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Test Bank: International Economic Essay

Sovereignity- supreme & independent power or authority in government as possessed or claimed by a state or community. Being sovereign nations can be more indifferent to the interests of others. As long as nations exist, international economics will always need a separate body of analysis distinct from the rest of economies.

Globalization- worldwide integration & development; extending to other or all parts of the world

Euro Benefits
* Low interest rates due to a high degree of price stability
* More price transparency
* Removal of transaction costs
* No exchange rate fluctuations

Disadvantages
* Lack of strong Federal government
* Two speed economies
* To raise or lower interest rates
* Abolished independent monetary policies

(being able to slash interest rates & devaluing a currency) Different moneys- the existence of separate national currencies means the price ratio between them can change Different fiscal policies- in the international area tax differences can set off massive flows of funds and goods that would not have existed without the tax discrepancies

Factor mobility- the importance of this intranatural mobility of the factors of production was that returns to factors tended to equality within countries but not between countries. The degree to which a factor of production, such as labor or capital, is able to move, either among industries or among countries, in response to differences in its factor price, thus tending to eliminate such differences. Mobility & accessibility at a cost there is a price involved

Land- people usually migrate within their own country more readily than they will emigrate abroad. Identity of languages, customs, and traditions
within countries exist rather than between countries.

Labor-Personal impediments include physical location, and physical and mental ability. The systemic impediments include educational opportunities as well as various laws and political contrivances and even barriers and hurdles arising from historical happenstance. Increasing and maintaining a high level of labor mobility allows a more efficient allocation of resources. Labor mobility has proven to be a forceful driver of innovations.

Rules of Government- economic stability, maintain order, opportunity, equality, education, resources, competitive markets, stimulus

Economies of scale- productivity = a measure of output/ input

Trade- to exchange an abundance of a deficit trade in order to create a new market

Price elasticity—inelastic 1% change in price < 1% change in quantity

Elastic 1% change in price > 1% change in quantity Marginal cost= total costs – total cost for one additional product. As one industry expands at the expense of others, increasing amounts of the other goods must be given up to get each extra unity of the expanding output

Total cost= total fixed costs + total variable costs

Fixed costs- costs that do not change with output ex: plant & equipment

Variable costs- costs that do change with output

AFC= total fixed costs / output
Downward slope because youre spreading the cost over what you produce always producing more

AVC= TVC / Output
MC curve intersects AVC & AFV at their lowest points

Utility- a consumer’s problem is to get as much happiness or well-being by spending the limited income that the consumer has available. Determinantes of how much a consumer buys: Consumer’s incomepreferencesopinion of product

Measure responsiveness by the slope of the demand curve, steep slope indicates low responsiveness. Elasticity- the percent change in one variable resulting from a 1% change in another variable.

Price elasticity of demand- is the percent change in quantity demanded resulting from a 1% increase in price

Net gain- is the difference between the value that consumers place on the product and the payment that they must make to buy the product.

Consumer surplus- is the difference between the maximum price a consumer is willing to pay and the actual price they do pay. If a consumer would be willing to pay more than the current asking price, then they are getting more benefit from the purchased product than they spent to buy it. The difference in the price that they would pay, if they had to, and the amount that they pay now is their consumer surplus. Allows us to quantify what the lower price is worth to consumers.

Arbitrage- buying something in one market & reselling the same thing in another market to profit from a price difference

Effects of consumers & producers- for the U.S (importing country) the shift from no trade to free trade lowers the market price U.S consumers benefit from this change & increase their quantity consumed.

Comparative advantage- a nation, like a person, gains from trade by exporting the goods or services in which it has its greatest comparative advantage in productivity and importing those in which it has the least comparative advantages

Production possibility curve- shows all the combinations of outputs of different goods and that an economy can produce with full employment of resources & maximum productivity. Pictures the production side of a country’s economy. Indifference curve- shows all the consumption points at which utility equals some constant. Each indifference curve is typically presumed to have a bowed shape.

A country’s factor endowment is commonly understood as the amount of land, labor, and capital that a country possesses and can exploit for manufacturing. Countries with a large endowment of resources tend to be more prosperous than those with a small endowment, all other things being equal. Give or bequeath an income or property to (a person or institution)

Scarcity is the fundamental economic problem of having seemingly unlimited human wants and needs in a world of limited resources. Deficiencies- a lack or insufficiency; shortage

Heckscher- Ohlin Theory- It states that a country will export goods that use its abundant factors intensively, and import goods that use its scarce factors intensively. In the two-factor case, it states: “A capital-abundant country will export the capital-intensive good, while the labor-abundant country will export the labor-intensive good.”

When the countries are not trading:

* the price of capital-intensive good in capital-abundant country will be bid down relative to the price of the good in the other country, * the price of labor-intensive good in labor-abundant country will be bid down relative to the price of the good in the other country.

Once trade is allowed, profit-seeking firms will move their products to the markets that have (temporary) higher price. As a result: * the capital-abundant country will export the capital-intensive good, * the labor-abundant country will export the labor-intensive good.

The goal of NAFTA was to eliminate barriers to trade and investment between the US, Canada and Mexico. NAFTA also seeks to eliminate non-tariff trade barriers and to protect the intellectual property right of the products.


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