International Economics
Terms
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- Ad valorem tariff
- a fixed percentage tax on traded commodities
- specific tariff
- a fixed sum per traded unit of commodity
- compound tariff
- combination of ad valorem and specific tariff
- consumption, production, and trade effects
- what happens to these 3 when a tariff is imposed
- voluntary export restraint
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when the exporting nation voluntarily restricts its exports to a numerical limit
-to reduce likelihood of importing country imposing other trade barrier
-same as quotas, but rent goes to the foreign producer - dumping
- when (1) the sales price in importing country is lower than in exporting country or (2) the sales price on importing country is lower than production costs
- persistent dumping
- continuous sale of commodity at higher price in domestic market than in international market
- predatory dumping
- temporary sale of commodity at below cost or at a lower price abroad than at home in order to drive out foreign producers, after which prices are raised to maximize profits
- sporadic dumping
- occasional sale of commodity at below cost or lower price abroad than domestically in order to unload an unforeseen urplus of a commodity without having to reduce domestic prices
- production cost subsidy
- i.e. tax rlief, zero interest loans
- Trade Promotion Authority (TPA)
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-president can negotiate agreements
-congress can only vote up/down without changes or modifications - Preferential trade arrangements
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-provides lower barriers on trade among participating nations than on trade with non-members
-i.e. British Commonwealth - Free Trade Area
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-removes all barriers to trade among members but each nation retains barriers against non-members
-i.e. NAFTA - Customs Union
- -no barriers among members and harmonizes trade policies towards rest of world
- Common Market
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-removes all barriers among members, harmonizes policies toward rest of world, allows free movement of labor and capital among members states
-i.e. EU as of 1993 - Economic Union
- -all in common market + unifies monetary, fiscal, and tax policies of members
- Benefits from Customs Unions
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-increased competition
-economies of scale production
-stimulus to investment - Gravity Model
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Tij = A x Yi x Yj x 1/Dij
value of trade = A x size of country i x size of country j x 1/distance between i and j - Current Account
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-goods balance
-service balance
-income receipts (earnings on investments)
-unilateral transfers (foreign aid, pensions to citizens abroad, etc.) - Capital Account
- net unilateral transfer of assts (debt forgiveness, etc.)
- Financial Account
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-private assets
-foreign assets in U.S.
-FDI
-long-term and short-term portfolios - Portfolio
- purchase of a non-controlling share of business
- Long-term Portfolio
- assets with maturity of more than 1 year
- Short-term Portfolio
- assets with maturity of less than 1 year
- T-Note
- 1-10 yrs.
- T-bill
- less than 1 year
- T-bond
- more than 10 years
- Official Reserve Assets
- central band transactions involving purchases of foreign assets (gold, SDRs, foreign currency denominated assets)
- official settlements balance
- net change in a country's official reserves (domestic-foreign)
- Flow Variable
- per unit of time (i.e. over a year, etc.)
- Stock Variable
- at a given point in time
- Financial Account Surplus
- you buy more foreign assets than they buy of yours
- exchange rate
- price of foreign currency in terms of the domestic currency
- effective exchange rate
- exchange index based on trade wights (captures overall picture of what's happening to the dollar)
- With a fixed exchange rate, if you run out of reserves and continue to face a BOP deficit you can...
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-devalue your currency
-let exchange rate float - P*
- foreign price
- P/E
- price in foreign currency
- EP*
- domestic price
- Net supply of forex
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(pbar/E)X - pbar*M = TB*
export spending in foreign currency terms - import spending in foreign currency terms = trade balance in foreign currency - Marshall-Lerner Condition
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effect of a devaluation on trade balance:
-a devaluation reduces the real quantity of imports
-devaluation also increases real quantity of exports
-any given quantity of exports earns less foreign exchange - J-Curve
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result of a currency devaluation to trade balance:
-negative valuation (exports bring in less foreign currency)
-improvements in TB
-Martshall-Lerner condition satisfied
-usually takes 3-5 years to happen in full - National Savings (S)
- = Spvt + Sgov
- Privat Savings (Spvt)
- = private disposable income (Y + NFP + TR + INT - T) - consumption
- Government Savings (Sgov)
- = Net gov't income (T-TR-INT) - gov't purchases
- Current Account equation
-
CA = S - I
or
NX = S - I - Current Deficit figure
- 7% of GDP
- Current debt figure
- 23-24% of GDP
- If renminbi is revalued...
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-imports won't change because production would just move to other low cost regions
-only benefit might be that China would buy more American products now that they're relatively cheaper
-no real big improvement in current account deficit - Euromarkets
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1950s--Americans set up accounts abroad in dollars (deposits denominated in currency other than that of the country)
-was a way to get around regulations - Market thickness, thinness
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thickness = highly liquid
thinness = less liquid - Petrodollars
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OPEC countires put lots of dollar surplusses into Euromarkets which were then lent out to developing countries
- when interest rates rose in the 1980s these countries couldn't pay them back, resulting huge financial crises - currency board system
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100% reserve backing
-stronger form of fixed exchange rate
-i.e. Hong Kong - bid-ask spread
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cost of trading forex (very low, making it cheap to trade so a lot occurs)
-difference between bid-price and ask-price - bid-price
- price at which a bank wants to sell currency
- vehicle currency
- currency used in financial market
- double coincidence of wants
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each party must have something that the other wants (innefficient)
-reason for vehicle currencies - disadvantage to dollar being a reserve currency
- fluctuations in demand abroad has a greater effect domestically
- advantage to dollar being a reserve currency
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in exchange for dollars, US gets goods and services...only cost is printing money
-seinorage - forward discount
- % per year by which the forward rate is below the spot rate
- forward premium
- % per year by which the forward rate is above the spot rate
- fd or fp
- = [(F-S)S] x 4 x 100
- forex futures
- forward currency contracts for standardized currency amounts and select dates
- ius
- fd + iuk
- Byrd ammendment
- encourages companies to file antidumping lawsuits by awarding the revenues collected from the resulting tariffs to the litigating companies
- Slow pace of Doha talks
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-National/coalition positions
-minesterial mandates
-WTO mercantilist ethic - national/coalition positions at Doha
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-Countries not looking at what’s best overall—only immediate concerns
-The “blame game†- Minesterial mandates at Doha
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-Developing countries have understood the meaning of the talks to be simply developed country concessions (results in little talk of services, just agriculture, etc.)
-“special†and “sensitive†industries are allowed to be left out - WTO mercantilist ethic at doha
- -Political opposition to lowering barriers actually hurts the home country—trade not a zero sum game
- How to renew the TPA
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-Importance of Doha will need to be emphasized to Congress
-Must emphasize foreign policy cost of abandoning regional trade agreements
-Bush must give concessions to democratic congress - Results of a failed Doha
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-Forgone welfare gains
-Slow weakening of the WTO—make trade disputes problematic, especially for smaller developing countries
-Increased regionalism—new bilateral FTAs among developed countries (hurts developing world)
-Increased protectionism
-Adverse shocks in financial market - Saving in the USA
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-Saving estimates don’t include education, R&D, etc. that are like savings in today’s information-based economy
-Increases in relative price of houses also represent effective saving
-U.S. companies save a lot!.....even if individuals don’t - Ways to reduce China's surplus without revaluing the renminbi
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-Work to build a functioning foreign exchange market
-Reduce some of its import tariffs
-Relax controls on outward movement of capital