C.2 Economics, Skill #6- Notes

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C.2 Economics, Skill #6- Notes

Analyze the features of global economics (e.g., exchange rates, terms of trade, comparative advantage, less developed countries) in terms of their impact on national and international economic systems.

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Comparative Advantage

The principle of comparative advantage says that trade should be based on the comparative opportunity costs between two countries

whichever country can produce a good more cheaply should produce that good and should trade for some other good that the country cannot produce as cheaply

both nations gain from trading and there is a more efficient allocation of the world's resources as well as larger outputs

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Financing International Trade- Exchange Rates

nations engaging in trade have to exchange their currencies following an exchange rate in the international currency market (i.e. American business exporting to Mexico doesn't want to be paid in pesos because that currency cannot be used in the US, so the importer must exchange pesos for US Dollars)

two major types of currency exchange formats

fixed

Bretton Woods system

44 nations met and created this system with the US dollar serving as the reserve currency of he system

countries bought and sold dollars to maintain their exchange rates

value of the US Dollar fixed at $35 per ounce of gold and was convertible on demand for foreigners holding US dollars

dissolved in 1971 as US dollar came under devaluation pressure and gold drained from the nation's reserves

International Monetary Fund (IMF)

created to supervise the exchange rate practices of member nations and intended to lend money to nations that were unable to meet paument obligations (bailouts)

World Bank

funded through the sale of bonds

loans money to developing nations for economic development

floating

March 1973 a managed, floating exchange rate was established by the major industrial countries

managed flat has withstood severe economic upheavals

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Balance of Payments

balance of payments account

sum of a country's transactions with other countries

current account

primarily tracks the import/ export of goods and services

includes net international transfer payments and net international factor income

net investment income is net interest and dividends paid by foreigners to Americans

n transfers consist of foreign aid, money sent to Americans/ their families living overseas

often termed the "balance of trade"

US has run trade deficits because the US imports more than it exports

unfavorable balance

if a nation imports more than it exports

favorable balance

if a nation exports more than it imports; current account surplus

financial account

most economists combine the capital and financial accounts into just the financial account

records trade-in assets (gold, government securities, banking liabilities, etc.)

if the balance is negative then a deficit is noted; if a balance is positive, then a benefit is noted. whether a deficit/ surplus is good/ bad depends on how the issue is resolved

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Developing Nations' Economies

economic growth in developing nations is faced with four obstacles:

traditional attitudes and beliefs

continued rapid population growth

misuse of resources

trade restrictions