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.
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.
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