What is the definition of Trade?
The voluntary exchange of goods, services, assets or money between one person or organization and another.
Why do international trade?
- all parties benefit
- imports provide:
1. higher quality and/or
2. less expensive products and/or
3. more quantity - exports create economic activity
- improve competitiveness
What are the 2 types of International Trade Theories?
- Early Country-Based Theories
- Modern Firm-Based Theories
What are ‘Early Country-Based Theories’
- focused on single country
- trade in commodities
- price is main component of purchase decision
What are ‘Modern Firm-Based Theories’
- focus on firm’s role in promoting international trade
- helpful to describe trade in differentiated goods
- brand name is main component of purchase decision
What is comparative advantage?
An economy’s ability to produce a good/service at a lower opportunity cost than its trading partners
What is opportunity cost?
What you have to give up to buy what you want in terms of other goods/services
What does capital intensive mean?
Business or industrial process that requires a large investment of money
Intra-industry trade
exchange of similar products belonging to the same trade
Inter-industry trade
Different types of goods are traded (not from the same industry, ie food and car parts)
What are differentiated goods?
A product that is uniquely different than those of its competitors
What is FPI?
Foreign Portfolio Investment:
- foreign individuals/institutions or funds buying stocks, bonds , mutual funds, etc. traded in stock exchanges
- seek an attractive rate of return
- ‘my mum owns a stock in Tesla’
What is FDI?
- acquisition of foreign assets for the purpose of controlling them
- new investment of property, plant, equipment, joint venture with a local partner
- “my dad has hotels all over the world”
What is a commodity?
A raw material (gold, wheat, coffee) that can be bought and sold. Different than a differentiated good in that it’s not associated with a specific brand.
What is mercantilism?
- Country based theory
- focuses on the accumulation of wealth by maximizing exports and minimizing imports
- protected domestic industries
Classic Gold Standard Era
- 1870s - WW1
- Trade-dominated capital flows
- Increased world trade with limited capital flow
Inter-War Years
- 1923-1938
- Increased Trade barriers to trade & capital flows
- Protectionism + nationalism
Fixed Exchange Rates
- 1944-1973
- capital flows begin to dominate trade
- expanded open economies
Floating exchange rates
- 1973-1997
- Capital flows dominate trade
- industrial economies increasingly open, emerging nations open slowly
Emerging Era
- 1997-Present
- selected emerging nations open capital markets
- capital flows drive economic development
Bretton Woods and the IMF
- 1944
- Post-war international monetary agreement
- Established USD monetary system, IMF and World Bank
- Countries fixed currencies in terms of gold
- Only USD remained convertible to gold
The impossible Trinity (can’t fulfill all 3)
- exchange rate stability
- full financial integration
- monetary independence
how do you calculate equilibrium price? (graph)
set a country’s supply and demand equal to each other, and solve for price.
What are the four Economic Rationales for Government Trade Intervention?
- fighting unemployment
- protecting infant industries
- promoting industrialization
- improving the comparative position
