International Economics Key Review Notes

DEFINITIONS

• Free trade is international trade free from any restrictions like tariffs, quotas or other protections.
• Exchange rate is the price of one currency in terms of another currency.
  • Fixed- the value of the currency against other currencies remains the same. It’s maintained by gv by intervening in the foreign exchange market using foreign exchange reserves to buy and sell the currency.
  • Floating- the exchange rate is determined by demand and supply in the foreign exchange market only.
  • Managed – Currencies are allowed to fluctuate in a narrow band in the short run, and allowed to be realigned in the long run.
• Currency movements
  • In floating- appreciation and depreciation
  • In fixed- revaluation and devaluation
• Balance of payments- a record of all flows of money in and out of a country, current + capital account.
  • Must equal zero.
• Balance of trade- the difference between the value of exports and imports.
  • trade surplus – greater value of goods and services exported than imported
  • trade deficit – greater value of goods and services imported than exported
• Capital account- movement of funds and loans for investment to abroad: sales of assets to foreigners and purchases of assets located abroad.
• Current account- the exports and imports of goods and services between countries and overseas, and net transfers: transfers of money.
  • Deficit- when there are more imports than exports
  • Surplus- when there are more exports than imports
• Absolute Advantage – The ability to produce a particular good with fewer resources than another country
• Comparative Advantage – The ability to produce a particular good at a lower opportunity cost than another country
• Visible Trade
  • Imports and exports of goods (surplus or deficit)
• Invisible Trade
  • Imports and exports of Services (surplus or deficit)
    • Tourism
• Foreign exchange market – where currencies are bought and sold
• Protectionism – an economic policy of restraining trade- saves the domestic industries
  • tariffs (taxes on imported goods), quotas (limit on quantity of goods that can be imported), and government regulations
• Bonds: An IOU from the government
  • Government says it will owe you an x amount of money
    • Bond yields carry interest, and at the end you get how much you bought it for + yield. Yield depends on the demand. Yield is generally greater on longer term bonds.

DIAGRAMS

• J curve- (Marshall Lerner)

Explanation of J – Curve: With time, an economy’s exchange rate against a foreign currency depreciates and appreciates. Cash outflows suggest, an economy depreciating it’s currency and having other currencies buy their products, as a result, the economy who is depreciating reaches a point in which they begin to appreciate again because they are selling more than they are buying, a thus a upward shift in the curve. This is all under the assumption and applicable only under the Marshal-Learner conditions that state each economy are trading inelastic goods, which are goods that are not sensitive to price change.

CURRENCY APP/DEP
Increased supply of yen (from japan) – appreciating dollar
Decreasing supply of yen (from japan) – depreciating dollar
Decreased demand for yen (from US) – depreciating yen
Increased demand for yen (from US) - appreciating yen
Interest rates increase- more investment from foreigners – currency appreciates
Interest rates decrease- less investment from foreigners – currency depreciates
Income levels increase- higher imports demand – currency depreciates
Income levels decrease- lower imports demand - currency appreciates
Inflation increase- lower exports demand – currency depreciates
Inflation decrease- higher exports demand – currency appreciates
Other factors- government intervention & speculators