International Trade

• If a country runs a current account surplus, it receives financial IOUs from its trading partners.
• If a country runs a current account deficit, it pays for this by giving its trading partners financial IOUs.
• The current account includes international flows from exports, imports, factor payments, and transfers.
• Trade increases the efficiency of production through gains from specialisation.
• A producer has an absolute advantage in producing a good (or service) if they can produce more units per hour than other producers.
• A producer has a comparative advantage in producing a good (or service) if the opportunity cost is lower than that of other producers.
• Economists argue that if the benefits outweigh the costs of specialisation & trade, a system of government taxes and transfers to compensate the losing households would still benefit everyone.
• Current account = Net exports + Net factor payments from abroad + Net transfers from abroad
• The financial account is the increase in domestic assets held by foreigners minus the increase in foreign assets held domestically.
• The financial account is defined so that the net flows in the financial account offset the net flows in the current account: Current account + Financial account = 0
• The financial account records international transactions in assets.

  • Debt (bonds and loans)
  • Equity
  • Real assets such as land
  • Transfers & gifts
• To qualify as foreign DIRECT investment, the capital flow must generate a large ownership stake in a local firm for the foreign investors.