International Economics Test 1

Front 1

Trade Penetration Ratio

Back 1

(Exports+Imports)/(GDP)

Front 2

How does Globalization effect the economy (2)

Back 2

Positive for consumer
more variety

Front 3

Trade Theory (5)

Back 3

-Countries trade to acquire goods they can't produce
-Most imports we are capable of producing, but we concentrate what we're good at --- Specialization and Division of Labor
-In trade everyone benefits
-Based on a countries Resources
-No impact on employment, just effects WHAT people do

Front 4

Barriers to trade (4)

Back 4

- Economists like free trade, union workers don't
-Trade between two countries (Ex. US and UK) win-win, but creates dislocation (ex. less textile workers)
-Luggage Tariff - cost to consumer is $105,000 per job saved

Front 5

Balance of Payments Accounts (3)

Back 5

-Summary of all transactions between a country and the rest of the world
-Deficit - Borrow from ROW
-Sustainability - not for long term

Front 6

Balance of Payments Accounts Formula

Back 6

Consumer + Investments + Government Spending > Production

Front 7

Market for Foreign Exchange (Foreign Money)

Back 7

Exchange rates even out productivity as long as there is a balance

Front 8

Mercantilism

Back 8

Wealth of Nation is based on gold stock

Front 9

Balance of Trade Formula

Back 9

Exports-Imports = Trade Balance

Front 10

When the trade balance is greater than 0 (3)

Back 10

-Increase Gold
-Discourage Imports
-Encourage Exports

Front 11

Problems with Trade Theory of Mercantilism (2)

Back 11

- Fallacy of Composition
-Impossible to pursue in long run - country can't consistently run BOT surplus or deficit

Front 12

Fallacy of Composition

Back 12

Assuming what's true from the whole is true for the part

Front 13

Hume Gold flow Mechanism (UK and France) (5)

Back 13

-UK exports > imports (surplus), increasing gold supply, increasing money supply, increase Puk
-France exports < imports (deficit) decreasing gold supply, decreasing money supply, decreasing Pfr
-UK will import goods from France (cheap) exploit less
-FR will import less and export more
-Flow of gold influences price change, which influences consumption change which creates balance

Front 14

Wealth of Nations (4)

Back 14

Adam Smith 1776 - wealth of a country is based on productivity not gold - the ability to produce goods and services
- More productive = higher standard of living
- propose of trade is to increase standard of living
-Trade permits better division of labor

Front 15

Absolute Advantage Model (2)

Back 15

-Adam Smith
-Autarky - absence of trade (country in isolation)

Front 16

PPF (Production Possibility Frontier)

Back 16

-Alternative Combinations of two goods that a country is capable of producing

Front 17

PPF Assumes (3)

Back 17

-Technology is constant
-Full employment of resources
-Efficiency employment of resources

Front 18

How to derive PPF

Back 18

Labor allocation - output level of both products

Front 19

Output Formula

Back 19

(Labor)(Output per worker)

Front 20

Slope of PPF

Back 20

Take absolute value

Front 21

MRT (Marginal Rate of Transformation)

Back 21

Given current state of technology, the MRT is the amount by which the output of good (Y-axis) must be reduced in order to increase the output of good (x-axis) by one unit (Or vice-versa)

Front 22

MRT formula

Back 22

(Change in Soybeans)/(Change in Shoes)

Front 23

Terms of Trade (tt) (2)

Back 23

-A number chosen between the MRT's of two countries where both countries are benefiting and willing to trade with one another

Front 24

Derive CPF in Autarky and Trade

Back 24

-Autarky = PPF
-Trade - Exports, Consumption of Adv. product, Imports of less Adv. Product

Front 25

How to Maximize worlwide production

Back 25

Have each country specialize in the product they have an absolute advantage in

Front 26

Impact of Trade on Employment in Absolute Advantage Model

Back 26

None in the long run

Front 27

How to make BOT equal zero

Back 27

(Imports)(Pproduct) =(Exports)(Pproduct)

Front 28

Comparative Advantage Model (4)

Back 28

-David Ricardo
-Based on greater output per worker (Divide US and China OPW)
-Each country will exploit the product in which it has a comparative advantage
-Transferring Workers

Front 29

Problems with Comparative Advantage Model (5)

Back 29

-Complete specialization
-What determines comparative Advantage? Resouces?History?
-What determines tt
-No role for Tastes and Preferences
-International transactions involve assets

Front 30

PPF straight vs. Concave line

Back 30

PPF straight - resources unspecialized, unrealistic (worker's can't be transferred frictionlessly)
REALITY - PPF is concave

Front 31

Derive slope of PPF (2)

Back 31

MRT - slope of the tangent line - (Change in Y)/(Change in X)
-Give up one x amount of y product for another

Front 32

How to find exports and import amounts (2)

Back 32

-Exports y (production-consumption)
-Imports x (consumption-production)

Front 33

MRS (Marginal Rate of Substitution)

Back 33

Amount of goods (y) consumers are willing to give up or accept in exchange for 1 unit of (x) with no change in welfare

Front 34

Equilibrium Terms of Trade

Back 34

-Price rises during shortage
????

Front 35

Hecksher-Ohlin Theorem (3)

Back 35

-Based on model of trade
-Country will have comparative advantage and therefore export products in which a country is relatively endowed
-ex. Us - Capital (K), Mexico - Labor (L)

Front 36

Hecksher-Ohlin Assumptions (6)

Back 36

-Tastes and preferences are the same in both countries - each countries tastes can be described by the same set of indifference curves
-Same quality of resources in each country, however, quantity is different
-All countries have access to the same set of production technologies
-No barriers to trade
-No transportation costs
(Last Two - Not feasible today - need frictionless world)

Front 37

Factor Price Equalization Theory (7)

Back 37

-Paul Samuelson
-more capital means less labor
-less labor means more capital
-w = wage rate of labor
- r = rental price of capital
-once trade opens up in each country, the return to the abundant favtor will increase, and the return to the scarce factor will decrease
-More jobs = lower wages

Front 38

w/r in US and Mexico when trade opens

Back 38

-Increases in Mexico
-Decreases in US

Front 39

Problems with Factor Price Equalization

Back 39

-Long-term process
-moving people across borders
-changing labor prices