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appreciate
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to increase in value:
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Euro
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Single currency of the European Union
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Leontief paradox
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the empirical finding that U.S. industries with trade surpluses were more labor intensive than U.S. industries with a trade deficit. This is contrary to the factor-production theory
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transfer pricing
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the over-pricing of under-pricing of goods in intrafirm trade of multinational corporations that is designed to shire income and profits from high-tax to low-tax countries
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Developing Countries
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Country whose average per capita income is only a fraction of that in more industrialized countries.
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Trade Deficit
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Balance of payments outcome when spending on imports exceeds revenues received from export.
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second best world
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spillover effects, externalities, and incentive distortions.
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perfect competition
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the market condition where there are many buyers and sellers of a good or factor of production and each buyer and seller has no control over the price of the good or factor
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capital intensive
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the situation where the production of a good requires a high capital-to-labor ratio compared with that of another good
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Comparative Advantage
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Country's ability to produce a given product relatively more efficiently than another country; production at a lower opportunity cost
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Nationally optimal Tariff
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The highest difference between the part of the tariff revenue paid by the exporting country and the welfare loss associated with the consumption and production effects is attained.
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tax
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a sum of money demanded by a government for its support or for specific facilities or services, levied upon incomes, property, sales, etc.
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constant returns to scale
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a production condition in which proportionate changes in factors of production lead to proportionate changes in output
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Balance of Payment
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difference between money paid to, and received from, other nations in trade.
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Protective Tariff
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tax on an imported product designed to protect less efficient domestic producers.
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constant costs
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the amount of a good (assumed to be unchanging) that a country must forego to produce each additional unit of another good
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Quota
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limit on the amount of a good that can be allowed into a country
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The balance on Financial Account equals:
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The sum of:
U.S.-owned assets abroad, excluding financial derivatives (Line 40)
Foreign-owned assets in the United States, excluding financial derivatives (Line 55)
Financial derivatives, net (Line 70)
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gross national product
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the total monetary value of all final goods and services produced in a country during one year.
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Specific Tariff
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A tax of 20 cents per UNIT of imported cheese is an example of...
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What is dollar depreciation?
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When the dollar will purchase less of a foreign currency.
Example: the exchange rate changes from 10 euros per dollar to 5 euros per dollar.
Depreciation causes the price of foreign goods to rise in dollar prices.
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Redistribution Effect (of import tariff)
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Transfer of income from the domestic buyers to domestic producers of the good
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Define Purchasing Power Parity.
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PPP is the application of the law of one price across countries for all goods and services.
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What is the U.S. Net Foreign Wealth?
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U.S Net Foreign Wealth = (foreign assets owned by U.S. residents) - (U.S. assets owned by foreign residents)
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Name one of the four kinds of dynamic gains from trade listed in Chapter 2.
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1. a country engaging in international trade uses its resources more efficiently.2. specialization leads to increasing returns to scale.3. prices lower, but quality will increase in firms that cannot compete with price.4. international trade enhances competition in a country's domestic market, reducing the chance of monopoly power to affect market pricing
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National income identity for an open economy:
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Y = C + I + G + EX - IM
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Privatization
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Conversion of state-owned factories and other property to private ownership
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wholly-owned subsidiary
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a foreign operation incorporated in the host country and owned by a parent corporation in the source country
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Foreign Exchange
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Foreign currencies used by countries to conduct international trade.
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European Union
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Successor of the European Community established in 1993 by the Maastrich Treaty.
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factor-price equalization theorem
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the premise that international trade will reduce or equalize factor prices between countries
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immigration
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the movement of labor from one country to another
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Exchange Rate
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When the price of one country's currency is described in terms of another country's currency.
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What influences aggregate money demand?
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Three things:
1. Interest rate/expected rates of return: A rise in the interest rate causes aggregate money demand to fall.
2. Prices: the prices of goods and services bough in transactions will influence the willingness to hold money to pay those transactions.
* A higher level of average prices means a greater need for liquidity.
3. Real national income (GNP): A higher real national income means more goods and services are being sold in the economy, increasing the need for liquidity.
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net national product
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the gross national product less allowance for depreciation of capital goods.
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source country
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the country that sends the factor of production to another country
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terms of trade
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the relative price at which two countries trade goods
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Revenue Tariff
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tax placed on imported goods to raise revenue
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Define GNP.
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The value of all final goods and services produced by a nation's factors of production in a given time period.
It does not specify that those factors must work within the borders of a country that owns them.
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capital-to-labor ratio (K/L)
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the amount of capital per unit of labor used to produce a good
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What is the Fisher effect?
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The Fisher effect describes the long-run relationship between nominal interest rates and the inflation rate.
It is expressed as:
R$ - Re = PIus - PIeu
This formula implies that the international interest rate difference equals the international expected inflation difference.
The Fisher effect predicts that a rise in the domestic inflation rate causes an equal rise in the interest rate on deposits of domestic currency in the long run, when other factors remain constant.
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opportunity costs
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the cost of a good is the amount of another good that must be given up to release enough resources to produce the first good
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"An increase in world relative demand for the U.S. output causes a long-run real depreciation of the dollar against the euro."
Do you agree or disagree with this statement? Explain your answer.
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Disagree.
There will be a long-run real appreciation of the dollar. Absent changes in monetary conditions, there will be long-run nominal appreciation of the dollar as well.
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Suppose Argentina's inflation rate is 30% over one year but the inflation rate in Australia is only 5% over the same period. According to relative PPP, what will happen over the year to the Australian dollar and the Argentine peso?
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Relative PPP predicts that inflation differentials are matched by changes in the exchange rate.
Under relative PPP, the Australian dollar/Argentine peso exchange rate would fall by 25%/
That is, the Australian dollar is expected to appreciate against the Argentine peso by 25%.
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Ad Valorem Tariff
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A tax of 15 percent per ITEM would be an example of...
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National savings identity:
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S = Y - C - G
In the closed economy, S = I.
A closed economy can increase its savings only by accumulating capital.
In the open economy, S = I + CA.
An open economy can save either by building up its capital stock or by acquiring foreign wealth.
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Define the Law of One Price.
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The law of one price simply states that the same good in different competitive markets must sell for the same price, when transportation costs and barriers between those markets are not important.
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The aggregate demand for money, Md, can be expressed as:
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Md = P x L(R,Y)
P is the price level
Y is real national income
R is the interest rate
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