ECON Notes
ECON Notes
Absolute Advantage
● one country can produce more of a given product with the same or less resources than
another country
Comparative Advantage
● lower opportunity cost = higher comparative advantage
● when a country gives up more to produce something that other countries produce
● Factors
○ abundance of resources
○ value of the good produced
● Limitations
○ Perils of Extreme Specialization
■ this concerns countries that specialize in agricultural products (volatile
products)
○ Unrealistic Assumptions
■ it is difficult to assess true comparative advantage when the goods are
not the same
● more often, goods are assumed to be identical even if they have
some sort of differentiation
■ transport cost cannot be ignored in practice
● can raise costs enough to eliminate a comparative advantage
■ perfect information about the availability and prices of goods is
IMPOSSIBLE
■ theory assumes relative constant cost
■ two-country model is unrealistic
■ full employment rarely occurs in practice
■ countries do not practice complete free trade
● Actors
○ speculation/hedge funds
○ remittance companies
○ retail/individual
○ central banks
○ investment banks and other banks
Currency Appreciation
● an increase in the value of a currency
● an increase in the demand or a decrease in supply of a currency
Currency Depreciation
● a decrease in value of a currency
● a decrease in demand or an increase in supply of a currency
Definition
● is a simply a record of the value of all transactions between one economy and another
within a period of time (usually a year)
● it is, in essence, a mere balance sheet; and should not be confused with the balance of
trade
Transactions
● inflows are credited to the relevant account
● outflows are debited to the relevant account
Components
1. Current Account
○ Balance of Trade in Goods (tangible)
○ Balance of Trade in Services (intangible)
○ Income (interest from investments included)
○ Current Transfers (Unilateral Net Transfers; private)
■ no exchange of goods & services is involved (unilateral)
■ transfer payments
2. Capital Account
○ Capital Transfers (produced)
■ Transfer of ownership of fixed assets
● e.g. assets transferred by migrants
● properties of migrants technically become the domestic country’s
assets
■ Transfers of funds linked to the acquisition of disposal of fixed assets
● e.g. property taxes in a migrant‘s home country paid by using
domestic income
■ Cancellation of liabilities
● i.e. cancellation of debt/loan
● e.g. Country A asks Country B to not pay them anymore,
assuming that the Country B borrowed money from Country A
■ Intergovernmental investment grants
● used for production of capital
3. Financial Account
○ direct investment
■ at least 10% ownership
■ long-term
■ risks involved (income not guaranteed)
○ surplus
■ balanced by a capital & financial account deficit
○ deficit
■ balanced by a capital & financial account surplus
● foreign holdings of the local currency fall under foreign ownership of local assets
Quotas
● maximum amount of imported products
Subsidies
Export Promotion Subsidies
Other Protectionist Measures (6)
● bureaucratic barriers
○ hassle paperworks
○ a lot of processes, demotivating for foreign suppliers
● environmental standards
○ harmful chemicals found in products may not be accepted
● product standards
○ goods of low quality may not be accepted
● qualifications
○ services of low quality may not be accepted
○ e.g. inability to speak in a country’s native language
● nationalistic campaigns
○ advertisements that promote domestic products/condemn imported products
● exchange rates
○ manipulation of domestic currency to make domestic products seem cheaper
than imported products
Unit 5: Economic Integration
Trade Bloc
● free trade area
○ reduced or no trade barriers within the bloc
○ no common external barrier
● customs union
○ reduced/no barriers within the bloc
○ common external barriers
● common market
○ CU + free movement of resources
■ reduced qualifications, less bureaucratic barriers, etc.
● economic & monetary union
○ CM + common currency
Trade Creation
● given that there were trade barriers before the creation of the trade bloc, the market
inefficiency and loss of consumer surplus will eventually be regained due to the removal
of trade barriers within the bloc, bringing the world supply curve back to normal
Trade Diversion
● given three countries, A, B, and C, where C sells a product at a lower price than B, when
country A and B creates a trade bloc together, raising the trade barriers for products
from C, consumers from A will be forced to buy products from country B due to its
relatively low price compared to C as an effect of the aforementioned trade barrier. As
such, there will be a market inefficiency within the trade bloc (since more is produced at
a higher price), as well as a loss in consumer surplus (due to the increase in price,
lowering Qd)