Portfolio
Reflection:
Evaluation:
Diagrams:
Definition:
- Free trade- international trade that takes place without any barriers, such as tariffs, quotas, or subsidies
- Tariff- duty that is placed upon imports to protect domestic industries from foreign competition and to raise revenue for the government
- Tariff imposed on Chinese paper into the EU
- Quota- an import barrier that set upper limits on the quantity or value of imports that may be imported into a country
- Subsidy- an amount of money paid by the government to a firm, per unit of output, to encourage output and to give the firm an advantage over foreign competition
- Voluntary Export Restraint- voluntary agreement between an exporting country and an importing country that limits the volume of trade in a particular product (or products)
- Infant industry argument- proposes that new industries should be protected from foreign competition until they are large enough to compete in international markets
- Dumping- selling of a good in another country at a price below its unit cost of production
- Anti-dumping- is legislation to protect an economy against the import of a good at a price below its unit cost of production.
Economic Integration and World Trade Organization (WTO)
- Free trade area (FTA)- exists when agreement made between countries, where countries agree to trade freely among members of group but are able to trade with countries outside free trade area in whatever ways they wish.
- Customs union- agreement made between countries where countries agree to trade freely among themselves, and they also agree to adopt common external barriers against any country attempting to import into the customs union.
- Common market- customs union with common policies on product regulation, free movement of goods, services, capital and labor
- Trade Creation- occurs when entry of country into trading bloc leads to production of good moving from high-cost producer to low-cost producer
- Trade diversion- occurs when entry of country into customs union leads to production of good moving from low-cost producer to high-cost producer
- World Trade Organization (WTO)- an international body that sets the rules for global trading and resolves disputes between its member countries.
- Also hosts negotiations concerning the reduction of trade barriers between member nations.
Balance of Payments and Balance of Payments Problems
- Balance of payments- record of value of all the transactions between residents of a country with the residents of all other countries over a given time period.
- Balance of trade- measure of the revenue received from the exports of tangible goods minus the expenditure on the imports of tangible goods over a given time period.
- Invisible balance- measure of the revenue received from the exports of services minus the expenditure on the imports of services over a given time period.
- Current account- measure of the flow of funds from trade in goods and services, plus net investment income flows (profit, interest and dividends) and net transfers of money (foreign aid, grants and remittances).
- Current account deficit in the US as they have a lot of expenditures but because of the cheap imports, they are not getting investments or profit.
- Capital account- measure of the buying and selling of assets between countries. The assets often separated to show assets that represent ownership and assets that represent lending.
- Current account surplus- exists where the revenue from the export of goods and services and income flows is greater than the expenditure on the import goods and services and income flows over a given time period
- Current account deficit- exists where revenue from the export of goods and services and income flows is less than the expenditure on import of goods and services over a given time period.
- Expenditure-switching policies- policies implemented by government that attempt to switch the expenditure of domestic consumers away from imports towards domestically produced goods and services.
- Expenditure-reducing policies- policies implemented by government that attempt to reduce overall expenditure in economy, including expenditure on imports
- Marshall-Lerner condition- states that a depreciation, or devaluation, of currency will only lead to an improvement in the current account balance if the elasticity of demand for exports plus elasticity of demand for imports is greater than one
- J-Curve- theory suggests that in the short term, even if the Marshall-Lerner condition is fulfilled, a fall in the value of currency will lead to a worsening of current account deficit, before things improve in long term.
Exchange Rate and Terms of Trade
- Exchange rate- the value of one currency expressed in terms of another
- Fixed exchange rate- an exchange rate regime where the value of a currency is fixed, or pegged, to the value of another currency, or to the average value of a selection of currencies, or to the value of some other commodity. (i.e. gold)
- Floating exchange rate- exchange rate regime where the value of a currency is allowed to be determined solely by demand for, and supply of currency on the foreign exchange marker
- Real world example: RMB vs. Dollar was fixed until recently when they changed it to floating where they let demand and supply influence rates.
- Depreciation- fall in value of one currency in terms of another currency in floating exchange rate system
- Appreciation- increase in value of one currency in terms of another currency in a floating exchange rate system
- US wants China to appreciate currency because of US’s current account deficit
- Devaluation- decrease in value of currency in a fixed exchange rate system
- Revaluation- increase in value of currency in a fixed exchange rate system
- Purchasing Power Parity (PPP) theory- states that under floating e.r system, e.r adjust to offset differential rates of inflation between countries that are trading partners in order to restore balance of payments equilibrium.
- Terms of trade- index showing value of country’s average export prices relative to their average import prices
- Deteriorating terms of trade- exist where average price of exports falls relative to average price of imports
- Elasticity of demand for exports- measure of responsiveness of quantity demanded of exports when there is a change in relative price of exports
- Elasticity of demand for imports- measure of the responsiveness of the quantity demanded of imports when there is a change in the relative price of imports.
Real World Examples and notes from lecture:
- Japan and their electronic goods
- Australia and their commodities with iron ore, minerals
- Japan best factor endowment: human resources
- Economic development and growth is most important
- China needs oil from Sudan (needed resources acquired)
- Rare earths from China to Japan
- China: Export led growth strategy. Japan back during the war that was export led growth strategy
Collaboration:
