eco2013 (6) - principles of economics: macro unit 10 study guides

Key Concepts and Definitions

• International trade involves the exchange of goods and services across national borders
• Absolute advantage refers to a country's ability to produce a good or service more efficiently than another country
• Comparative advantage occurs when a country can produce a good or service at a lower opportunity cost than another country
• Terms of trade represent the ratio of export prices to import prices for a country
• Tariffs are taxes imposed on imported goods to protect domestic industries and generate revenue for the government
• Quotas limit the quantity or value of goods that can be imported into a country
• Embargoes prohibit trade with a particular country or region for political or economic reasons
• Exchange rates determine the value of one currency in terms of another currency

Historical Context of International Trade

• Ancient trade routes (Silk Road) facilitated the exchange of goods and ideas between civilizations
• Mercantilism, a dominant economic theory from the 16th to 18th centuries, emphasized the importance of exports and the accumulation of gold and silver
• The Industrial Revolution in the late 18th and early 19th centuries led to increased production and trade of manufactured goods
• Colonialism and imperialism in the 19th and early 20th centuries shaped global trade patterns and power dynamics
• World War I and the Great Depression in the early 20th century disrupted international trade and led to increased protectionism
• The Bretton Woods system, established after World War II, aimed to promote international economic cooperation and stability
  • It included the creation of the International Monetary Fund (IMF) and the World Bank
  • The system fixed exchange rates to the U.S. dollar, which was pegged to gold

Theories of International Trade

• Adam Smith's theory of absolute advantage suggests that countries should specialize in producing goods they can make more efficiently than others
• David Ricardo's theory of comparative advantage argues that countries should specialize in goods they can produce at a lower opportunity cost
  • This theory forms the basis for modern arguments in favor of free trade
• The Heckscher-Ohlin model emphasizes the role of factor endowments (land, labor, capital) in determining trade patterns
• The gravity model of trade predicts that trade flows between countries are positively related to their economic sizes and negatively related to the distance between them
• New trade theory incorporates economies of scale, product differentiation, and imperfect competition into models of international trade
• The product life-cycle theory suggests that the location of production shifts as a product moves through its life cycle (introduction, growth, maturity, decline)

Trade Policies and Agreements

• Free trade agreements (FTAs) reduce or eliminate trade barriers between participating countries (NAFTA, EU-Japan Economic Partnership Agreement)
• The World Trade Organization (WTO) promotes trade liberalization and provides a framework for negotiating trade agreements and resolving disputes
• Preferential trading arrangements (PTAs) offer reduced tariffs or other preferential treatment to specific countries or groups of countries
• Non-tariff barriers (NTBs) include quotas, subsidies, and regulations that can restrict trade
• Trade remedies, such as anti-dumping duties and countervailing duties, are used to address unfair trade practices
• Trade wars occur when countries engage in tit-for-tat retaliation by imposing tariffs or other trade barriers on each other's goods
• Trade creation refers to the increase in trade that results from the formation of a trade agreement or customs union
• Trade diversion occurs when a trade agreement diverts trade away from more efficient producers outside the agreement

Exchange Rates and Currency Markets

• Exchange rates can be fixed (pegged to another currency or a basket of currencies) or floating (determined by market forces)
• Appreciation occurs when a currency increases in value relative to another currency
• Depreciation happens when a currency decreases in value relative to another currency
• Purchasing power parity (PPP) suggests that exchange rates should adjust to equalize the prices of goods and services across countries
• The foreign exchange market is the largest financial market in the world, with trillions of dollars traded daily
• Central banks can intervene in currency markets to influence exchange rates through open market operations, interest rate changes, or capital controls
• Currency crises can occur when a country experiences a sudden and significant depreciation of its currency, often due to speculative attacks or economic imbalances

Balance of Payments

• The balance of payments (BOP) records a country's transactions with the rest of the world over a given period
• The current account includes trade in goods and services, income payments, and unilateral transfers
  • A current account deficit occurs when a country's imports exceed its exports
  • A current account surplus happens when a country's exports exceed its imports
• The capital and financial account records transactions involving assets and liabilities, such as foreign direct investment (FDI) and portfolio investment
• The official reserves account shows changes in a country's holdings of foreign exchange reserves
• BOP imbalances can lead to adjustments in exchange rates, interest rates, or economic policies
• The Marshall-Lerner condition states that a currency depreciation will improve a country's trade balance if the sum of the absolute values of the export and import demand elasticities is greater than one
• The J-curve effect suggests that a currency depreciation may worsen a country's trade balance in the short run before improving it in the long run

Global Economic Institutions

• The International Monetary Fund (IMF) promotes global monetary cooperation, financial stability, and provides loans to countries facing balance of payments difficulties
• The World Bank Group provides financing, technical assistance, and policy advice to developing countries to promote economic development and poverty reduction
• The World Trade Organization (WTO) oversees the global trading system, provides a forum for trade negotiations, and resolves trade disputes
• The Organisation for Economic Co-operation and Development (OECD) promotes policies to improve economic and social well-being, and provides data and analysis on a wide range of economic issues
• Regional development banks, such as the African Development Bank and the Asian Development Bank, provide financing and technical assistance to support economic development in their respective regions
• The United Nations Conference on Trade and Development (UNCTAD) promotes the integration of developing countries into the global economy and provides analysis and policy recommendations on trade and development issues

Contemporary Issues in International Trade

• Global value chains (GVCs) involve the fragmentation of production processes across multiple countries, leading to increased interdependence and complexity in international trade
• Trade in services, including financial, telecommunications, and professional services, has grown rapidly in recent decades and presents unique challenges for trade policy
• Digital trade, encompassing e-commerce and data flows, has become increasingly important, raising questions about regulation, taxation, and privacy
• Intellectual property rights (IPRs) protection is a contentious issue in international trade, with debates over the balance between incentivizing innovation and ensuring access to knowledge and technology
• Labor standards and environmental concerns have become more prominent in trade discussions, with some arguing for the inclusion of provisions in trade agreements to address these issues
• The rise of emerging economies, particularly China and India, has shifted the balance of power in the global trading system and led to increased competition and tensions
• The COVID-19 pandemic has disrupted global supply chains, leading to calls for greater resilience and diversification in international trade
• The increasing use of trade restrictions and the escalation of trade tensions have raised concerns about the future of the rules-based multilateral trading system