Podcast
Questions and Answers
What is the definition of a closed economy?
What is the definition of a closed economy?
A closed economy is one that does not interact with other nations.
International trade has declined in volume since 1950.
International trade has declined in volume since 1950.
False (B)
What are the three main factors that have contributed to a significant increase in international trade volume?
What are the three main factors that have contributed to a significant increase in international trade volume?
- Exports, imports, and net exports
- Transportation, telecommunication, and technology (correct)
- Trade policies, tariffs, and quotas
- Investments, savings, and consumption
What is the formula for calculating net exports?
What is the formula for calculating net exports?
A positive value for net exports indicates a _______, while a negative value indicates a _______.
A positive value for net exports indicates a _______, while a negative value indicates a _______.
What is the definition of net capital outflow?
What is the definition of net capital outflow?
What are the three possible outcomes when a foreigner buys US products?
What are the three possible outcomes when a foreigner buys US products?
What is the relationship between net exports and net capital outflow?
What is the relationship between net exports and net capital outflow?
Which equation accurately represents national savings in an open economy?
Which equation accurately represents national savings in an open economy?
A trade deficit always indicates a negative economic outcome.
A trade deficit always indicates a negative economic outcome.
A trade deficit can result from which of the following events?
A trade deficit can result from which of the following events?
What is the definition of a nominal exchange rate?
What is the definition of a nominal exchange rate?
A currency appreciates when it ______ in value, while it depreciates when it ______ in value.
A currency appreciates when it ______ in value, while it depreciates when it ______ in value.
What is the primary factor determining exchange rates in the short run?
What is the primary factor determining exchange rates in the short run?
What primary factor drives currency demand in international markets?
What primary factor drives currency demand in international markets?
A higher real interest rate in a country typically leads to a depreciation in its currency.
A higher real interest rate in a country typically leads to a depreciation in its currency.
What is the defining characteristic of a pegged currency?
What is the defining characteristic of a pegged currency?
What are the primary motivations for governments pegging their currencies?
What are the primary motivations for governments pegging their currencies?
Pegging a currency involves passively setting the exchange rate without any market intervention.
Pegging a currency involves passively setting the exchange rate without any market intervention.
Describe how China managed to keep its currency undervalued before 2005.
Describe how China managed to keep its currency undervalued before 2005.
What is the main difficulty in keeping a currency overvalued, compared to undervaluing it?
What is the main difficulty in keeping a currency overvalued, compared to undervaluing it?
A country switching entirely to another currency completely eliminates the need for its own monetary policy.
A country switching entirely to another currency completely eliminates the need for its own monetary policy.
What is the defining principle of purchasing power parity (PPP) in international economics?
What is the defining principle of purchasing power parity (PPP) in international economics?
What is the Big Mac Index?
What is the Big Mac Index?
What is the main advantage of countries sharing a common currency?
What is the main advantage of countries sharing a common currency?
Countries that share a currency have complete control over their own monetary policy.
Countries that share a currency have complete control over their own monetary policy.
What are the two main types of trade policies?
What are the two main types of trade policies?
What is the primary consequence of tariffs, relative to free trade?
What is the primary consequence of tariffs, relative to free trade?
Quotas and tariffs have similar effects on currency markets and the overall economy.
Quotas and tariffs have similar effects on currency markets and the overall economy.
What is the main reason that tariffs are considered a source of government revenue?
What is the main reason that tariffs are considered a source of government revenue?
The burden of a tariff is entirely borne by the consumer.
The burden of a tariff is entirely borne by the consumer.
A study performed in 2018 found that Trump's tariffs had what impact on US consumers?
A study performed in 2018 found that Trump's tariffs had what impact on US consumers?
What is the projected impact of a 20% tariff on household expenses in the US?
What is the projected impact of a 20% tariff on household expenses in the US?
A country has a comparative advantage in producing a good if it can produce it with a lower opportunity cost.
A country has a comparative advantage in producing a good if it can produce it with a lower opportunity cost.
Explain the concept of autarky, as discussed in the context of international trade.
Explain the concept of autarky, as discussed in the context of international trade.
In the context of trade, what happens to consumer surplus when a country starts exporting a good?
In the context of trade, what happens to consumer surplus when a country starts exporting a good?
The gain from trade always outweighs the costs for all individuals and industries within a country.
The gain from trade always outweighs the costs for all individuals and industries within a country.
What is the key principle of trade that is applied in the example of Isoland?
What is the key principle of trade that is applied in the example of Isoland?
International trade allows countries to specialize in producing goods where they have a competitive advantage, benefiting global economic efficiency.
International trade allows countries to specialize in producing goods where they have a competitive advantage, benefiting global economic efficiency.
What happens to total surplus when a tariff is imposed on imported goods?
What happens to total surplus when a tariff is imposed on imported goods?
Tariffs protect domestic industries from foreign competition.
Tariffs protect domestic industries from foreign competition.
What type of economy did the US model assume before considering open economics?
What type of economy did the US model assume before considering open economics?
What are the key factors that have contributed to the monumental increase in international trade volume since 1950?
What are the key factors that have contributed to the monumental increase in international trade volume since 1950?
What are the main components of the "trade balance"?
What are the main components of the "trade balance"?
A trade surplus occurs when a country's exports surpass its imports.
A trade surplus occurs when a country's exports surpass its imports.
A trade deficit occurs when a country's imports exceed its exports.
A trade deficit occurs when a country's imports exceed its exports.
What is the net capital outflow (NCO)?
What is the net capital outflow (NCO)?
A positive NCO indicates that a country is investing more in foreign countries than foreign countries are investing in them.
A positive NCO indicates that a country is investing more in foreign countries than foreign countries are investing in them.
A negative NCO implies that foreign countries are investing more in the given country than it is investing in foreign nations.
A negative NCO implies that foreign countries are investing more in the given country than it is investing in foreign nations.
What is the relationship between NCO and NX, and what is its significance in open economics?
What is the relationship between NCO and NX, and what is its significance in open economics?
What economic indicator describes the "trade openness index"?
What economic indicator describes the "trade openness index"?
How are international trade and savings and investments related in the context of an open economy?
How are international trade and savings and investments related in the context of an open economy?
A trade deficit is invariably a detrimental factor for a country's economic well-being.
A trade deficit is invariably a detrimental factor for a country's economic well-being.
What are the main factors that can trigger a trade deficit?
What are the main factors that can trigger a trade deficit?
How can a country's currency appreciate or depreciate in terms of another country's currency?
How can a country's currency appreciate or depreciate in terms of another country's currency?
A country's currency appreciates when its value increases in comparison to another country's currency.
A country's currency appreciates when its value increases in comparison to another country's currency.
A country's currency depreciates when its value declines in comparison to another country's currency.
A country's currency depreciates when its value declines in comparison to another country's currency.
How does the exchange rate impact the comparative advantage of a nation in terms of trading goods and services?
How does the exchange rate impact the comparative advantage of a nation in terms of trading goods and services?
Supply and demand forces are the primary determinants of exchange rates, particularly in the short run.
Supply and demand forces are the primary determinants of exchange rates, particularly in the short run.
What is the effect of an increase in demand for Japanese products or assets on the exchange rate between USD and Japanese yen?
What is the effect of an increase in demand for Japanese products or assets on the exchange rate between USD and Japanese yen?
A rise in US real interest rates encourages a reduction in demand for USD, making it less attractive to foreign investors.
A rise in US real interest rates encourages a reduction in demand for USD, making it less attractive to foreign investors.
What is the significance of a "strong dollar" for the US economy?
What is the significance of a "strong dollar" for the US economy?
What is the difference between a floating exchange rate and a fixed exchange rate?
What is the difference between a floating exchange rate and a fixed exchange rate?
Why do governments choose to peg their currency to a fixed exchange rate?
Why do governments choose to peg their currency to a fixed exchange rate?
China's rapid economic growth in the 1990s and 2000s was heavily reliant on its export-driven model.
China's rapid economic growth in the 1990s and 2000s was heavily reliant on its export-driven model.
How did China maintain its currency undervalued relative to the US dollar during the period from 1997 to 2005?
How did China maintain its currency undervalued relative to the US dollar during the period from 1997 to 2005?
What does "defending the peg" refer to when discussing currency pegging?
What does "defending the peg" refer to when discussing currency pegging?
The US dollar is widely accepted as the world’s most stable currency, making it a popular target for currency pegging.
The US dollar is widely accepted as the world’s most stable currency, making it a popular target for currency pegging.
Maintaining an overvalued currency is typically easier than keeping a currency undervalued, because a country can simply print their currency to increase supply.
Maintaining an overvalued currency is typically easier than keeping a currency undervalued, because a country can simply print their currency to increase supply.
What is the primary issue that arises for countries that switch to another currency, like the US Dollar?
What is the primary issue that arises for countries that switch to another currency, like the US Dollar?
Hyperinflation is a key factor that can encourage countries to switch to another currency.
Hyperinflation is a key factor that can encourage countries to switch to another currency.
What concept governs the long-run exchange rate determination?
What concept governs the long-run exchange rate determination?
The "Big Mac Index" is a lighthearted approach for measuring Purchasing Power Parity (PPP) in exchange rates across countries.
The "Big Mac Index" is a lighthearted approach for measuring Purchasing Power Parity (PPP) in exchange rates across countries.
The Euro is the only common currency shared by European countries.
The Euro is the only common currency shared by European countries.
What are the main advantages of a shared currency system like the Eurozone?
What are the main advantages of a shared currency system like the Eurozone?
What is the main disadvantage of a shared currency system, like the Eurozone?
What is the main disadvantage of a shared currency system, like the Eurozone?
Tariffs and quotas typically have distinct effects on exchange rates and economies.
Tariffs and quotas typically have distinct effects on exchange rates and economies.
Tariffs can serve as a source of government revenue.
Tariffs can serve as a source of government revenue.
The burden of a tariff is always entirely borne by the importer.
The burden of a tariff is always entirely borne by the importer.
Tariffs are a universally beneficial policy, promoting economic growth and prosperity for all nations.
Tariffs are a universally beneficial policy, promoting economic growth and prosperity for all nations.
What is a closed economy?
What is a closed economy?
What are the main factors that have led to the significant increase in international trade volume since 1950?
What are the main factors that have led to the significant increase in international trade volume since 1950?
The term 'trade openness index' refers to the share of a country's GDP represented by exports and imports combined.
The term 'trade openness index' refers to the share of a country's GDP represented by exports and imports combined.
Which of the following is NOT a key topic covered in the study of open economies?
Which of the following is NOT a key topic covered in the study of open economies?
What is comparative advantage?
What is comparative advantage?
In the example provided in this lecture, which country has the comparative advantage in producing avocados?
In the example provided in this lecture, which country has the comparative advantage in producing avocados?
What is the primary benefit of specialization and trade as per the lecture?
What is the primary benefit of specialization and trade as per the lecture?
What is the definition of net exports?
What is the definition of net exports?
The balance of trade is always equivalent to the balance of capital flow.
The balance of trade is always equivalent to the balance of capital flow.
How do economists use the terms 'savings' and 'investment' in an open economy?
How do economists use the terms 'savings' and 'investment' in an open economy?
How is a trade deficit related to net capital outflow?
How is a trade deficit related to net capital outflow?
Which of the following can cause a trade deficit?
Which of the following can cause a trade deficit?
A trade deficit is always a bad thing for a country's economy.
A trade deficit is always a bad thing for a country's economy.
What is the 'nominal exchange rate'?
What is the 'nominal exchange rate'?
What is the difference between a currency appreciation and depreciation?
What is the difference between a currency appreciation and depreciation?
Which of the following scenarios would lead to an appreciation of the US dollar?
Which of the following scenarios would lead to an appreciation of the US dollar?
What is a pegged currency?
What is a pegged currency?
Why might a country choose to peg its currency?
Why might a country choose to peg its currency?
How does a country defend a currency peg?
How does a country defend a currency peg?
What was China's strategy for maintaining its currency peg?
What was China's strategy for maintaining its currency peg?
What is the main risk associated with adopting a currency peg, particularly when seeking to overvalue a currency?
What is the main risk associated with adopting a currency peg, particularly when seeking to overvalue a currency?
What is the alternative to a currency peg that countries can use?
What is the alternative to a currency peg that countries can use?
What is Purchasing Power Parity (PPP)?
What is Purchasing Power Parity (PPP)?
What are the advantages of sharing a currency, as exemplified by the Euro?
What are the advantages of sharing a currency, as exemplified by the Euro?
What is the primary disadvantage of sharing a currency?
What is the primary disadvantage of sharing a currency?
What are the two main types of trade policies discussed in this lecture?
What are the two main types of trade policies discussed in this lecture?
What was President Trump's stance on tariffs?
What was President Trump's stance on tariffs?
Tariffs reduce total surplus, creating a deadweight loss.
Tariffs reduce total surplus, creating a deadweight loss.
What is the impact of tariffs/quotas on currency?
What is the impact of tariffs/quotas on currency?
Where does the burden of a tariff ultimately fall?
Where does the burden of a tariff ultimately fall?
What was the main finding of the study on tariffs implemented in 2018?
What was the main finding of the study on tariffs implemented in 2018?
What is the prediction of the Tax Foundation regarding the impact of a 20% tariff in 2025?
What is the prediction of the Tax Foundation regarding the impact of a 20% tariff in 2025?
In the numerical example comparing trade between the US and Mexico using avocados and non-avocados, what is the key condition that governs whether both countries will benefit from trading?
In the numerical example comparing trade between the US and Mexico using avocados and non-avocados, what is the key condition that governs whether both countries will benefit from trading?
What is the main takeaway about the impact of trade on total surplus in a country?
What is the main takeaway about the impact of trade on total surplus in a country?
A tariff always causes a decline in total surplus.
A tariff always causes a decline in total surplus.
Flashcards
Comparative advantage
Comparative advantage
The ability of a country to produce a good or service at a lower opportunity cost than other countries.
Trade Volume
Trade Volume
The amount of goods and services exchanged between countries.
Open Economy
Open Economy
An economy that interacts with other nations through trade in goods, services, and capital.
Exports
Exports
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Imports
Imports
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Trade Balance (NX)
Trade Balance (NX)
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Trade Surplus
Trade Surplus
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Trade Deficit
Trade Deficit
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Net Capital Outflow (NCO)
Net Capital Outflow (NCO)
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National Saving
National Saving
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Domestic Investment
Domestic Investment
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Exchange Rate
Exchange Rate
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Currency Appreciation
Currency Appreciation
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Currency Depreciation
Currency Depreciation
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Purchasing Power Parity (PPP)
Purchasing Power Parity (PPP)
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Tariff
Tariff
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Import Quota
Import Quota
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Real Interest Rate
Real Interest Rate
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Gains from Trade
Gains from Trade
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Opportunity Cost
Opportunity Cost
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Specialization
Specialization
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Net Exports (NX)
Net Exports (NX)
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Currency Peg
Currency Peg
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Defending the Peg
Defending the Peg
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Strong Dollar
Strong Dollar
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Weak Dollar
Weak Dollar
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Exports and Currency
Exports and Currency
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Imports and Currency
Imports and Currency
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Eurozone
Eurozone
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Shared Currency Advantages
Shared Currency Advantages
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Shared Currency Disadvantages
Shared Currency Disadvantages
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Tariffs and Currency
Tariffs and Currency
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Tariffs and Government Revenue
Tariffs and Government Revenue
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Tariffs: Consumer and Producer Impact
Tariffs: Consumer and Producer Impact
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Study Notes
Lecture 23: International Macroeconomics
- The lecture concerns international macroeconomics, a field that considers how nations interact in the global economy.
- International trade is a vital part of both domestic and global economic activity.
- The volume of international trade has increased significantly since 1950, primarily due to improvements in transport, telecommunications, and technology, as well as trade policy changes (e.g., GATT, NAFTA, USMCA).
- Trade has become a larger proportion of global GDP over time.
- The lecture also touches on the recent political discourse around trade policies and their impact.
- Trump's advocacy for more tariffs and their relevance to US manufacturers was highlighted.
- The lecture dives into the core concept of an open economy, encompassing imports, exports, trade balances, capital flows, exchange rates, tariffs, and quotas.
- The production possibilities frontier (PPF) is a concept introduced. Without trade, the PPF is identical to the consumption possibilities frontier.
- Comparative advantage is described as a country's ability to produce a good at a lower opportunity cost compared to other countries.
- Examples of this concept are illustrated with avocados and non-avocados to illustrate potential benefits of trade.
- The lecture introduces the vocabulary related to international flows of goods. Defining exports and imports, as well as explaining net exports (NX) and trade imbalances (surplus or deficit), is part of the lecture.
- Net capital outflow (NCO) is defined as the net purchase of foreign assets by domestic residents, less the net purchase of domestic assets by foreigners.
- The equality of net exports and net capital outflow is presented as an accounting identity (NCO = NX).
- The relationship between domestic savings, investment, and net capital outflow in an open economy, along with alternative interpretations, is explained.
- The potential effect of trade deficits on national savings and investment is explored.
- Implications of trade deficits, factors that may cause these (national saving drops, increased foreign inflow or domestic investment increases) are covered.
- Exchange rates are covered. They are defined as the rate at which one currency is exchanged for another currency. Examples are provided.
- The determination of exchange rates is presented as a supply and demand issue in the currency market
- Real interest rates significantly impact currency demand. Higher real interest rates on domestic assets attract investment leading to higher demand for that currency.
- The concept of a "strong dollar" in relation to potentially higher or lower exports/imports is explained in the context of international trade.
- The lecture then explores the concept of currency pegging, a system where a nation's currency is maintained at a fixed rate to another currency. The practicality of maintaining such a peg, particularly China, is analyzed, offering reasons for the use and complexities.
- The lecture also looks at ways a country deals with hyperinflation by using alternative means for valuation, and the implications of such an action given existing financial systems.
- Purchasing Power Parity (PPP) is introduced and explained as an economic theory that attempts to derive the real exchange rate between two currencies, based on the purchasing power of the currencies in two different countries.
- The concept of a "Big Mac Index," a tongue-in-cheek calculation for evaluating exchange rates based on the relative price of a McDonald's Big Mac in various countries, is clarified
- The use of a shared currency, like the Euro, as an alternative to currency pegging, is discussed, along with its advantages and disadvantages.
- The lecture explores tariffs and quotas as trade policies, emphasizing their effects on currency exchange, government revenue, and their impact on domestic consumers.
- Key takeaways from a previous lecture concerning trade and tariffs (from Lecture 7) regarding the impact of trade and tariffs on consumer, producer, and total surplus are summarized.
- The final pages of the lecture examine the impact of tariffs and quotas on currency exchange rates and government income. Specific insights into the impact of Trump's tariffs in 2018 are detailed.
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