Introduction to Economics 2 Dersi 7. Ünite Sorularla Öğrenelim

What are the reasons for international economic transactions?

International economic transactions are made in order to gain in simple terms:

• Consumers gain by meeting their demands with a lower price and higher quality variety of commodities.
• Producers gain by producing for a larger market with increased competition.
• Investors gain by choosing the most profitable investment from all around the globe.

What is import?

Import is a commodity or a service purchased from foreign sources.

What is export?

Export is a commodity or a service sold to foreign buyers.

What is general equilibrium?

General Equilibrium refers to the situation of concurrent equilibrium of the internal and external balance of an economy.

What is internal equilibrium?

Internal Equilibrium refers to the full employment of economy with price stability.

What is external equilibrium?

External Equilibrium refers to the balance of payments equilibrium.

What is general equilibrium determined by? 

General equilibrium is determined by the implementation of two economic policies: (1) expenditure-changing policies, (2) expenditure-switching policies. In other words, internal equilibrium and external equilibrium is achieved by an effective implementation of the expenditure-changing and expenditure-switching policies.

What are expenditure-changing policies?

Expenditure-changing policies are the fiscal and monetary policies which change the volume of the total expenditure.

What are expenditure-switching policies?

Expenditure-switching policies are the policies which switch the total expenditure from imported commodities to domestic commodities or vice versa.

What is the main motive for international trade?

The common assumption of the theories is that international trade increases the welfare via specialization in the most effective production and exchange referring to exports and imports.

What is autarky?

Autarky is the absence of international trade.

What is production possibilities frontier?

Production possibilities frontier (PPF) is the boundary between those combinations of commodities and services that can be produced and those that cannot.

What is consumption possibilities frontier?

Consumption possibilities frontier (CPF) is also referred to budget line. Consumption possibilities frontier or the budget line describes the limits to the consumption choices of a household. In international economics, it defines the consumption choices of a country under the given relative prices.

What is terms of trade?

Terms of trade is the ratio of the export price index of a county to its import price index.

What do Mercantilists argue?

What does theory of absolute advantage postulate?

Theory of absolute advantage postulates that if a country produces only the commodity that it can produce most efficiently and exchanges part of its output for the other commodities it demands, it would maximize its total output and welfare of its individuals.

Who proposed the theory of absolute advantage?

Theory of absolute advantage is proposed by Adam Smith.

What is Heckscher-Ohlin theory?

Heckscher-Ohlin theory is the international trade theory developed by two Swedish economists, Eli Heckscher and Bertil Ohlin. The Heckscher-Ohlin theory explains the reason of the differences in the relative commodity prices in autarky by using the factor intensity and factor abundance.

What does factor intensity refer to?

Factor intensity refers to intensity of the factors of production used in the production of a certain commodity.

What is factor abundance?

Factor abundance is the factor of production which exists in a greater proportion and with a relatively lower price in one country than the other country.

When do economies of scale exist?

Economies of scale exist when the cost of producing a unit of a commodity falls as its output rate increases. In other words, it features of a firm’s technology that leads to a falling long run average cost as output increases.

What is imperfect competition?

Imperfect competition is a type of market structure showing some but not all the features of perfect competition.

What is perfect competition?

Perfect competition is a market in which there are many firms each selling an identical commodity; there are many buyers; there are no restrictions on entry into and exit from the industry; firms in the industry have no advantage over potential new entrants; firms and buyers are well informed about the price of the commodity that each firm is produced.

What is constant returns to scale?

Constant returns to scale gives a constant long run average cost of a firm as output increases. Constant returns to scale occur if the percentage increase in output equals the percentage increase in inputs.

When do increasing returns to scale occur?

Increasing returns to scale occur when the percentage increase in output exceeds the percentage increase in all inputs, with given input prices.

What does traditional trade restriction aims refer to?

Traditional trade restriction aims refer to protecting domestic producers and collecting revenue to the treasury.

What is tariff?

Tariff is a tax or a duty levied on the traded commodity as it crosses a national boundary.

What is non-tariff restriction?

Non-tariff restriction is any action other than a tariff that restricts international trade. It is a barrier resulting from a prohibition, condition or a specific market requirement that makes importation or exportation of a commodity costly or difficult.

What is GATT?

GATT is the General Agreement on Tariffs and Trade which was signed in 1947. It covers the rules and regulations of international commodity trade.

Why is Uruguay Round important?

Uruguay Round is the most well-known trade round of GATT that started in 1986 and ended in 1994. At the Uruguay Round, the signatory countries decided to establish WTO (World Trade Organization).

What is foreign exchange rate?

Foreign exchange rate is the price of one country’s currency expressed in terms of another country’s currency. It is simply referred to exchange rate.

What are the characteristics of the foreign exchange market? 

The characteristics of the foreign exchange market:

1. There is a single foreign exchange market: Due to the effective and fast communication networks, the foreign exchange market for any currency, for example the pound, is comprised of all the places such as İstanbul, Tokyo, New York, London, etc., where pound is bought and sold for other currencies. The increased electronic communication and contact of the different countries leads to a single foreign exchange market.
2. The participants of the foreign exchange market can act without meeting each other: The market functions electronically. In other words, the demand for and the supply of foreign currency meet electronically. Thus, there is no need for the participants to meet for a foreign exchange.
3. The foreign exchange market resembles to a perfectly competitive market: The foreign exchange market has some features of a perfectly competitive market of a real economy. There are many buyers and sellers in the foreign exchange market. Each participant has a small market share. There are no restrictions on the entry in and exit from the market. The participants are quite well-informed about the market. 

What is equilibrium exchange rate?

Equilibrium exchange rate is the exchange rate determined by the intersection of the demand and supply curves for the foreign currency.

What is nominal exchange rate?

Nominal exchange rate gives the quantity of the foreign currency that can be bought by the national currency. In other words, nominal exchange rate is the price of one country’s currency expressed in terms of another country’s currency.

What is real exchange rate?

Real exchange rate is the nominal exchange rate weighted by the consumer price index of the two countries.

What is currency appreciation?

Currency appreciation is the rise in the value of one currency in terms of another currency in the flexible exchange rate system.

What is currency depreciation?

Currency depreciation is the fall in the value of one currency in terms of another currency in the flexible exchange rate system.

What is currency devaluation?

Currency devaluation is the fall in the value of one currency in terms of another currency by the decision of the central bank.

What is currency revaluation?

Currency revaluation is the rise in the value of one currency in terms of another currency by the decision of the central ban

What is balance of payments (BOP)?

Balance of payments (BOP) is the summary statement of all the economic transactions made by the foreign currency.

What are credit international transactions?

Credit international transactions are the international transactions that embrace the receipt of payments from foreigners.

What are debit international transactions?

Debit international transactions are the international transactions that embrace the making of payments to foreigners.

What does current account deficit refer to?

Current account deficit refers to a situation where the net result of the Current Account is negative.

What does current account surplus refer to?

Current account surplus refers to a situation where the net result of the Current Account is positive.

What are foreign direct investments (FDI)?

Foreign direct investments (FDI) are the real investments made directly to the firms, capital commodities and land. In foreign direct investments, the control on the investment is in the hands of the investor.

What is capital account?

Capital account constitutes the properties that are not financial, like the patent rights, intellectual property rights and licenses, etc.

What is financial account?

Financial account is the main sub-account of the Capital Account and Financial Account under which the foreign direct investments and portfolio investments are recorded.

What are portfolio investments?

Portfolio investments are financial properties and assets such as bonds, Treasury bills and stocks.

What does balance of payments deficit refer to?

Balance of payments deficit refers to the situation where the net result of the “Current Account + Capital and Financial Account + Official Reserves Account + Statistical Discrepancy Account” equation is negative.

What does balance of payments surplus refer to?

Balance of payments surplus refers to the situation where the net result of the “Current Account + Capital and Financial Account + Official Reserves Account + Statistical Discrepancy Account” equation is positive.