IB International Economics

Why do Countries Trade?

100

The main gain from trade is being able to buy goods and services at ___ prices

lower

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.

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

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.

500

Name 3 main functions 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

Free trade and protectionism

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.

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

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

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.

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.

Exchange Rates

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

200

What is revaluation?

When the value of a currency of a fixed exchange rate regime is raised.

300

Name 2 determinants of the demand for a currency in a floating exchange rate system

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

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

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

Balance of Payments

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.

200

Current account = ...

Capital account + financial account + net errors and ommissions

300

What is the effect of a current account deficit on the exchange rate?

The exchange rate of that country will decrease/ be low.

400

What are the components of the financial account?

1. direct investment 2. portfolio investment 3. reserve assets

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.

Economic Integration

100

Define preferential trade areas

Trading block that gives preferential access to certain products from certain countries

200

Define monetary union

a common market with common currency and a common central bank

300

Give an example of a monetary union and a free trade area

Could include: monetary union: Eurozone Free trade area: NAFTA

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 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