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International Economics (Exchange rate: the value of one currency…
International Economics
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Balance of Payments: a record of the value of all the transactions between the residents of one country and the residents of all other countries in the world over a given period of time (usually one year)
Current Account
Measure of the flow of funds from trade in goods and services, plus other income flows and transfers.
A CA deficit may lead to downward pressure on the value of the ER of a currency. Since more money is leaving the country, its supply increases and so its value depreciates
Correcting CA deficits: expenditure-switching policies (Protectionism or depreciation/devaluation) & expenditure-reducing policies (deflationary fiscal and monetary policies)
Capital Account
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Includes capital transfers (net monetary movements gained or lost through actions such as the transfer of goods and financial assets by migrants entering or leaving the country)
Includes transactions in non-produced, non-financial assets (patents, copyrights)
Financial Account
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If foreign ownership of domestic financial assets increases more quickly than domestic ownership of foreign financial assets then there is more money coming into the country than going out.
Includes: Direct investment, Portfolio Investment, Reserve Assets
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J-Curve
If ML condition is satisfied, then we expect expenditure-switching policies to be effective. However, in the short run, a CA deficit usually gets worse before it gets better due to lags.
Economic integration
Trading bloc: a group of countries that join together in some form of agreement in order to increase trade between themselves and/or to gain economic benefits from cooperation of some level
- Preferential trading area: gives preferential access to certain products from certain countries
- Free trade area: an agreement made between countries to trade freely among themselves and maintain control over their trade agreements with other countries
- Customs union: an agreement made between countries to trade freely among themselves and adopt common external barriers against other countries.
- Common markets: a customs union with common policies on product regulation, and free movement of goods, services, capital and labour
- Economic and monetary union: a common market with a common currency and central bank (no control over monetary policy and exchange rates, however, do not suffer from exchange rate volatility)
- Complete economic integration: an integration where individual countries involved have formed a monetary and economic union.
HL Trade creation: when entering a customs union leads to the production of a good or service transferring from a high-cost producer to a low-cost producer (typically due to the removal of a tariff)
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HL Trade diversion: when entering a customs union leads to the production of a good or service moving from a low-cost producer to a high-cost producer (typically because the country adopts the external barriers which make trade with their previous partners more expensive).
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Terms of Trade (T0T)
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An increase in the TOT means that a given quantity of exports will buy a larger quantity of imports than before. This is because its the price of exports are higher than the price of imports
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