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International Trade
International Trade
Course
enterpreneurship development studies (eds 221)
19 Documents
Students shared 19 documents in this course
University
Covenant University
Academic year: 2020/2021
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Trade Between Countries
Production possibilities frontier (PPF): A graph depicting an
economy’s maximum possible output combinations, given
fixed resources.
• If a point is either on or below the PPF, then it is a
possible production combination.
• The slope of the PPF represents the opportunity cost for
each good.
Utility measures satisfaction from consuming a good. High
utility implies high satisfaction.
Indifference curve: A curve that represents all combinations
of goods that yield the same utility—the higher the curve, the
higher the utility.
• The intersection of the PPF and the highest indifference
curve yields the best production combination.
Comparative advantage: Producing a good at a lower
opportunity cost than another producer.
International specialization: When countries focus on
producing goods that give them comparative advantage.
Terms of trade: The ratio at which a country can trade its
exports for imports.
• Terms of trade must be in between the slopes of the
countries’ PPFs.
Gains from trade: The increase of utility due to trade.
Trade Restrictions
Tariff: A tax on imports; tariffs often increase international
prices.
Consumer surplus (CS): The difference between the price
consumers are willing to pay and the price they actually pay.
Also known as consumer welfare.
• To calculate consumer surplus, find the area of the
triangle between the demand curve and the actual price.
Quota: A limit on the quantity of imports.
SMARTLY
INTERNATIONAL TRADE
Price
0
5
10
15
20
25
30
35
40
45
50
0 50 100 150 200 250 300 350 400 450 500
Quantity
Orangeland’s Market for Cloth:
Before Tariff
consumer
surplus actual price
imported
supply
local
supply
demand curve
Cloth
Oranges
PPF
30
Cloth
Oranges
10 20
Cloth
Oranges
Clothland PPF
Orangeland PPF
Producer surplus (PS): The difference between the price
at which producers are willing to sell their product and the
actual price.
World trade organization (WTO): An international
organization that works to promote free trade and creates
trade rules.
The WTO is a multilateral agreement, or an agreement
among many nations, to reduce tariffs and quotas.
The WTO works to create common markets, or groups of
countries with minimal trade restrictions.
Goods market: A market in which people buy and sell goods
and services.
Financial market: A market in which people buy and sell
financial assets.
Openness: A consumer’s ability to choose between
domestic and foreign products.
• A country’s openness can be measured by calculating
the trades of goods and services as a percentage of
GDP.
Trade balance: The total value of exports minus the total
value of imports.
Trade surplus: Occurs when trade balance is positive, or
when a country exports more than it imports.
Trade deficit: Occurs when trade balance is negative, or
when a country imports more than it exports.
Net capital flow (NCF): The net flow of funds a country
invests abroad.
• A positive net capital flow means that a country invests
more outside of itself than the world invests in it.
Balance of payments (BOP): A set of accounts that
summarize a country’s international transactions.
Current account: Mainly composed of the trade balance.
Capital account: Summarizes the financial market, or NCF.
Trade balance may also be
called net exports.
Openness formula:
(exports + imports)
GDP
100
Openness in Goods and Financial Markets
x
local
supply
Price
0
5
10
15
20
25
30
35
40
45
50
0 50 100 150 200 250 300 350 400 450 500
Quantity
Orangeland’s Market for Cloth:
Before Tariff
actual
price
supply
curve
PS
Real exchange rate: The price of domestic goods in terms of
foreign goods; used to compare the price of goods between
countries.
Fixed exchange rate system: Exchange rates remain
constant for long periods of time.
Bretton Woods Agreement: The value of the US dollar was
set at a constant price per ounce of gold, and the values of
member nations’ currencies were fixed in terms of the US
dollar.
Pegging: When a nation commits to setting a fixed exchange
rate against either a commodity or foreign currency.
Floating exchange rate system: Supply and demand
determine a currency’s value.
- An increase in demand for a currency will increase
its value, and an increase in supply will decrease the
currency’s value.
- Countries peg their currency to other floating currencies,
as opposed to fixed currencies.
Changes in supply and
demand cause fluctuations in a
currency’s value.
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International Trade
Course: enterpreneurship development studies (eds 221)
19 Documents
Students shared 19 documents in this course
University: Covenant University
Was this document helpful?
©2021 QUANTIC SCHOOL OF BUSINESS AND TECHNOLOGY
MACROECONOMICS: INTERNATIONAL TRADE
Trade Between Countries
Production possibilities frontier (PPF): A graph depicting an
economy’s maximum possible output combinations, given
fixed resources.
• If a point is either on or below the PPF, then it is a
possible production combination.
• The slope of the PPF represents the opportunity cost for
each good.
Utility measures satisfaction from consuming a good. High
utility implies high satisfaction.
Indifference curve: A curve that represents all combinations
of goods that yield the same utility—the higher the curve, the
higher the utility.
• The intersection of the PPF and the highest indifference
curve yields the best production combination.
Comparative advantage: Producing a good at a lower
opportunity cost than another producer.
International specialization: When countries focus on
producing goods that give them comparative advantage.
Terms of trade: The ratio at which a country can trade its
exports for imports.
• Terms of trade must be in between the slopes of the
countries’ PPFs.
Gains from trade: The increase of utility due to trade.
Trade Restrictions
Tariff: A tax on imports; tariffs often increase international
prices.
Consumer surplus (CS): The difference between the price
consumers are willing to pay and the price they actually pay.
Also known as consumer welfare.
• To calculate consumer surplus, find the area of the
triangle between the demand curve and the actual price.
Quota: A limit on the quantity of imports.
SMARTLY
INTERNATIONAL TRADE
Price
0
5
10
15
20
25
30
35
40
45
50
050 100 150 200 250 300 350 400 450 500
Quantity
Orangeland’s Market for Cloth:
Before Tariff
consumer
surplus actual price
imported
supply
local
supply
demand curve
Cloth
Oranges
PPF
30
Cloth
Oranges
20
10
Cloth
Oranges
Clothland PPF
Orangeland PPF
