Why do countries trade?
Countries trade when they do not have the resources or capacity to satisfy their own needs and wants. Countries can then make a surplus of goods they have and trade it for the resources they need.
What are the benefits and costs of exports? Of imports?
Exports-Benefits:
Access more markets- (in a domestic market the potential for sales is limited, but a world market allows for larger sales), longer production run, achieve economies of scale that way and reduce their costs
Employment- Companies that enga
In what sense is it a fallacy that exports are good and imports are bad?
Exports do create more competition which leads to innovation, export agencies have about 18% higher pay than import agencies, and more exports provide the currency to import. BUT if you are only exporting, then you are not consuming such goods or products
What are the static and dynamic gains from trade?
Static gains: reallocation of resources, increase in production and consumption. increase in welfare as the production of goods increase in the trading country. Increase national income which in term raises its level of output and growth rate of the econo
What is the difference between absolute and comparative advantage? What does Babe Ruth have to do with it?
Absolute advantage: a country has an absolute advantage in producing a good or service if it can produce more of them with a given amount of resources (labor, time, and other factors of production) than other countries can.
Comparative advantage: the abil
What determines a country's comparative advantage?
opportunity costs, resource endowment, and technological advantage. Also a lot of capital and and land resources.
What products/industries/sectors does the United States have a comparative advantage in?
petroleum followed by pharmaceuticals, aerospace, weapons. Disadvantage, labor intensive goods like clothes. Skill and capital intensive, and agriculture due to the amount of land we have.
Can governments shape, influence, or distort comparative advantage?
When countries have a mixed resource endowment, governments can intervene in the marketplace and use industrial policy to shape their comparative advantage (invest in new technologies, teach skills). This is because of the United State's ability to innova
What is industrial policy and how does it affect the case for free trade?
Government shaping comparative advantage through trade protection (infant industry protection), subsidies, Research and Development support (to build up the industry.
This is very big with aerospace in which the U.S. is a big supplier of aircrafts, so the
What is trade liberalization? Who benefits? Who loses?
Reduction of trade barriers in which the the expansion of trade leads to economic welfare.
Former trade liberalization led to reduction that producers care about.
Producer, consumers and economy as a whole benefit because of cheaper products and more opti
Is trade an opportunity or threat to workers? Does trade create or destroy jobs?
It's both, some workers gain, some lose. Trade both creates jobs in areas where we have comparative advantage and destroys/eliminates jobs where we have a comparative disadvantage. Trade also puts pressure on wages and affects the composition of jobs we h
If an economy overall benefits from trade, why do governments often restrict trade?
Political economy notion, the loser lobby very hard while the winners are less noticeable and more diffused. The losses are more concentrated in certain sectors and it puts more pressure on the administration. This is because of domestic pressure due to j
What kind of trade barriers do governments impose?
Border: Tariffs, quotas, etc. Because of trade negotiates, the average tariff level in the U.S. is pretty low around 3%. In certain areas/products such as textiles, apparel, sugar there is a higher level of protection but on average, the tariff level is p
What are the consequences of import restrictions on consumers, producers, and national economies?
consumers: higher prices and lack of priority.
producer: cannot receive the materials needed.
nationally: tensions with other countries.
What is globalization in economic terms? What are the benefits and costs of globalization?
International economic activity is composed of going across borders, goods, services, capital (includes technology) and labor.
Benefits: increases economic independence, capital flows through FDI, and technology flows. globalization has increased and trad
How can globalization and economic interdependence be measured?
GDP and looking at trade and services as a percent of GDP. If that ratio is increasing, that can signal increased global economic interdependence. Capital flows as a percentage of GDP and Labor as a percentage of the population, percentage of foreign work
Is globalization reversible?
War can make globalization reversible and terrorist attack e.g. WWI and 911, 1990 East Asian Crisis , Recession 2008-2009 Capital flows dried up and trade slowed down, still a backlash against globalization and growing number not in favor of TTIP.
Why has China prevented its currency, the RMB, from appreciating too fast against the U.S. dollar?
When a country's currency depreciates, the country's exports become cheaper for foreigners to buy and they will buy more. In turn, increased demand for exports can increase domestic production and employment. When a country's currency depreciates it also
. What is the difference between portfolio and foreign direct investment?
Portfolio investment is very liquid and FDI is much more complicated. FDI implies investment by foreign investors directly in the productive assets of another nation. FPI means investing by investors in financial assets such as stocks and bonds of entitie
Why do companies engage in FDI?
Integrate opportunities in a foreign market and FDI gets rid of affect from protectionist action. Prefer FDI because its more economic activity and portfolios investments are not as stable in savings and doesn't give you as much employment.
What are some common concerns about outflows of FDI?
If invested abroad, not investing abroad. U.S. is probably largest foreign direct investor in terms of outflows. Some worry about foreign direct investment abroad because they fear the loss of jobs. But a lot of these companies have to invest abroad becau
Where does most U.S. outward FDI take place - in developed or developing countries?
In developed countries, with more than 50% in Europe.
Developed countries because they are high income countries and easier to do business with. 65% of FDI is in developed countries which are high-income countries and have existing markets. Developing cou
What are some national security concerns about FDI?
Concerns about FDI in the U.S.- fears of leakage of technology/products will be imported back to the country of origin and not in the U.S.
What is trade policy? What are its three components?
Measures/policies that affect the flow of trade across borders. Any measure or action taken by a government that will affect the flow, composition, and direction of imports, exports, and investments. Trade policy instruments include freer trade negotiatio
What are the various types of trade liberalizing agreements?
Multilateral (conducted by the World Trade Organization) Doha Round trade association, bilateral and regional free trade agreements, eliminate tariffs. Bilateral(ex: U.S.-Jordan, US-Singapore.), Multilateral (Doha Round Agreement-includes all WTO countrie
Why are the U.S. and the EU negotiating the Transatlantic Trade and Investment Partnership (TTIP)?
By reducing barriers, both economies will grow faster and because of concerns that the U.S. was falling behind in competition with China and India. The T-TIP is intended to be an ambitious and comprehensive trade agreement that significantly expands trade
How is the WTO different than its predecessor organization, the General Agreement on Tariffs and Trade or GATT?
Open access to all markets in that there is non-discrimination (agrees to extend most favored nation principle to all members) built into this agreement which makes the organization unique and makes the world more efficient because it will increase trade
What are the main principles of the GATT/WTO trading system?
Free but fair, most-favored nation treatment (MFN) , and allows for " nation treatment"(once a country gains access to another country, would be treated as favorable as a domestic company)