Level II. First, learn how comparative advantage results in a welfare gain from
international trade and the two models of the sources of comparative advantage.
Learn the types of trade restrictions and their effects on domestic price and quantity.
For the balance of payments, focus on how a surplus or deficit in the broadly defined
capital account must offset a deficit or surplus in the merchandise trade account.
Finally, focus on how the difference between domestic income and expenditures and
the difference between domestic savings and investment are related to a country’s
balance of trade.
WARM-UP: INTERNATIONAL TRADE
Before we address specific topics and learning outcomes, it will help to define some
terms as follows.
Imports: Goods and services that firms, individuals, and governments purchase from
producers in other countries.
Exports: Goods and services that firms, individuals, and governments from other
countries purchase from domestic producers.
Autarky or closed economy: A country that does not trade with other countries.
Free trade: A government places no restrictions or charges on import and export
activity.
Trade protection: A government places restrictions, limits, or charges on exports or
imports.
World price: The price of a good or service in world markets for those to whom trade
is not restricted.
Domestic price: The price of a good or service in the domestic country, which may be
equal to the world price if free trade is permitted or different from the world price
when the domestic country restricts trade.
Net exports: The value of a country’s exports minus the value of its imports over some
period.
Study Session 5
Trade surplus: Net exports are positive; the value of the goods and services a country
exports are greater than the value of the goods and services it imports.
Trade deficit: Net exports are negative; the value of the goods and services a country
exports is less than the value of the goods and services it imports.
Terms of trade: The ratio of an index of the prices of a country’s exports to an index of
the prices of its imports expressed relative to a base value of 100. If a country’s terms
of trade are currently 102, the prices of the goods it exports have risen relative to the
prices of the goods it imports since the base period.
Foreign direct investment: Ownership of productive resources (land, factories, natural
resources) in a foreign country.
Multinational corporation: A firm that has made foreign direct investment in one or
more foreign countries, operating production facilities and subsidiary companies in
foreign countries.
LOS 19.a: Compare gross domestic product and gross national product.
CFA
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Program Curriculum, Volume 2, page 336
Gross domestic product over a period, typically a year, is the total value of goods and
services produced within a country’s borders. Gross national product is similar but
measures the total value of goods and services produced by the labor and capital of a
country’s citizens. The difference is due to non-citizen incomes of foreigners working
within a country, the income of citizens who work in other countries, the income of
foreign capital invested within a country, and the income of capital supplied by its
citizens to foreign countries. The income to capital owned by foreigners invested
within a country is included in the domestic country’s GDP but not in its GNP. The
income of a country’s citizens working abroad is included in its GNP but not in its GDP.
GDP is more closely related to economic activity within a country and so to its
employment and growth.
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