TRADE What is the difference between absolute advantage and comparative advantage?- Absolute Advantage – the ability to dosomething better than the others.o Producing a good more efficiently than any other country- Comparative Advantage – producing a good at a lower opportunity cost than any other country. A nation gains by specializing in producing and exporting what it produces most efficiently. In Table A below, name the country that has an absolute advantage for cloth and the country with an absolute advantage for wine.- Cloth, ENGLAND- Wine, ENGLANDIn Table A above, name the country that has a comparative advantage in cloth and the country with a comparative advantage in wine.- Cloth, ENGLAND- Wine, PORTUGAL- The opportunity cost of producing cloth is lower in England, and the opportunity cost for producing wine is lower in Portugal. What is the consumer surplus and the producer surplus- Consumer surplus: at least some consumers would purchase goods at higher prices. Surplus is what consumers as a whole save from lower price. - Producer surplus: at least some producers would produce goods at lower prices. Surplus is what producers as a whole gain by higher prices. What is opportunity cost? Give an example.- The loss of potential gain from other alternatives when one alternative is chosen. - EX: England must sacrifice 1 ½ bolts of cloth to produce a barrel of wine, or it can give up 2/3 of a barrel of wine to produce a bolt of cloth. What does the term “factors of production” mean? Identify two factors of production.- Factors of Production: The resources necessary for economic activity. - Land (agricultural production) - Human capital (skilled labor) What is a tariff? What is the purpose of imposing tariffs?- Tariff: A tax on imports levied at the border and paid by the importer. - The purpose of imposing tariffs is to protect newly established domestic industries from foreign competition, to raise revenue, to protect domestic producers from “dumping” by foreign companies or governments. What is a “non - tariff barrier to trade? Give and example.- Non – tariff barrier to trade: regulations targeted at foreign goods. - EX: quotas, limiting the quantity of a foreign good that can be sold domesticallyWhat is trade liberalization? Name an international organization past or present that promotes trade liberalization.- Trade liberalization: the removal or reduction of restrictions on barriers on the free exchange of goods between nations. - EX: World Trade OrganizationWhy are producers of domestic goods more likely to succeed in promoting trade policy than consumers of those products?- The producers of domestic goods are generally more organized than the consumers because the producers want to be assured of the financial stability formthe trade policy. What is dumping?- Dumping: Selling goods below the true cost of production in order to drive out competitors and gain market share. By what means does the World Trade Organization enforce its dispute settlements?- World Trade Organization: o Complaints are sent to dispute settlement body.o Panel of trade experts established to hear disputeo Panel investigates and issues a report that becomes a ruling within 60 days.o If not overturned, the ruling becomes binding enforced by WTO – authorized retaliatory tariffs. FINANCIAL RELATIONSExplain the difference between foreign portfolio investment and foreign direct investment.- Portfolio Investments: give the investor a claim on some income, but no role in managing the investment- Direct Investment: Investments in a foreign country via the acquisitions of a local facility or the establishment of a new facility. Made by a company that owns and controls facilities that are located in another country. Why do private investors invest abroad? Why do poor countries borrow from abroad?- Private investors invest abroad because they can make more money, higher interest rates in developing countries encourage capital to flow from richer to poorer countries (those with capital want to move their money to where profits arehigher). Poor countries borrow from abroad because capital is scarce in poorer countries. International investors want to take money from capital rich countries to capital poor ones. Explain the apparent paradox that while capital is more scarce in developing countries, most foreign investment takes place in industrialized countries.- This occurs because wealthy countries have lower risks. Investment flows to the wealthy countries because industrialized countries are more economically and politically stable. There is always a risk that poor countries may undertake policies that devalue an investment. What is concessional finance? Name an international organization that practices concessional finance.- Concessional finance is typically lent a below – market interest rates (it is more a form of aid than finance) - EX: The World Bank, which loans at no interest to the poorest nations. What is the IMF? What is its role in international financial relations?- The International Monetary Fund was established at Bretton Woods to manage theinternational monetary system. - Its role is to aid a country facing debt difficulties, and the IMF can negotiate a program of economic policies. Once these policies are enacted, the IMF will give inexpensive loans to the country. Identify two common criticisms of multinational corporations.- MNC’s look for pollution friendly countries to open factories- Outsourcing jobs to countries with lower wagesDescribe three examples of conditions typically imposed by the IMF for providing loans.- Devalue currency- Privatize goods- Decrease trade barriersWhat are “austerity measures”? Give one example.- Austerity measures are policies to save money by lowering spending and reducingof public services to bring them in line with revenues. - An example would be the state of Wisconsin in 2011 cut spending on schools in order to save revenues. MONETARY RELATIONSIdentify a domestic group that prefers a weaker currency and a group that prefers a stronger currency. Explain why each group has this preference.- Domestic consumers prefer a strong currency because it makes foreign imports cheaper and increases national purchasing power. Domestic producers who exportprefer a weaker currency because more countries will want to import their cheaperproduct. What is monetary policy? How do governments use it to respond to high unemployment?- A monetary policy