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39 Cards in this Set

  • Front
  • Back
Trade Penetration Ratio
How does Globalization effect the economy (2)
Positive for consumer
more variety
Trade Theory (5)
-Countries trade to acquire goods they can't produce
-Most imports we are capable of producing, but we concentrate what we're good at --- Specialization and Division of Labor
-In trade everyone benefits
-Based on a countries Resources
-No impact on employment, just effects WHAT people do
Barriers to trade (4)
- Economists like free trade, union workers don't
-Trade between two countries (Ex. US and UK) win-win, but creates dislocation (ex. less textile workers)
-Luggage Tariff - cost to consumer is $105,000 per job saved
Balance of Payments Accounts (3)
-Summary of all transactions between a country and the rest of the world
-Deficit - Borrow from ROW
-Sustainability - not for long term
Balance of Payments Accounts Formula
Consumer + Investments + Government Spending > Production
Market for Foreign Exchange (Foreign Money)
Exchange rates even out productivity as long as there is a balance
Wealth of Nation is based on gold stock
Balance of Trade Formula
Exports-Imports = Trade Balance
When the trade balance is greater than 0 (3)
-Increase Gold
-Discourage Imports
-Encourage Exports
Problems with Trade Theory of Mercantilism (2)
- Fallacy of Composition
-Impossible to pursue in long run - country can't consistently run BOT surplus or deficit
Fallacy of Composition
Assuming what's true from the whole is true for the part
Hume Gold flow Mechanism (UK and France) (5)
-UK exports > imports (surplus), increasing gold supply, increasing money supply, increase Puk
-France exports < imports (deficit) decreasing gold supply, decreasing money supply, decreasing Pfr
-UK will import goods from France (cheap) exploit less
-FR will import less and export more
-Flow of gold influences price change, which influences consumption change which creates balance
Wealth of Nations (4)
Adam Smith 1776 - wealth of a country is based on productivity not gold - the ability to produce goods and services
- More productive = higher standard of living
- propose of trade is to increase standard of living
-Trade permits better division of labor
Absolute Advantage Model (2)
-Adam Smith
-Autarky - absence of trade (country in isolation)
PPF (Production Possibility Frontier)
-Alternative Combinations of two goods that a country is capable of producing
PPF Assumes (3)
-Technology is constant
-Full employment of resources
-Efficiency employment of resources
How to derive PPF
Labor allocation - output level of both products
Output Formula
(Labor)(Output per worker)
Slope of PPF
Take absolute value
MRT (Marginal Rate of Transformation)
Given current state of technology, the MRT is the amount by which the output of good (Y-axis) must be reduced in order to increase the output of good (x-axis) by one unit (Or vice-versa)
MRT formula
(Change in Soybeans)/(Change in Shoes)
Terms of Trade (tt) (2)
-A number chosen between the MRT's of two countries where both countries are benefiting and willing to trade with one another
Derive CPF in Autarky and Trade
-Autarky = PPF
-Trade - Exports, Consumption of Adv. product, Imports of less Adv. Product
How to Maximize worlwide production
Have each country specialize in the product they have an absolute advantage in
Impact of Trade on Employment in Absolute Advantage Model
None in the long run
How to make BOT equal zero
(Imports)(Pproduct) =(Exports)(Pproduct)
Comparative Advantage Model (4)
-David Ricardo
-Based on greater output per worker (Divide US and China OPW)
-Each country will exploit the product in which it has a comparative advantage
-Transferring Workers
Problems with Comparative Advantage Model (5)
-Complete specialization
-What determines comparative Advantage? Resouces?History?
-What determines tt
-No role for Tastes and Preferences
-International transactions involve assets
PPF straight vs. Concave line
PPF straight - resources unspecialized, unrealistic (worker's can't be transferred frictionlessly)
REALITY - PPF is concave
Derive slope of PPF (2)
MRT - slope of the tangent line - (Change in Y)/(Change in X)
-Give up one x amount of y product for another
How to find exports and import amounts (2)
-Exports y (production-consumption)
-Imports x (consumption-production)
MRS (Marginal Rate of Substitution)
Amount of goods (y) consumers are willing to give up or accept in exchange for 1 unit of (x) with no change in welfare
Equilibrium Terms of Trade
-Price rises during shortage
Hecksher-Ohlin Theorem (3)
-Based on model of trade
-Country will have comparative advantage and therefore export products in which a country is relatively endowed
-ex. Us - Capital (K), Mexico - Labor (L)
Hecksher-Ohlin Assumptions (6)
-Tastes and preferences are the same in both countries - each countries tastes can be described by the same set of indifference curves
-Same quality of resources in each country, however, quantity is different
-All countries have access to the same set of production technologies
-No barriers to trade
-No transportation costs
(Last Two - Not feasible today - need frictionless world)
Factor Price Equalization Theory (7)
-Paul Samuelson
-more capital means less labor
-less labor means more capital
-w = wage rate of labor
- r = rental price of capital
-once trade opens up in each country, the return to the abundant favtor will increase, and the return to the scarce factor will decrease
-More jobs = lower wages
w/r in US and Mexico when trade opens
-Increases in Mexico
-Decreases in US
Problems with Factor Price Equalization
-Long-term process
-moving people across borders
-changing labor prices