources
-Economies of Scale
-Increased Competition
Free Trade
takes place between countries where there are no barriers to trade put in place by governments or international organizations.
sunset industry
industry in decline.
sunrise industry
new or infant industry
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.
Arguments for Protectionism
-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.
Arguments against protectionism
-may raise prices to consumers and producers of imports that they buy.
-less choice
-competition diminishes -- less incentive to lower prices
-distorts comparative advantage.
A tax that is charged on imported goods.
an amount paid by the government to a firm, per unit of output.
physical limit on the numbers or value of goods that can be imported into a country.
Voluntary Export Restraints
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.
Administrative Barriers
Red Tape--certain processes that have to take place
Health and Safety Standards
may restrict import entry if it is lengthy to carry out proof that they are not violating these codes.
an extreme quota or complete ban on imports and is usually put in place as a form of political punishment
Nationalistic Campaigns
governments will sometimes run marketing campaigns to encourage people to buy domestic instead of foreign goods.
World Trade Organization: an international organization that sets the rules for global trading and resolves disputs between its member countries.
Aims of WTO
-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
-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
-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)
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.
Trading Bloc
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.
Preferential Trading Areas
trading bloc that gives preferential access to certain products from certain countries
Free Trade Areas
a n agreement made between countries that agree to trade freely among themselves, but are allowed to trade with other countries if they wish.
Customs Union
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.
Common Markets
a customs union with common policies on product regulation, free movement of goods, services, capital, labor.
Economic and Monetary Union
a common market with a common currency.
Complete economic integration
individual countries would have no control of economic policy full monetary union, and complete harmonization of fiscal policy.
Exchange Rates
the value of one currency expressed in terms of another currency
Fixed exchange rate
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.
Floating Exchange Rate
the value of a currency is allowed to be determined solely by demand for and supply of the currency on the foreign exchange market.
What causes the value of a country's currency to increase?
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.
What causes its value to decrease?
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.
Advantage of high exchange rate
-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
Disadvantages of high exchange rate
-damages import industries --> might be difficult to sell goods abroad = unemployment.
-damage to domestic industries--> more imports are purchased (less expensive).
advantages of a low exchange rate:
-greater employment in export industries.
-greater employment in domestic industries = makes imports more expensive -- encourages domestic consumers to buy domestic products.
disadvantage of low exchange rate
inflation --makes imported final goods more expensive.
Government intervenes to:
-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.
Balance of Payments
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
Current Account
the measure of flow of funds from trade in goods and services, plus other income flows.
Net Investment Incomes
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.
Net transfers of money
payments made between countries when no services or goods change hands.
Capital Account
a measure of the buying and selling of assets between countries
include anything that can be owned and has value (land, real estate, companies, stocks, shares, government bonds)
Expenditure Switching Policies
any policies implemented by the government that attempt to switch the expenditure of domestic consumers away from imports towards domestically produced goods and services
Expenditure Reducing Policies
any policies that reduce overall expenditure in the economy (AD-- left)
limitations of theory of comp adv 6

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

infant industry argument

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

strategic trade argument

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

national security argument

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.

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

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


the practice of Selling a good in international markets at a price that is below the cost of producing it. illegal
arguments against protectionism 7

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

supply of a domestic currency

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

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

imports increase --> currency ...

appreciates, depreciates
a country's interest rates and the value of its currency...... (
change in the same direction
causes of change in Exchange rates 8

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

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


(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.

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

opposite direction

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

in which ways can Exchange rate affect inflation?

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

how can Exchange rate affect demand-pull inflation

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

Exchange rate: effect on employment

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.

Exchange rate: effect on economic growth

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

Exchange rate: effect on current account balance

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

Exchange rate: effects on foreign debt

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

(problem faced by many developing countries)

fixed Exchange rate system

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)
4 advantages of fixed Exchange rate


Exchange rate stability

fiscal/monetary discipline

less speculative risk

3 disadv. of fixed exc rate

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

advantages of floating 5

the BoP automatically adjusts

no war retaliation

freedom of mon/fiscal policy

less risk of importing inflation

disad. of floa 3

lack of predictability

lack of fiscal/monetary caution

speculations can destabilise

advantage of a single currency (euro ex.)

trade Creation highly likely

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

lower transaction consts for firms

better resource allocation

encourages price transparency

disadvantages of a single currency (Euro)

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

overvalued currency

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

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

balanc eof payments

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

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

foreign demand
debits create a .... for the domestic currency


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

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

capital account

net capital transfers

and net transactions

financial account

consist of inflows minus outflows of funds for

direct investment, portfolio investment and reserve assets

how is current account and financial account interdependent

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.

epansionary monetary policy and the trade balance

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)

contractionary monetary policy and the trade balance

worsens a trade deficit but improves a trade surplus

preventing currency speculation

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

some consequences of persistent current account deficit 8

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

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

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.


(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)

marshall Lerner condition

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

consequences of persistent current account surpluses

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

2examples of free trade areas

Nafta (Canada mexico us)


example of custums unions

possible disad of trading blocs 3

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

trade creation
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
terms of trade

average price of exports/average price of imports *100
improvement in the terms of trade
increase in the value of the ratio of avg. export prices to average import prices (a fall in the OC of imports)

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

changed in global demand

Changes in global supply

Changes in relative inflation rates

change sin relative Exchange rates

causes of Changes in l-t 4

1. growth in World income levels, affecting global demand

2. Changes in proeductivity

3. technological advances

4. trade protection

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

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.

Changes in global supply and its effect on terms of trade

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

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....

the same

opposite direction