Why do Countries Trade?
Free trade and protectionism
Exchange Rates
Balance of Payments
Economic Integration
100
The main gain from trade is being able to buy goods and services at X prices
lower
100
Define free trade
Free trade is when trade takes place between two countries without barriers to trade or interference by governments or international trade organizations. Goods and services are allowed to move freely between countries.
100
Define exchange rate and give an example.
an exchange rate is one currency expressed in terms of another currency. For example 1€ is 7.44dkk
100
Define balance of payments
Record of the value of all the transactions between the residents of one country and the residents of all other countries in the world over a given time period.
100
Define preferential trade areas
Trading block that gives preferential access to certain products from certain countries
200
How do countries acquire foreign currency
When they export goods abroad they acquire foreign currency that they can use to buy other goods abroad.
200
Name 3 arguments FOR protectionism
answers could include: 1. protection of domestic employment 2. protecting economy from low- cost labour 3. protecting infant industry 4. avoid risks of overspecialization 5. Prevent dumping 6. protect product standards
200
What revaluation?
When the value of a currency of a fixed exchange rate regime is raised.
200
Current account = ...
Capital account + financial account + net errors and ommissions
200
Define monetary union
a common market with common currency and a common central bank
300
What are the gains from international trade? Name at least 3
1. lower prices 2. greater choice 3. differences in resources 4. economies of scale 5. increased competition 6. more efficient allocation of resources 7. sources of foreign exchange
300
Name two arguments AGAINST protectionism
answers could include: 1. protectionism may raise prices to consumers 2. protectionism would lead to less choice for consumers 3. diminished competition 4. protectionism distorts comparative advantage
300
The demand for a currency depends on what? Name 2 things
Answers could include: 1. demand for exports of goods and services 2. inflows of direct and portfolio investment 3. speculative buying 4. central bank officially buying the currency
300
What is the effect of a current account deficit on the exchange rate?
The exchange rate of that country will decrease/ be low.
300
Give an example of a monetary union and a free trade area
Could include: monetary union: Eurozone Free trade area: NAFTA
400
How does international trade lead economies of scale?
1. Because production at a larger scale (more output) and then lower costs. 2. Specialization and trade can lead to improvements in world productive efficiency.
400
Name 2 types of administrative trade barriers and explain their meaning.
Of the following: 1. Red tape: having long and complicated administrative paperwork may slow down imports 2. Health, safety, and environmental standards: these different types of restrictions on how goods and services are produced may restrict entry into a country. 3. Embargos: embargo is an extreme quota. a ban on the import of goods or services.
400
Name 3 advantages of having a floating exchange rate.
1. No need for currency reserves 2. monetary policy is free to target domestic goals 3. auto balance of payments adjustment 4. reduced risk of speculation
400
What are the components of the financial account?
1. direct investment 2. portfolio investment 3. reserve assets
400
Define common market
It is a customs union with common policies on product regulation and free movement of labour, capital, goods and services.
500
Name 3 mains of the WTO
Answers could include: 1. administer WTO agreements 2. Forum for trade negotiations 3. Handle trade disputes 4. monitor national trade policies 5. provide assistance in trade for developing countries 6. cooperate with other international organizations
500
Draw a tariff graph and label the part on the graph that represents the inefficiency of domestic producers and loss of world efficiency.
Correctly drawn tariff graph, all labels, correctly marked box.
500
Why may the government wish to control the ER of a country? Name at least 2 reasons.
1. Decrease ER to increase employment 2. Increase ER to fight inflation 3. maintain fixed exchange rate 4. Improve account deficit 5. increase stability of ER to increase business confidence
500
Explain how a country may have a current account surplus but a balance of trade deficit.
Explain that the current account is made up of balance of trade in goods and services AND net investment income and current transfers. The investment income and current transfers out weight out the balance of trade deficit.
500
Name 3 advantages of being part of a monetary union
could include: 1. exchange rate fluctuations disappear 2. currency is more stable against speculation 3. increased export markets /ease of trade 4. coordinated macro policy with lower inflation and interest rates 5. price transparency
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