Flashcards · H060 · Topic 7

The global context flashcards

16 cards on Topic 7, subtopics 7.1 to 7.3. Pick a subtopic or study them all.

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Absolute vs comparative advantage: Absolute: fewer resources per unit, or more output from the same resources. Comparative: giving up less of other goods to make a good (lower opportunity cost).
Export price index 108, import price index 96. Terms of trade?: 108 ÷ 96 × 100 = 112.5, an improvement of 12.5%: each unit of exports buys more imports.
Terms of trade vs trade balance: Terms of trade: a price ratio (export prices ÷ import prices). Trade balance: a money value (exports − imports). Better terms of trade can still lower export revenue if demand is elastic.
Benefits and costs of international trade: Benefits: lower prices, more choice, economies of scale, specialisation by comparative advantage. Costs: job losses in import-competing industries, dependence on others, exposure to world shocks.
Unit labour cost and international competitiveness: ULC = labour cost ÷ output. Competitiveness is the ability to sell against foreign rivals; it rises when ULC falls relative to rivals, and with non-price factors such as quality.

Balance of payments: The account of every payment crossing a country's border, in either direction, in a stated time span. Credits are money in; debits are money out.
The current account: Trade in goods, trade in services, income (primary) and current transfers (secondary).
The accounting identity: Current account + capital account + financial account + errors and omissions = 0, so a current account deficit is matched by net inflows elsewhere.
Causes of a current account deficit: Fast growth raising imports, high inflation or unit labour costs, a strong exchange rate, low productivity and a narrow export base.
Expenditure-reducing vs expenditure-switching policies: Reducing: lowers total demand, and so imports. Switching: shifts demand from foreign to home goods (depreciation, tariffs).

Floating vs fixed exchange rate system: Floating: market forces set the rate. Fixed (pegged): the central bank commits to a target rate, using reserves and interest rates to defend it.
Appreciation and depreciation vs revaluation and devaluation: Appreciation and depreciation: a rise or fall in a floating currency. Revaluation and devaluation: an official upward or downward resetting of a pegged rate.
What makes a currency appreciate?: Higher demand for it or lower supply: higher interest rates than abroad (hot money), stronger exports, inward investment, lower inflation than abroad, and speculation that it will rise.
Effects of a depreciation: Exports cheaper abroad and imports dearer, so net exports and AD may rise; inflation tends to rise through import prices. The current account improves only if PEDx + PEDm > 1 (Marshall-Lerner).
J-curve: After a depreciation the trade balance first worsens, because demand for exports and imports is inelastic in the short run, then improves as buyers adjust.
A currency falls 20% (0.50 to 0.40 foreign units). By how much do import prices in home currency rise?: By 25%: a good costing 1 foreign unit cost 2.00 home units and now costs 2.50. A fall in one currency is not an equal rise in the other.