International Trade and Capital Flows Flashcards Preview

CFA Level 1 - Quantitative Methods > International Trade and Capital Flows > Flashcards

Flashcards in International Trade and Capital Flows Deck (24)
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1
Q

Gross Domestic Product

A

Total value of goods and services produced within a countries borders

2
Q

Gross national product

A

measures the total value of goods and services produced by the labor and capital of a country’s citizens

3
Q

Benefits of international trade

A
  • import substitute goods cheaper, while the exporting country increases employment, wages and profits.
4
Q

Cost of International trade

A

Country importing may lose jobs that made the good that is being substituted

5
Q

Absolute advantage

A

when producing a good, if it can produce the good at a lower cost in terms of resources than that of another country.

6
Q

Comparative advantage

A

When a country has an opportunity cost in terms of other goods that could be produced instead is lower than that of another country.

7
Q

In production possibility frontiers, the slope of the frontier is equal to the opportunity cost.

A

8
Q

Ricardian model of Trade

A
  • has only 1 factor of production: labor

- the source of differences in production costs comes from the change in the labor productivity due to technology.

9
Q

Hecksher-Ohlin model

A

2 factors of production: capital and labor

  • the source of comparative advantage is the differences in the relative amount of each factor.
  • In H-O model, there is a redistribution of wealth within each country between labor and the owners of capital.
10
Q

Reasons for trade restrictions:

A
  • infant industries: protection from foreign competition to give the new industry time to grow competitively on an international scale
  • national security - in the event of conflict, having goods produced domestically creates safety and its availability
11
Q

Reasons for trade restrictions NOT supported by theory:

A
  • protecting domestic jobs
  • protecting domestic industries
  • government collection of tariffs
12
Q

Types of trade restrictions

A
  1. Tariffs: taxes on imported goods
  2. Quotas: the amount of imports allowed over period X
  3. Export subsidies: government pays firms that export
  4. Minimum domestic content:
  5. Voluntary export restraint: restricts amounts of goods to be exported to avoid tariffs and quotas.
13
Q

Effects of a tariff

A

An increase in domestic price, a decrease in quantity imported, increase in quantity supplied domestically, domestic producers gain, foreign exporters lose and domestic government gets tariffs.

14
Q

Effects of a Quota

A

Domestic producers gain, domestic consumers lose because prices increase, if domestic government selles import licenses, government revenue increases.

15
Q

Voluntary Export Restraint (VER)

A

Welfare loss to importing country equal to the equivalent quota.

16
Q

Export Subsidies

A

Benefits exporters, increases prices and reduces consumer surplus

17
Q

In general, trade restrictions:

A
  • reduce imports, increasing price, decrease consumer surplus, increase the domestically-supplied quantity, and increases producer surplus
18
Q

Capital restrictions across borders…

A

decreases economic welfare,, but may blockout a huge inflow of foreign capital to responsibly grow the industry.

19
Q

Types of trading blocks

A
  1. Free Trade Area = all barriers to imports and exports are removed
  2. Customs Union = All barriers to imports and exports are removed AND all countries adopt a common set of trade restrictions with non-members
  3. Common Market = All barriers to imports and exports are removed AND all countries adopt a common set of trade restrictions with non-members AND All barriers to the movement of labor and capital goods among member countries are removed.
  4. Economic Union = All barriers to imports and exports are removed AND all countries adopt a common set of trade restrictions with non-members AND All barriers to the movement of labor and capital goods among member countries are removed AND Member countries establish common institutions and economic policy for the union.
  5. Monetary Union = All barriers to imports and exports are removed AND all countries adopt a common set of trade restrictions with non-members AND All barriers to the movement of labor and capital goods among member countries are removed AND Member countries establish common institutions and economic policy for the union AND members adopt a single currency.
20
Q

The Balance of Payments (BoP) includes:

A
  1. current account - flows of goods and services
  2. capital account - capital transfers and acquisition of non-financial assets
  3. Financial account - investment flows
21
Q

Items in the Current Account

A
  • merchandise and services
  • income receipts – foreign income from dividends and interest on debt securities
  • Unilateral transfers – money received from those working abroad and direct foreign aid.
22
Q

Items in Capital Account

A
  • Capital transfers– debt forgiveness and goods and financial assets migrants bring with them.
  • sales and purchases of non-financial assets: not produced assets like rights to natural resources and intangible assets like patents, copyrights, trademarks, etc.
23
Q

Items in Financial Account

A
  • Government owned assets abroad – gold, foreign currencies, LT assets, etc…
  • Foreign owned assets in country…
24
Q

BOP = X - M = private savings + government savings - investment

A

Both sides must remain equal