6 Questions
Which of the following is a benefit of international trade?
Increasing efficiency and output due to specialization
What is the term for the rate at which goods and services are traded between countries, adjusted for differences in inflation rates?
Real Exchange Rate
Which of the following is a characteristic of a floating exchange rate?
It is determined by market forces of supply and demand
What is the term for a country that can produce a good or service using fewer resources than another country?
Absolute Advantage
What is recorded in the current account of the balance of payments?
Transactions related to goods and services, income, and transfers between countries
What happens to a country's currency when it depreciates?
Its value decreases relative to another country's currency
Study Notes
International Trade
- Gains from Trade: Countries specialize in producing goods and services in which they have a comparative advantage, leading to increased efficiency and output.
- Absolute Advantage: A country has an absolute advantage if it can produce a good or service using fewer resources than another country.
- Comparative Advantage: A country has a comparative advantage if it can produce a good or service at a lower opportunity cost than another country.
- Ricardian Model: A model that assumes labor is the only factor of production and shows how countries benefit from trade even if one country is more efficient in producing all goods.
Exchange Rates
- Nominal Exchange Rate: The price of one country's currency in terms of another country's currency.
- Real Exchange Rate: The rate at which goods and services are traded between countries, adjusted for differences in inflation rates.
- Appreciation: An increase in the value of a country's currency relative to another country's currency.
- Depreciation: A decrease in the value of a country's currency relative to another country's currency.
- Floating Exchange Rate: The exchange rate is determined by market forces of supply and demand.
- Fixed Exchange Rate: The exchange rate is set and maintained by the government or central bank.
Balance of Payments
-
Current Account: Records transactions related to goods and services, income, and transfers between countries.
- Trade Balance: The difference between a country's exports and imports of goods and services.
- Income Account: Records income earned from abroad and paid to foreigners.
- Unilateral Transfers: Gifts and grants received from or given to foreigners.
- Capital Account: Records transactions related to investments, loans, and other financial flows between countries.
- Official Reserve Account: Records changes in a country's official reserves, such as foreign currencies and gold.
- Balance of Payments Identity: The sum of the current account, capital account, and official reserve account is equal to zero.
Test your understanding of international trade concepts, including gains from trade, exchange rates, and balance of payments. Learn about comparative advantage, nominal and real exchange rates, and the different components of the balance of payments.
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