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39 Cards in this Set
- Front
- Back
Trade Penetration Ratio
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(Exports+Imports)/(GDP)
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How does Globalization effect the economy (2)
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Positive for consumer
more variety |
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Trade Theory (5)
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-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 |
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Barriers to trade (4)
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- 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 |
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Balance of Payments Accounts (3)
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-Summary of all transactions between a country and the rest of the world
-Deficit - Borrow from ROW -Sustainability - not for long term |
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Balance of Payments Accounts Formula
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Consumer + Investments + Government Spending > Production
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Market for Foreign Exchange (Foreign Money)
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Exchange rates even out productivity as long as there is a balance
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Mercantilism
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Wealth of Nation is based on gold stock
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Balance of Trade Formula
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Exports-Imports = Trade Balance
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When the trade balance is greater than 0 (3)
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-Increase Gold
-Discourage Imports -Encourage Exports |
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Problems with Trade Theory of Mercantilism (2)
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- Fallacy of Composition
-Impossible to pursue in long run - country can't consistently run BOT surplus or deficit |
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Fallacy of Composition
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Assuming what's true from the whole is true for the part
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Hume Gold flow Mechanism (UK and France) (5)
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-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 |
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Wealth of Nations (4)
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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 |
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Absolute Advantage Model (2)
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-Adam Smith
-Autarky - absence of trade (country in isolation) |
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PPF (Production Possibility Frontier)
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-Alternative Combinations of two goods that a country is capable of producing
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PPF Assumes (3)
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-Technology is constant
-Full employment of resources -Efficiency employment of resources |
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How to derive PPF
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Labor allocation - output level of both products
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Output Formula
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(Labor)(Output per worker)
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Slope of PPF
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Take absolute value
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MRT (Marginal Rate of Transformation)
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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)
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MRT formula
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(Change in Soybeans)/(Change in Shoes)
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Terms of Trade (tt) (2)
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-A number chosen between the MRT's of two countries where both countries are benefiting and willing to trade with one another
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Derive CPF in Autarky and Trade
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-Autarky = PPF
-Trade - Exports, Consumption of Adv. product, Imports of less Adv. Product |
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How to Maximize worlwide production
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Have each country specialize in the product they have an absolute advantage in
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Impact of Trade on Employment in Absolute Advantage Model
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None in the long run
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How to make BOT equal zero
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(Imports)(Pproduct) =(Exports)(Pproduct)
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Comparative Advantage Model (4)
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-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 |
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Problems with Comparative Advantage Model (5)
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-Complete specialization
-What determines comparative Advantage? Resouces?History? -What determines tt -No role for Tastes and Preferences -International transactions involve assets |
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PPF straight vs. Concave line
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PPF straight - resources unspecialized, unrealistic (worker's can't be transferred frictionlessly)
REALITY - PPF is concave |
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Derive slope of PPF (2)
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MRT - slope of the tangent line - (Change in Y)/(Change in X)
-Give up one x amount of y product for another |
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How to find exports and import amounts (2)
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-Exports y (production-consumption)
-Imports x (consumption-production) |
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MRS (Marginal Rate of Substitution)
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Amount of goods (y) consumers are willing to give up or accept in exchange for 1 unit of (x) with no change in welfare
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Equilibrium Terms of Trade
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-Price rises during shortage
???? |
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Hecksher-Ohlin Theorem (3)
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-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) |
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Hecksher-Ohlin Assumptions (6)
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-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) |
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Factor Price Equalization Theory (7)
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-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 |
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w/r in US and Mexico when trade opens
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-Increases in Mexico
-Decreases in US |
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Problems with Factor Price Equalization
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-Long-term process
-moving people across borders -changing labor prices |