MACROECONOMIC DEFINITIONS-PART 3
*STARRED ITEMS WILL BE CONSIDERED ONLY FOR EXTRA CREDIT
DEFINITIONS.
68. ABSOLUTE ADVANTAGE: A nation has
such an advantage when the cost of producing a given commodity is less than
another nation’s cost of producing the same commodity.
69. COMPARATIVE ADVANTAGE: A nation has
such an advantage when the opportunity cost of producing a given commodity is
less than another nation’s opportunity cost of producing the same
commodity.
70.
71. SPECIALIZATION: Concentrating
resources in the production of those goods in which a nation has a comparative
advantage results in specialization. Such concentration increases the productivity
of those resources and raises the standard of living for that nation.
72. PRODUCTION POSSIBILITY FRONTIER
(PPF): Assuming an economy with a given amount of resources and a given
technology, the PPF is a series of points that represent maximum output
combinations from a given set of inputs. Points on the PPF imply that the
economy is operating at full-employment. NOTE: The slope of the PPF is
determined by the opportunity costs of domestic production.
73. CONSUMPTION POSSIBILITY FRONTIER (CPF):
This curve represents the consumption possibilities that are available to the
consumers of that country when the surplus production of one good can be traded
for other goods. NOTE: The slope of the CPF is determined by the terms
of trade (TOT).
74. TARIFFS: Taxes levied on imported
goods by the importing country’s government.
*75. WELFARE LOSS OF TRADE RESTRICTIONS: When
domestic consumers reduce their consumption of an imported good and domestic
producers expand their production of a competing domestic substitute in
response to a trade restriction. Resources are thereby diverted into lower
valued uses because of the restriction. Specifically, consumers will reduce
their consumption of the imported good with a trade restriction imposed upon it
and increase their consumption of other goods which have a lower valued use
than the imported good. Producers will expand production of the competing
domestic good, thereby drawing resources away from the production of other
goods which have more value.
76. QUOTAS: Quantity limitations on the
amount of imported goods imposed by the importing country’s government.
77. VOLUNTARY EXPORT RESTRICTIONS (VERs): These restrictions are agreements negotiated between
the governments of the importing and exporting countries. The importing
country’s government initiates the negotiations at the request of some domestic
industry which desires protection from foreign competition. The exporting
country’s government voluntarily agrees to limit the exports of a given good from
a given industry.
78. THE CURRENT ACCOUNT IN GOODS AND
SERVICES: That portion of a country’s international accounts that consists of
imports (which imply an outflow of that country’s currency), exports (which
imply an inflow of that country’s currency), and unilateral transfers (such as
gifts and foreign aid).
79. TRADE DEFICIT: When the balance on
the current account indicates that the outflow of a country’s currency from
imports exceeds the inflow of a country’s currency from exports. (NX = X - M
< 0)
80. TRADE SURPLUS: When the balance on
the current account indicates that the inflow of a country’s currency from
exports exceeds the outflow of a country’s currency from imports. (NX = X - M
> 0)
81. THE CAPITAL ACCOUNT: That portion
of a country’s international accounts that consists of the purchases (which
imply an outflow of that country’s currency) and sales (which imply an inflow
of that country’s currency) of real and financial assets and international
lending and borrowing.
82. DEMAND CURVE FOR A CURRENCY: The
demand for currency A is equivalent to the supply of currency B by consumers in
country B who want to purchase country A’s goods but must do so with A’s
currency. Thus the demand for currency A is equivalent to the exports from country
A to country B. As the price of currency A decreases, the goods in country A
become relatively cheaper to people in country B so that there is an increase
in the quantity demanded of country A’s currency and an increase in country A’s
exports.
83. SUPPLY CURVE FOR A CURRENCY: The
supply of currency A is equivalent to the demand for currency B by consumers in
country A who want to purchase country B’s goods. Thus the supply of currency A
is equivalent to the imports into country A from country B. As the price of
currency A decreases, the goods in country B become relatively more expensive
to people in country A so that there is an decrease in the quantity supplied of
country A’s currency and a decrease in country A’s imports.
84. EXCHANGE RATE: The price of the
currency of one country expressed in a number of units of another country’s
currency. For example, the yen price of the dollar would be expressed as e($) = 50¥/$.
85. PURCHASING POWER PARITY (PPP): This
is a method of calculating exchange rates that attempts to value currencies at
rates such that each currency will buy an equal basket of goods.
86. FIXED EXCHANGE RATES: When central
banks choose a particular exchange and offer to buy and sell its currency at
that particular exchange rate.
87. FLOATING EXCHANGE RATES: Exchange
rates which are determined solely by the supply and demand for particular
currencies.
88. MANAGED EXCHANGE RATES (aka DIRTY
FLOAT or CRAWLING PEG): Exchange rates which are managed by the central bank in
order to prevent large fluctuations in them. Such fluctuations introduce
elements of uncertainty into international trade and may presumably discourage
some trade from occurring.
THIRD EXAM---------------------------------------THIRD EXAM