Absolute advantage - one country would have an absolute advantage over the other if it can produce same amount of goods with fewer resources.
This is then the ability of country to produce more goods than its competitors using same or less resourses.
Comparative advantage - the production of a product can produce the product at a lower domestic opportunity cost than can a trading partner.
It is also the basis for all trade.If the two nations specialize according to comparative. advantage, then to get the other product, they must trade.
Terms of Trade - the rate of exchange of two products is be determined through negotiation
Terms of trade - the outcome .
Gains from trade are based on comparative advantage, not absolute advantage
Input and Output Approach
Output problem - based on the most of an item producer can make if it specializes using a set amount of resources.
Take B/A for comparative advantage and pick the highest amount for absolute advantage.
Input problem approach - based on the least resources producer needs to make a set amount of an item .
Take A/B for comparative and pick lowest amount for absolute.
Foreign Exchange Market
- The foreign exchange market or forex market as it is often called is the market in which currencies are traded.The supplier of dollars is also the demander of yen. Therefore, both the supply of dollars and the demand for yen represent that aspect of the transactions. Conversely, the supplier of yen is also the demander of dollars so those two curves reflect that aspect of the transactions.
Balance of Payments
Balance of Payments: The balance of payments (BOP) is the method countries use to monitor all international monetary transactions at a specific period of time.
- Divide into 3 components capital, current, official reserves account.
Current Account:Trade – buying and selling of goods and services
Exports – a credit entry
Imports – a debit entry
Trade balance – the sum of Exports and Imports
Factor income – repayments and dividends from loans and investments
Factor earnings – a credit entry
Factor payments – a debit entry
Factor income balance – the sum of earnings and payments.
The capital account records the net change in ownership of foreign assets. It includes the reserve accounts (the foreign exchange market operations of a nation's central bank).
