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Terms in this set (40)
Approximate size as a % of global GDP for EU, USA, BRICS, Japan.
USA ~ 25%
European Union ~ 25%
Japan ~ 6%
Everyone else ~ 19%
+ I + G + (X - M)
Total Consumption: expenditure of one household
= C + I + G + (X - M)
Gross Domestic Product: The total value of goods produced and services provided within a country.
GDP = C +
+ G + (X - M)
Investment: Purchase of goods that are used in the future, not today.
GDP = C + I +
+ (X - M)
Government Spending: Government consumption, investment and transfer payments.
GDP = C + I + G + (
Total Exports: All exports of a country.
GDP = C + I + G + (X -
Total Imports: All imports of a country.
GDP = C + I + G +
(X - M)
Net Exports: The difference between a country's total value of exports and total value of imports.
How an increase in net exports (X - M) increases real GDP if C + I + G stay the same
Suppose the U.S has these numbers (in trillions):
C = $11, I = $3.5, G = $3.5, X = $2.5 and M = 3
What if X changed to $4? What changes?
Nothing has changed!!!
Since C includes the imports, 11+3 = 14 and 11+4 = 15
So, X increases by 1 and so does C, thus equaling out the equation
How an increase in net exports (X - M) might not increase real GDP
If net exports increase by the same amount as net imports do through a fair trade, real GDP may not increase, but remain constant.
How a larger trade deficit could be an indicator of an improving economy
A trade deficit can signal that a country's consumers are wealthy enough to purchase goods than their country produces
Consider the circumstances - are other countries investing in a productive way, or a predatory way?
The Role of the IBRD. The World Bank offers loans, grants and other financial products through the International Bank of Reconstruction and Development (IBRD) and the International Development Association. The function of the IBRD is to promote financial growth in middle- and low-income countries.
The IMF is playing an expanding role in the global monetary system. The IMF's key roles are the following: To promote international monetary cooperation. To facilitate the expansion and balanced growth of international trade.
The main purpose of the GATT was substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis. Another purpose of GATT was to reduce tariff. Before the GATT was formed, the tariff of each country was very high.
WTO IN BRIEF. In brief, the World Trade Organization (WTO) is the only international organization dealing with the global rules of trade. Its main function is to ensure that trade flows as smoothly, predictably and freely as possible.
Why different countries have different PPFs
Every country has different needs and wants
Countries want to produce what they are good at to specialize especially for trade
Every country has capabilities in producing certain goods. This is due to resources of a country as far as materials are concerned and knowledge/the level of educational in a country.
What comparative advantage means
The ability of an individual or group to carry out a particular economic activity (such as making a specific product) more efficiently than another activity
What opportunity cost means
What you give up for something else
I.e., Going to class instead of sleeping in (You are giving up sleep for class)
The loss of potential gain from other alternatives when one alternative is chosen.
How markets bring about the changes in the economy as trade policies change
If we allow trade, we can specialize in certain products. If we don't allow trade, certain countries are not able to specialize in certain products.
Global trade will lead to increased employment in comparative advantage industries.
In what way does a country benefit from freer trade?
Long term positive benefits despite the short term unemployment; higher levels of consumption in all economies involved, more specialization (bringing greater efficiency and higher quality goods), lower prices, and reduction in poverty on a world wide scheme
What does the model indicate in terms of employment gains/losses?
Whatever markets we have we have a comparative disadvantage in, we will see losses in. Those businesses will either shrink or shut down and we can see a loss of employment because of this.
What would likely happen to employment as trade barriers are reduced?
A short-term reduction of employment due to people being laid off or fired from unproductive industries, and a long-term increase back to the status quo due to people being hired in more productive industries
Difference in effects between the import-competing (comparative disadvantage) industries and the exporting (comparative advantage) industries.
Lost jobs in industries that have comparative disadvantages because they face competition from cheaper imports.
Domestic producers can't compete so they go out of business or shrink.
Comparative advantage will grow overtime producing more jobs.
Comparative disadvantage= fewer jobs
Employment in the economy as a whole
Short term:losses of employment in comparative disadvantage industry.
Long term: employment is at the same level as before, however, there is a shift in which these jobs are located; from comparative disadvantage industry to comparative advantage industry.
Long term gain to economy, but likely short term costs
We will see a short dip in the PPF/PPC during the transition period, but it will eventually go back onto the PPF/PPC
How can the severity of the transition be reduced or the speed of the transition be increased?
The severity can be reduced by implementing it slowly over many years
The speed of the transition can be increased by having government programs to help those in transition
An import tariff is a tax on imports between sovereign states. It is a form of regulation of foreign trade. It is a policy that taxes foreign products to encourage or protect domestic industry.
An export tariff is a tax imposed on commodities leaving a customs area
Ad valorem Tariff
Percentage of the value of the product
Fixed monetary fee per unit of the product
A tariff so high that it makes an import prohibitively expensive. A prohibitive tariff discourages importers from bringing goods into the country in the first place because they will be difficult to sell. For example, a country may levy a 900% tariff on a good that it wishes to keep out.
An import quota is a type of trade restriction that sets a physical limit on the quantity of a good that can be imported into a country in a given period of time
Equilibrium when there is no trade (autarky)
The definition of autarky is economic independence or self-sufficiency. With this being said the equilibrium would not be able to go beyond the PPF since it cannot trade. Countries are often worse off than being under an autarky. This is the point where domestic demand= domestic supply.
Equilibrium when there is free trade and imports
Competitive pressure from imports means that the equilibrium price with free trade will be lower than the autarky equilibrium price .
In the example in class, consumers treat the goods as identical no matter where they are made. As a result, any equilibrium will involve price matching: same price for domestic and imported versions of good x.
Equilibrium when there is an import tariff
Tariff equilibrium ends up between Price of Autarky and Price of Free Trade. It's higher than the free trade price. When making trade less free with an import tariff in an import market leads to higher prices for both foreign made and domestically made good x, greater domestic production, lower domestic consumption, and tariff revenue for the domestic revenue.
comparison of a quota with an "equivalent" tariff
The government gets revenue for a tariff but not with a quota.
Tariff is better than a quota ( smaller DWL)
A quota is nice to the foreign producer because the quota hurts them less then the tariff does.
A lot more certainty with amount of imports with a quota whereas tariffs are more of an estimation.
(referring to graph) With a tariff the domestic production will stay at 180k but imports will increase. The growth in the market benefits the foreign producers. However with a quota of (q4-q3) imports will stay at 420k but domestic production will increase so the growth will benefit the domestic producers. When the market changes they are no longer equivalent
what is meant by "equivalent" tariff
An equivalent tariff is a tariff that generates identical prices and quantities as some quota would. Every quota has an equivalent tariff. However, an equivalent tariff and its corresponding quota will produce different deadweight losses.
differences in DWL between quota and tariff compared to free trade
There is a higher net cost (DWL) for the quota than for its "equivalent" tariff. Tariff is "better" than the quota due to the smaller deadweight loss with a tariff.
explanations as to why a country might use an import quota rather than an "equivalent" tariff
May want to be "nice" to foreign producers, a quota will hurt them less than the tariff
A quota tells the country an exact amount of imports that will come in to the country. A tariff does not do this. To measure how many imports will come into a country when a tariff is put in place, the tariff must be in place for long enough to let the market react to it.
what happens to the level of trade protection as the market demand grows?
Impact of each policy on foreign producers?
Tariff: foreign producers have to pay tariff to domestic government; government revenue (area A).
Quota: area of tariff revenue (area A) goes to foreign producers.
Using Consumer Surplus, Producer Surplus, and Government Revenue to evaluate impacts of changes in trade policy.
Change in Consumer Surplus - Area of Trapezoid (A+B+C+D)
Change in Producer Surplus - Area of Trapezoid B Government Revenue - Area of Rectangle A
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