Diagrams & Definitions

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Diagrams & Definitions

  1. 1. Portfolio<br />Definitions and diagrams from Section 4<br />
  2. 2. Factor endowments<br />Factors of production that a country has available to produce goods and services<br />Real world example: Japan has people, China has land<br />
  3. 3. specialization<br />Country specializes in the production of goods and services where they have a comparative advantage in production.<br />
  4. 4. Absolute and comparative advantage<br />Absolute: The ability to produce a particular good with fewer resources than another country. <br />Comparative: The ability to produce a particular good at a lower opportunity cost than another country.<br />Real world example: Japan makes technology and Thailand rice<br />
  5. 5. Shoes (pairs)<br />3<br />2<br />China<br />India<br />0<br />5<br />12<br />Cloth (meter)<br />Figure 1: Production PossibilitiesCurves (PPCs) for India and China<br />
  6. 6. Protectionism & free trade<br />Free trade: Absence of intrusions (subsidies) or barriers (tariff and quota) in the flow of goods and services between countries.<br />Protectionism: Presence of intrusions (subsidies) or barriers (tariffs and quotas) in the flow of goods and services between countries<br />
  7. 7. Tariff<br />Tariffs: taxes on goods imported into a country in order to protect local industries. They are a form of protectionism and are often used by governments to try to reduce the level of imports into a country.<br />Real world example: Brazil on US agricultural products<br />
  8. 8. Price of agricultural goods<br />SBrazil<br />Government Revenue<br />Deadweight loss<br />P1<br />P3<br />SUS+TARIFF<br />P2<br />SUS<br />D<br />Q3<br />Q5<br />Q1<br />Q2<br />Q4<br />0<br />Quantity of agricultural goods<br />Before tariff<br />domestic<br />imports<br />After tariff<br />domestic<br />imports<br />Tariff<br />
  9. 9. Quota<br />Quota: limit on the quantity of goods that can be imported into a countryin order to protect local industries.<br />Real world example: Japan <br />
  10. 10. Price of agricultural goods<br />SBrazil<br />Government Revenue<br />Deadweight loss<br />P1<br />P3<br />SUS+TARIFF<br />P2<br />SUS<br />D<br />Q3<br />Q5<br />Q1<br />Q2<br />Q4<br />0<br />Quantity of agricultural goods<br />Before tariff<br />domestic<br />imports<br />After tariff<br />domestic<br />imports<br />Quota<br />
  11. 11. Subsidy<br />Subsidy: payment made to firms or consumers designed to encourage an increase in output in order to protect local industries. <br />Real world example: US to agricultural farmers<br />
  12. 12. Price of agricultural goods<br />SUS<br />SUS+SUBSIDIES<br />Cost to Government<br />Size of subsidy<br />P1<br />SWORLD<br />P2<br />D<br />Q3<br />Q1<br />Q2<br />0<br />Q4<br />Quantity of agricultural goods<br />Before subsidy<br />domestic<br />imports<br />After subsidy<br />domestic<br />imports<br />Subsidy<br />
  13. 13. Voluntary exports restraint<br />Voluntary agreement between an exporting country and an importing country that limits the volume of trade in a particular product<br />Real world example: Japan and cars (reduced their exports to US)<br />
  14. 14. Dumping & anti-dumping<br />Dumping: selling of a good in another country at a price below its unit cost of production<br />Anti-dumping: legislation to protect an economy against the import of a good at a price below its unit cost of production<br />Real world example: Dumping US chicken in China (anti-dumping China on US chicken)<br />
  15. 15. World trade organization (wto)<br />International body that sets the rules for global trading and resolves disputes between its member countries. It also hosts negotiations concerning the reduction of trade barriers between its member nations.<br />
  16. 16. Economic integration & globalization<br />Economic integration: A process whereby countries coordinate, link and harmonize their economic policies.<br />Globalization: The spread of economic, social & cultural ideas across the world, the result of increased economic integration through trade, investment and improving technology <br />
  17. 17. Trading blocks<br />Countries agree to increase trade and cooperate.<br />Real world example: EU and ACP<br />
  18. 18. Free trade area<br />Countries remove trade barriers between themselves but trade in anyway with counties outside the group<br />Real world example: NAFTA<br />
  19. 19. Customs union & common market<br />Countries adopt common trading policies. <br />Countries adopt common regulations policies and the free movement of goods and service, capital and labor to form a common market.<br />Real world example: EU <br />
  20. 20. Economic and Monetary Union<br />Countries adopt a common market and currency.<br />Real world example: Euro zone<br />
  21. 21. Trade creation<br />Entry of country into a customs union leads to the transfer of production from a high cost producer to a low cost producer<br />Real world example: Spain joined the EU<br />
  22. 22. Trading Bloc<br />A<br />B<br />Low Cost Producer<br />C <br />High cost Producer<br />Tariffs<br />B<br />Before trade creation<br />
  23. 23. C <br />High cost Producer<br />A<br />B<br />Low cost Producer<br />B<br />After trade creation<br />
  24. 24. Trade diversion<br />Entry of country into a customs union leads to the transfer of production from a low cost producer to a high cost producer<br />
  25. 25. D<br />Low cost producer<br />A<br />C <br />High cost Producer<br />B<br />Before trade diversion<br />
  26. 26. Trade Barriers<br />D<br />Low cost producer<br />C <br />High cost Producer<br />A<br />B<br />After trade diversion<br />
  27. 27. Balance of payments<br />Record of the value of all the transactions between the residents of a country with the residents of all other countries over a given time period<br />Current account + capital account<br />
  28. 28. Current account<br />Visible Trade<br />+ Invisible Trade<br />+ Net Transfers<br />
  29. 29. Visible trade<br />Exports of goods minus imports of goods over a given time period<br />
  30. 30. Invisible trade<br />Exports of services minus imports of services over a given time period<br />
  31. 31. Net transfers<br />Net payments of interest, profits and dividends from investments and transfers of money<br />
  32. 32. Capital account<br />Net Transfers of Capital <br />+ Net Investment and loans<br />+ Changes in National Reserves<br />
  33. 33. Expenditure-switching policies<br />Policies implemented by the government that attempt to switch the expenditure of domestic consumers away from imports towards domestically produced goods and services<br />
  34. 34. Exchange rate system<br />Exchange Rates express the value of one currency in terms of another currency. <br />
  35. 35. Floating exchange rate system<br />Supply and Demand determine the exchange rate<br />Real world example: US<br />
  36. 36. Price of US dollars in terms of Yuan<br />D<br />P<br />Ep<br />S<br />0<br />Q<br />Quantity of US dollars<br />Supply and demand for US dollars<br />
  37. 37. Managed exchange rate<br />Exchange rate generally allowed to float but governments intervene to avoid sudden fluctuations<br />Real world example: China now, Japan<br />
  38. 38. Fixed exchange rate system<br />Government intervention to maintain a fixed exchange rate<br />Real world example: China before<br />
  39. 39. Price of Yuan in terms of Dollars<br />D<br />P<br />Ep<br />Fixed exchange rate<br />P*<br />Shortage<br />S<br />0<br />Q<br />Quantity of Yuan<br />Q1<br />Q2<br />Fixed exchange rate (devaluated: shortage)<br />
  40. 40. Price of Yuan in terms of Dollars<br />Surplus<br />D<br />Fixed exchange rate<br />P*<br />P<br />Ep<br />S<br />0<br />Q<br />Quantity of Yuan<br />Q1<br />Q2<br />Fixed exchange rate (surplus)<br />
  41. 41. appreciation<br />Increase in the value of one currency un terms of another currency in a floating exchange rate system<br />Real world example: Chinese Yuan<br />
  42. 42. Price of currency A in terms of currency B<br />S1<br />EP2<br />P2<br />P1<br />EP1<br />D2<br />D1<br />0<br />Q1 Q2 <br />Quantity of currency A<br />Increase in demand<br />
  43. 43. S2<br />Price of currency A in terms of currency B<br />S1<br />EP2<br />P2<br />P1<br />EP1<br />D<br />0<br />Q2 Q1 <br />Quantity of currency A<br />Decrease in supply<br />
  44. 44. depreciation<br />A fall in the value of one currency in terms of another currency in a floating exchange rate system<br />Real world example: US Dollars<br />
  45. 45. Price of currency A in terms of currency B<br />S1<br />P2<br />P1<br />EP1<br />EP2<br />D1<br />D2<br />0<br />Q2 Q1 <br />Quantity of currency A<br />Decrease in demand<br />
  46. 46. S1<br />Price of currency A in terms of currency B<br />S2<br />EP2<br />P1<br />P2<br />EP1<br />D<br />0<br />Q1 Q2<br />Quantity of currency A<br />Increase in supply<br />
  47. 47. devaluation<br />Decrease in the value of a currency in a fixed exchange rate system<br />
  48. 48. Price of Yuan in terms of Dollars<br />D<br />P<br />Ep<br />Rate #1<br />P1<br />P2<br />Rate #2<br />Shortage<br />S<br />0<br />Q<br />Quantity of Yuan<br />Q1<br />Q2<br />Devaluation<br />
  49. 49. revaluation<br />Increase in the value of a currency in a fixed exchange rate system<br />Real world example: US want Chinese Yuan to be revaluated <br />
  50. 50. Price of Yuan in terms of Dollars<br />Surplus<br />D<br />P2<br />Rate #2<br />P1<br />Rate #1<br />P<br />Ep<br />S<br />0<br />Q<br />Quantity of Yuan<br />Q1<br />Q2<br />Revaluation<br />
  51. 51. Marshall-Lerner Condition<br />PED of Exports + PED of imports > 1<br />Reducing the currency exchange rate will only reduce the Current Account deficit when the PED of Exports together with the PED of imports is greater than one i.e. elastic.<br />
  52. 52. J-Curve<br />Though policy makers may hope that a currency depreciation will improve the Current Account deficit in the short-run the Current Account Deficit will worsen even when the Marshall-Lerner Condition is meet.<br />
  53. 53. Current account balance<br />+<br />0<br />Time<br />-<br />J-curve<br />
  54. 54. Terms of trade<br />Relationship between the price received for exports and the amount of imports a country is able to buy with that money.<br />

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