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Terms in this set (80)
The exchange of goods and services between countries
A trade protection that sets a legal limit in the quantity of a good that can be imported over a particular time period. Helps regulate the volume of trade between countries, can reduce imports and restrict foreign competition.
The removal or reduction of restrictions or barriers on the free exchange of goods between nations (Tariffs, licensing rules, quotas).
Increases competition between firms, resulting in greater efficiency in production and improves allocation of resources.
Effect of Quotas on imports
Under free-trade, demand is at Q4; 0-Q1 is the domestic supply, the rest is imported.
A quota of Q2-3 is imposed,shifting domestic supply out by the amount of the quota.
The extra revenue gained for the domestic government is between Q2Q3,PWPQ
The effect of quotas and tariffs
Quotas do not create revenue for host government. Domestic consumers are worse off (higher price for smaller quantity). Domestic producers are better off (higher price and more sold). Domestic employment in protected industries increase. Domestic income distribution worsens (the poor lose most from higher prices). Misallocation of global resources.
The effect of tariffs on revenue and expenditure
Consumer surplus is lost, producer surplus is gained. Governments gain revenue. Consumer expenditure shifts from the area under PwC1 to PtC2. Domestic producers increase revenue from PwS1 to PtS2. Foreign revenue decreases from PwS1-C1 to PtS2-C2.
The unrestricted purchase and sale of goods and services between countries without the imposition of constraints (tariffs, duties, quotas)
Government actions and policies that restrict international trade with the intent of protecting local businesses/jobs from foreign competition (tariffs, quotas, subsidies, tax cuts)
A tax imposed on imported goods and services. Used to restrict trade by increasing the price of imported goods and services to consumers. Provides additional revenue for governments and domestic producers at the expense of consumers and foreign producers.
A government order that restricts commerce or exchange with a specific country. A result of unfavourable political or economic circumstances to isolate the country to force it to act on the issue.
A protecionist tariff that domestic governments impose on foriegn imports it believes are far below fair market value
Import duties on components or raw materials are the lowest, and move progressively higher to the finished goods.
Trade Protectionism pros
Prevents dumping; protects domestic workers and companies; prevents monopolies forming; raise government revenue which can be used for merit goods; essential for national defence in times of crisis; better for the environment as there is less travel; difficult to compete with the world market; safeguards infant industries
Trade Protectionism cons
Potential for corruption, bribes and smuggling; could give rise to trade wars; prevents and inhibits free market trade; can prevent specialisation; foreign producers worse off; income distribution worsens; prevents import of quality items; global resource allocation worsens; misallocation of resources, government intervention distorts market signals; lack of foreign competition encourages inefficieny
Benefits of Free International trade
Lower consumer prices due to reduced trading costs; greater consumer choice; increased ability to access resources (natural and capital goods not available in the domestic country); efficient allocation of scarce resources; increased competition encourages efficiency and improved quality and prices; source of foreign exchange; Increased market size; Improved international relations.
Financial assistance for domestic firms to help compete against foreign imports by lowering the costs of production. Protects local jobs.
Goods and services sold to overseas buyers
Foreign goods or services bought into domestic households or firms
World Trade Organisation
A global international organization dealing with the rules of trade between nations.
To encourage free international trade (reduce/remove artificial trade barriers such as subsidies); To remove discriminatory in trade relations between member nations; To help provide trade opportunities for economically developing countries to enhance their growth and development prospects
Provides a forum for international trade; encourages free international trade; handles trade disputes; oversee multilateral trade agreements; monitoring national trade policies;
Reduces the cost of production for domestic firms. Domestic supply curve shifts out, so are able to supply more and thus gain more revenue despite still selling at world price. Foreign producers supply less. Consumption is not affected as price does not change, however the quality of goods affects whether they benefit. There is an increased government expenditure, taxpayers lose out, opportunity lost subsidising inefficient firms.
Bureaucratic rules and regulations that countries use as a form of protection (food safety, environmental standards, product quality). Increases costs for foreign firms to comply with this.
Restrictions on the
quantity of foreign exchange
bought/sold by domestic residents (limiting exchange of foreign currency)
The price of one currency measured in terms of another
Free floating exchange rate system
The value of a currency is determined by the demand for, and supply of, the currency on the foreign exchange market
An increase in the value of the exchange rate relative to another currency. Exports become expensive, imports become cheaper. Increase in demand or fall in supply.
A fall in the value of the exchange rate relative to another currency. Increase in supply or fall in demand.
Causes of change in the exchange rate
Foreign demand for a country's exports, increase demand leads to appreciation; Domestic demand for imports, increase demand leads to appreciation of foreign currency; Relative interest rates, cut in interest rates reduces investor incentives who sell the domestic currency leading to depreciation; Relative inflation rates, increase in inflation reduces export demand leading to depreciation; FDI, inward FDI boosts currency demand leading to appreciation; Portfolio investment; Speculation
Foreign Direct Investment
Net transfer of funds to purchase physical capital (factories, machines) in an enterprise in a foreign economy
Buying/selling of of financial investments abroad (stocks, shares, bonds), foreign currency is demanded.
Domestic currency is supplied when banks and government lend money to overseas firms and governments.
Effect of Exchange rate changes
Employment - Appreciation reduces export demand (difficult to sell at a higher price), profits fall causing unemployment. Inflation - Appreciation reduces inflation rate, imports are cheaper reducing APL, unemployment from appreciation causes lower consumption reducing inflation. Economic growth - appreciation (low exports, unemployment) will cause a fall in growth. Balance of payments - appreciation (export fall, cheap imports) leads to import penetration, Current Account Balance worsens. Importers/exporters.
Fixed exchange rate system
The central bank buys and sells foreign currency to ensure that the value of the domestic currency stays pegged (fixed)
The price of a currency is officially and deliberately increased
The price of currency is officially and deliberately lowered. International competitiveness can increase as exports become cheaper.
Managed exchange rate system (managed float)
The government or central bank intervene periodically in the foreign exchange market to influence the exchange rate by affecting the demand for and supply of the domestic currency. Prevents large and sudden fluctuations, encouraging certainty and confidence in an economy.
Advantages: Cheap imported goods, downwards pressure on inflation; Domestic producers must be more efficient to compete with cheap imports.
Disadvantages: Exports less competitive, lower profits in export industries; Cheap imports expensive exports, negative impact on balance of payments.
Advantages: Cheap exports improve growth and employment in export industries; Expensive imports cause consumers to buy domestic goods.
Disadvantages: Expensive imports leads to
(raw materials and components higher increasing APL)
Evaluation of different exchange rate systems
Fixed ER advantage: Reduces uncertainty for international trade, firms certain about future costs/prices, encourages international trade, removes volatility/fluctuations caused by currency speculations.
Fixed ER disadvantage: Reduces the ability to use
to affect the economy (during a recession), Opportunity cost in using the large reserves to maintain the FER on a daily basis.
Opposite for Floating: create instability and uncertainties, ER is more responsive to changes in the economy.
Balance of Payments
A financial record of a country's transactions with the rest of the world over a given time period (a year). Records all credit and debit items. Consists of Current, Capital/Financial accounts.
All payments received from other countries (export revenue, FDI, capital transfers)
All payments made to other countries (import purchases, overseas income transfers, repatriation of profits from MNCs)
A record of all
exports and imports
of goods and services, plus its
net investment income
from overseas assets and net balance of transfers between countries' individuals and governments
Current account components
Balance of trade in goods; Balance of trade in services; Income; Current transfers
Balance of trade
Difference between a country's total export earnings and total import expenditure (both goods and services)
Balance of trade in goods
Exports/imports of physical goods between a country/the world
Balance of trade in services
Exports/imports of services between country/world.
Records the infows minus outflows earned from
Inflows/outflows of payments not made in exchange for anything between country/world (Official development assistance, grants, concessionary loans, donations)
Current account defecit
Country spends more than it earns. Caused by: low export demand (exports relatively more expensive from high labour costs, falling income, high exchange rate) or increased import demand (cheap imports from high ER or better quality products)
Current account surplus
When a country has a positive net balance on its current account. Caused by high export demand (improved domestic competitiveness, high labour productivity) or reduced import demand (expensive or low quality foreign items)
Records the different forms of capital inflows and outflows of a country during a given time period (foreign currency flows, bank deposits)
Capital account components
Capital transfers; Transactions in non-produced, non-financial assets.
Net monetary movements of capital goods used in the production process (machinery, equipment) and financial assets (investment grants, debt forgiveness)
Transactions in non-produced, non-financial assets
Exchange of money in non-produced assets (natural resources) and intangible assets (patents, copyrights, trademarks)
Records a country's net transactions in
external financial assets and liabilities
(FDI, real estate, stock market investments). Records the difference between sales of domestic assets to foreign buyers, and purchases of foreign assets by domestic buyers.
Financial capital inflow
Occurs when foreigners loan money to domestic citizens by acquiring domestic assets
Financial account components
Inflows and outflows of
, mainly undertaken by MNCs
Official reserves readily available to a government for direct financing of international payments imbalances and to affect the exchange rate (gold reserves, foreign exchange assets)
Current account (deficit) and exchange rate
For a current account deficit (outflows>inflows), the country requires more foreign exchange (to buy imports) whilst it faces lower demand for its own currency (exports decline). "Net borrower". Resolved under a freely-floating ERS as exports become relatively cheaper/imports relatively expensive, so export earnings rise/income expenditure falls. Difficult in fixed ERS unless devaluation approved.
Current account (surplus) and exchange rate
A current account surplus (inflows>outflows) has a high demand for currency (increased exports), so upwards pressure on exchange rate. Country considered "net lender" to other countries. Implies export oriented growth, or low incomes (unable to buy imports)
Forms of economic integration
Preferential bilateral/multilateral trade agreements; Trading blocs; Monetary union; FDI; Globalisation/expansion of MNCs
The process of countries becoming more interdependent and economicaly unified.
Preferential trade agreement
A trade deal between two or more countries that gives special/favourable terms and conditions. (tax exemptions/concessions)
Bilateral trade agreement
Contractual trade agreement between two countries (closer economic partnership agreements)
Multilateral trade agreement
Legally binding trade deal between more than two countries
Preferential Trade agreements (PTA)
Gives certain countries special/easier access to specific products in a market due to certain advantages (reduction/removal of tariffs/non-tariff barriers to international trade)
WTO rules, a country cannot discriminate against other WTO member countries by imposing higher trade barriers on one country whilst reducing it on another
A group of countries that agree to economic integration and freer international trade by removing trade barriers with one another. Intensifies competition between member countries, firms benefit by accessing a larger market
Free Trade Area
(Least economically integrated trading bloc) Member countries agree to remove trade barriers with one another but impose
separate tax barriers
with non-member countries [NAFTA]
A group of member countries that engage in free trade and impose a
common external tariff
for non-member countries [EU]
(Most integrated trading block) Customs union that also allows the
of goods, services, and capital between member countries [CARICOM]
Economic integration Cons
loss of national economic sovereignty (economic independence), difficult to adjust to different standards, detrimental conditions in one country likely to affect the economic performance of the others (recession, inflation), more short-run unemployment due to increased intensity of competition
Member states of a common market adopt a single currency and hence a common central bank that oversees monetary policy
Creation of a monetary union
Members agree to permanently fix their exchange rates and use a common currency to establish the CB: convergence of interest rates within the MU. [EUROZONE]
Monetary union Pros
Exchange rate certainty from common currency; no risks from ER fluctuations/uncertainties; Trade creation occurs from PTA and confidence in common currency; No transaction costs to exchange currency; Attracts inwards investment from non-member states (no associated ER risks) which has a positive impact on economic growth and employment; Price transparency
Monetary union Cons
Loss of economic freedom/flexibility as member countries cannot adjust macroeconomic policies to combat specific domestic problems; Impact of CB actions are asymmetric on countries (contrasting interest/unemployment rates); cannot exercise own ER policy to ensure a BOP
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