INTG

• Explain the meaning of the term Pareto Improvement.

  A Pareto improvement is an economic change or reallocation of resources that results in at least one individual becoming better off without making anyone else worse off. A situation is deemed Pareto optimal if all opportunities for Pareto improvement have been exhausted.
• List the primary causes (or determinants) of international trade.

  1. Proximity and size
  2. Comparative Advantage
  3. Savings and capital flows
  4. Economies of scale and market structure
  5. Idiosyncratic factors
• What is the Heckscher-Ohline Theorem?

  The Heckscher-Ohlin Theorem posits that countries export goods that use their abundant resources intensively and import goods that use their scarce resources intensively.
• What is the Stolper-Samuelson Theorem?

  The benefits of an increase in the price of a good flow to

  those in possession of the factor used intensively in production of that good.
• Describe the distributional consequences associated with liberalization of trade as predicted by a Specific Factors model.


  According to the Specific Factors model, trade liberalization is expected to benefit owners of factors of production that are specific to export sectors. However, it may harm those specific to import-competing sectors, resulting in a redistribution of income within a country.
• What is meant by the term factor price equalization and why has it been incomplete as trade liberalization accelerated in the late 20th century?

  Factor price equalization is a theory that suggests free trade will result in the equalization of wages and other factor costs among countries. However, this equalization has been incomplete due to factors such as differences in technology, trade barriers, and the immobility of some factors of production. Despite increased trade liberalization in the late 20th century, these factors have prevented complete equalization.
• How does elasticity matter for our analysis of the welfare effects of trade policies such as tariffs and quotas?

  It determines how consumers and producers respond to price changes. High elasticity means consumers or producers can easily adjust their demand or supply in response to price changes, affecting the distribution of benefits and costs from trade policies.
• Summarize which groups benefit and which are adversely affected as countries move from autarky to free trade (the process called trade liberalization).

  Beneficiaries:

  • Consumers
  • Producers in Exporting Sectors
  • The Economy overall

  Adversely Affected:

  • Workers and Producers in Import-Competing Sectors
  • Specific Factors in Declining Industries
• Explain the meaning of the term Quota Rents

  Quota rents are the extra profits earned by importers who have the right to import goods under a quota, due to the difference between the higher domestic price and the lower world price of the restricted goods.
• What is the optimal tariff argument and why does it only apply to large countries?

  The optimal tariff argument posits that a large country can impose a tariff to improve its terms of trade by reducing the world price of its imports. It only applies to large countries because only they have enough influence on global markets to affect world prices with their trade policies. Small countries, lacking this market power, cannot alter world prices and thus cannot exploit this strategy for their benefit
• What is the meaning of International Price Discrimination?

  International Price Discrimination occurs when a company sells the same product at different prices in different countries, not due to cost differences but to maximize profits based on varying demand elasticities, tariffs, and market conditions.
• What is the meaning of Dumping?

  Dumping is defined as selling a product in a foreign country at a price that is lower than the price charged by the same firm in its home market.
• Distinguish between internal balance and external balance.

  Internal balance refers to a situation where an economy achieves full employment and price stability.

  External balance refers to a sustainable position in the balance of payments, avoiding excessive deficits or surpluses in international trade.
• Explain how a country might be able to run a deficit on trade in goods and services, and yet run a current account surplus.

  If it earns enough from its investments and transfers abroad. Specifically, if the income from foreign investments and net transfer payments is greater than the deficit from trade in goods and services, the current account can be in surplus. This means that the country's total earnings from its international economic transactions are positive, despite importing more goods and services than it exports
• Provide a workable definition of the term Balance of Payments equilibrium.

  When a country's Balance of Payment is perfectly matched by the Non-Reserve Transactions on its Financial Account. In other words, when its Current Account balance is fully financed by private capital flows, thus making its Official Settlements Balance (Reserve Transactions Balance) equal to zero.
• Explain the relationship between a country’s Balance of Payments and its Net International Investment Position.

  The Balance of Payments reflects the flow of funds in and out of a country due to trade and financial transactions, while the Net International Investment Position represents the cumulative result of these flows over time, showing a country's net position as a creditor or debtor relative to the rest of the world.
• What are the two dominant private market “conduits” through which international capital flows between countries?

  Foreign Direct Investment (FDI): This involves investing directly in physical assets or companies in another country, often leading to a controlling interest in the business.

  Portfolio Investment: This includes investments in foreign stocks, bonds, and other financial instruments that do not result in direct control over the entities. Portfolio investments are typically more liquid than FDI and are driven by investors seeking diversification and return on their capital.
• Would a country with an intertemporal comparative advantage in present production and consumption have a high or low real interest rate, and would it tend to be a borrower or a lender in global capital markets?


  High, because a high real interest rate reflects the country's preference for consuming now rather than in the future, indicating a relatively lower supply of savings available for investment. They would tend to be a borrower in global capital markets. It borrows to finance current consumption or investment, anticipating higher income or output in the future to repay these borrowings.
• What are reserves, and what condition gives rise to the need for official reserve transactions?

  Reserves are assets held by a country's central bank, usually in the form of foreign currencies or gold, to settle international transactions and support the value of the national currency. Official reserve transactions are needed when there is a deficit in the balance of payments that cannot be financed through private capital flows, requiring the use of these reserves to balance international payments.
• What were the three key transnational institutions of the Bretton Woods system?

  The World Bank

  The International Monetary Fund (IMF)

  The General Agreement on Tariffs and Trade (GATT)
• Provide an explanation of the term mercantilism.

  Mercantilism is an economic doctrine from the 17th century that advocated for accumulating wealth through trade surpluses, achieved by protectionism and subsidization of domestic industries.
• What three accounts are summarized in a Balance of Payments?

  Current account, Capital account, Financial account
• What are the three broad categories of transactions in the Current Account?

  Primary Income, Secondary Income, Balance of Trade
• What are the three broad categories of information in the Financial Account?

  Reserve account, Non-Reserve Account, Errors and Omissions
• What kind of transactions are recorded in the Non-Reserve Account?

  Portfolio Investment, Direct Investment, other investment derivative transactions
• What is the meaning of Balance of Payments equilibrium?

  A country's Balance of Payment is said to be in equilibrium when the Official Settlement Balance is zero.
• What is Absolute advantage?

  A possession of an absolute productivity advantage in production, while comparative advantage refers to possession of a relative advantage due to lower opportunity costs of production.
• What is Comparative advantage?

  A possession of lower opportunity cost of production in a good or a service.
• What does the term Autarky mean?

  It describes the antithesis of free trade - a situation in which country is self-sufficient and does not trade with other countries.
• Define Free trade.

  A Trading regime with no restrictions or barriers on the movement of goods, services, and peperhapsrhabs factors of production.
• What is Protectionism?

  Protectionism refers broadly to policies inhibit free trade and that tend to shield domestic agents from the full effects of international trade.
• What are Terms of trade?

  The price of a country’s exports divided by the price of its imports, always measured using end-user prices (prices in their currencies).