Open-Economy Macroeconomics Essentials Free Online FlashCards

What is comparative advantage?

Comparative advantage means producing a good at a lower opportunity cost than another producer. It explains why specialization and trade can benefit both countries.

Who has comparative advantage in wheat?

The United States has the comparative advantage in wheat: it gives up 0.5 units of coffee per unit of wheat, compared with Brazil’s 1 unit.

What is the open-economy GDP identity?

Y = C + I + G + NX. Net exports are included because exports are domestic production sold abroad, while imports are subtracted to exclude foreign production.

How are net exports related to saving and investment?

NX = S − I. A country whose national saving exceeds domestic investment tends to lend abroad and run positive net exports; the reverse tends to produce a deficit.

How do FDI and portfolio investment differ?

Foreign direct investment gives the investor a lasting interest or significant control, such as building a factory. Portfolio investment purchases securities without controlling the business.

What does the current account record?

The current account records goods, services, primary income, and secondary income. In simplified form, CA = NX + net income from abroad + net transfers.

How do the balance of payments and IIP differ?

The balance of payments records international transaction flows during a period. The international investment position measures the stock of foreign assets and liabilities at a particular date.

What is the difference between appreciation and depreciation?

Appreciation is a market-determined increase in a currency’s value; depreciation is a market-determined decrease. Under fixed rates, corresponding official changes are revaluation and devaluation.

What shifts demand for a domestic currency right?

Foreign buyers of domestic goods or financial assets demand the domestic currency. An increase in foreign demand for domestic exports shifts currency demand right and tends to cause appreciation.

What is the short-run effect of currency appreciation?

A currency appreciation makes domestic goods more expensive abroad and imports cheaper at home. Exports tend to fall, imports rise, net exports decrease, and aggregate demand shifts left.

What are the main effects of a tariff?

A tariff is a tax on an imported good. It raises the domestic price, reduces imports and consumer purchases, increases domestic supply, generates government revenue, and creates deadweight loss.

How does an import quota differ from a tariff?

A quota is a legal limit on imports. It raises the domestic price and reduces imports, while creating quota rents for whoever receives the right to sell the limited imports.