Trade        

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  • Created by: rebecca
  • Created on: 13-03-13 19:58
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  • Trade
    • Absolute advantage
      • Where one country is able to produce more of a good or service with the same amount of resources, such that the unit cost of production is lower.
    • Comparative advantage
      • Where one country produces a good or service at a lower relative opportunity cost than others
    • Terms of trade
    • Balance of paymets
      • IMBALANCES current account defecits 1. High levels of consumption causing excessive spending on foreighn produced goods 2. High levels of investment causing capital goods to be imported from abroad 3. Change in CA causing cheaper goods to be imported rather than produced domestically
      • POLICIES TO CORRECT IMBALANCES
        • EXPENDITURE SWITCHING POLOCIES: Policies that increase the price of imports and reduce the price of exports in order to reduce the demmand for imports and raise the demmand for exports
        • EXPENDITURE REDUCING POLICIES: polocies that reduce the overall level of national income in order to reduce the demmand for imports
    • Economic intergration
      • ECONOMIC INTERGRATION: blurring the boundaries that separate economic activity in one nation state from that in another
        • FREE TRADE AREAS (FTAS) they agree to remove tariffs and quotas on trade between themselves but they keep the right to decide their own trade policy towards countries that do not belong in the fta.
        • CUSTOM UNIONS agreement between 2 or more countries to abolish tariffs on trade between them and to place a common external tariff on trade with non members
        • SINGLE MARKETS promoting the free movement of labour and capital and agreeing common polocies in a number of area, also removes restirctions of the free movement of trade
        • MONETARY UNIONS: deepest form of intergration in which countries share the same currency and have a common monetary policy as a result
  • Recipricol absolute advantage- Where in a theoretical world of two countries and two products each country has an absolute advantage in one of the products.
    • Absolute advantage
      • Where one country is able to produce more of a good or service with the same amount of resources, such that the unit cost of production is lower.
  • Relative opportunity cost- the cost of production of one good or service in terms of the sacrificed output of another good or service in one country relative to another
    • Comparative advantage
      • Where one country produces a good or service at a lower relative opportunity cost than others
  • The price of a countries exports relative to the price of its imports
    • Terms of trade
  • Index of average export prices/index of average import prices
    • trading possibility curve a representation of all the combinationsof two products that a country can consumer if it engages in international trade
      • Exchange rate systems
        • Trade
          • Balance of paymets
            • IMBALANCES current account defecits 1. High levels of consumption causing excessive spending on foreighn produced goods 2. High levels of investment causing capital goods to be imported from abroad 3. Change in CA causing cheaper goods to be imported rather than produced domestically
            • POLICIES TO CORRECT IMBALANCES
              • EXPENDITURE SWITCHING POLOCIES: Policies that increase the price of imports and reduce the price of exports in order to reduce the demmand for imports and raise the demmand for exports
              • EXPENDITURE REDUCING POLICIES: polocies that reduce the overall level of national income in order to reduce the demmand for imports
          • Economic intergration
            • ECONOMIC INTERGRATION: blurring the boundaries that separate economic activity in one nation state from that in another
              • FREE TRADE AREAS (FTAS) they agree to remove tariffs and quotas on trade between themselves but they keep the right to decide their own trade policy towards countries that do not belong in the fta.
              • CUSTOM UNIONS agreement between 2 or more countries to abolish tariffs on trade between them and to place a common external tariff on trade with non members
              • SINGLE MARKETS promoting the free movement of labour and capital and agreeing common polocies in a number of area, also removes restirctions of the free movement of trade
              • MONETARY UNIONS: deepest form of intergration in which countries share the same currency and have a common monetary policy as a result
        • Freely floating exchange rate - A system whereby the price of one currency expressed in terms of another is determined by the forces of demmand and supply
          • The value of the currency is determined solely by the forces of demand and supply and there is no goverment intervention
          • The demmand and supply for currency on the forex is affected by three things 1. TRADE (fe) uk goods sold in the usa create a demmand for the pound. 2. SHORT TERM CAPITAL FLOWS (deposits in bank accounts) 3. LONG TERM CAPITAL TRANSACTIONS buying and selling of assets
      • fixed exchange rate - An exchange rate system in which the value of one currency has a fixed value against other countries. Often set by the goverment
        • Exchange rate systems
          • Freely floating exchange rate - A system whereby the price of one currency expressed in terms of another is determined by the forces of demmand and supply
            • The value of the currency is determined solely by the forces of demand and supply and there is no goverment intervention
            • The demmand and supply for currency on the forex is affected by three things 1. TRADE (fe) uk goods sold in the usa create a demmand for the pound. 2. SHORT TERM CAPITAL FLOWS (deposits in bank accounts) 3. LONG TERM CAPITAL TRANSACTIONS buying and selling of assets
        • The value of the currency has a fixed value against another currency
        • Important advantages over freely floating exchange rate 1. REDUCES THE RISK OF TRADE UNCERTAINTY (enjoy higher levels of trade) 2. REDUCED COST OF TRADE (dont need to hedge their risks by buying currencies in the futures market) which lowers the cost of international trade 3. DICIPLINE ON DOMESTIC FIRMS match productivity improvements of foreigh competitors and do not allow ulc to increase`
      • Semi fixed semi floating exchange rate - An exchange rate system that allows a currencies value to fluctuate within a permitted band of fluctuation
        • EXCHANGE RATE BAND SYSTEMS (ER) floats freely within a permitted band of fluctuation intervention only occours when the er reaches its upper or lower limit
        • CRAWLING PEG SYSTEMS exchange rate is fixed but large revalulations or devalulations areavoided by frequent but small changes to the fixed rate
        • MANAGED FLOATING SYSTEMS the exchange rate is allowed to float but there is central bank intervention to prevent large fluctuations.

      Comments

      Andy

      Good Stuff!

      davidsalter

      This is a comprehensive mind map covering the reasons for trade and exchange rate systems. Suitable for unit 4 of the exam, it can be adapted by students.

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