Unit 5

Unit 5

1. Unit 5

   • Absolute Advantage: The ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost at which any other entity produces that good or service.
   • Comparitive Advantage: Comparative advantage refers to the ability of a party to produce a particular good or service at a lower opportunity cost than another
   • The Case for Trade Restrictions: to protect domestic economy and employment from cheap foreign competition
   • Barriers to Free Trade
     • Tariffs: tax on imported goods
       • Revenue Tariff: placed on products not domestically, purpose to raise revenue
       • Protective Tariff: designed to protect domestic producers from foreign competition
     • Quotas: limit # of particular goods imported
     • Embargoes & Sanctions: prohibition of any kind of business with another country
     • Bumping: selling in a foreign market for less than in a domestic market
     • Subsidies: gov't assistance given to domestic producers
     • Gov't legislation: governments pass legislation to protect domestic market or environment
   • Every international transaction requires the exchange of one country's currency for another currency
   • Canadian export/RECEIPT: international transaction in which foreign currency is converted into Canadian $
   • Canadian import/PAYMENT: international transaction in which Canadian are converted into foreign currency
   • Participants in Foreign Exchange Market
     • Traders: Importers (payment) and exporters (receipts)
     • Travellers: to Canada (receipt) and to Canadians abroad (payment)
     • Investors: direct and portfolio
     • Speculators
     • Central Banks
   • Demand for CAD dollars: affected by demand for Canadian exports and investments by foreigners in Canada
     • If demand for CAD exports increases, there would be an increase in the demand for the CAD dollar and the dollar would appreciate
   • Supply for CAD dollars: affected by amount of imports by Canadians and Canadian investment in foreign countries
     • If Canadians increase their demand for imports from Europe, the supply of CAD dollars in market increases and as a result value of dollar depreciates
   • Fixed Exchange Rates: currency held at a predetermined value
     • Advantages: less risks for importers and exporters
     • Disadvantages: doesn't represent true value of currency
   • Managed Floating Exchange Rates
     • C of B intervenes in the international financial market to slow down changes
     • Use foreign reserves to buy/sell CAD dollars in market
     • Use interest rates to influence demand and supply of their currency
   • International Balance of Payments
     • Current Account
       • Merchandise Trade: goods or visible trade
       • Invisible Trade or Non-merch trade: services, investment payment
     • Capital Account
       • Includes migrants' funds, inheritances, gob't pension payment to Canadians living abroad
       • Financial Account: includes direct and portfolio investment in Canada