İKTİSADA GİRİŞ II

Last but not least, international economic transactions affect the general equilibrium of an economy. The main aim of the economic policies is to attain the internal equilibrium and external equilibrium at the same time. The concurrent equilibrium of the internal and external equilibrium is called general equilibrium of an economy. Internal equilibrium refers to full employment with price stability. On the other hand, external equilibrium refers to equilibrium in the balance of payments.

As also understood from the information given, the answer is E. All of the statements related to international economic transactions in the options are correct.

General equilibrium is determined by the implementation of two economic policies: expenditure-changing policies and expenditure-switching policies. Internal equilibrium and external equilibrium is achieved by an effective implementation of the expenditure-changing and expenditure-switching policies.

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

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

As also understood from the information given, the answer is E. All of the statements related to general equilibrium in the options are correct.

General equilibrium is determined by the implementation of two economic policies: expenditure-changing policies and expenditureswitching policies.

Expenditure-changing policies are the fiscal and monetary policies that are used to change the volume of the total expenditure. The instruments of the fiscal policy are the public expenditure and taxes. On the other hand, the instruments of the monetary policy are the open market operations, reserve requirements and discount rates.

As also understood from the information given, the answer is E. All of the statements related to expenditure-changing policies in the options are correct.

General equilibrium is determined by the implementation of two economic policies: expenditure-changing policies and expenditure-switching policies.

Internal equilibrium and external equilibrium is achieved by an effective implementation of the expenditure-changing and expenditure-switching policies.

Expenditure-switching policies are the policies which change the total expenditure in the expense of imports or domestic commodities. The instruments of the expenditure-switching policies are the trade restrictions, foreign exchange controls, devaluations and revaluations.

As also understood from the information given, the answer is E. All of the statements related to expenditure-switching policies in the options are correct.

Expenditure-switching policies are the policies which change the total expenditure in the expense of imports or domestic commodities. The instruments of the expenditure-switching policies are the trade restrictions, foreign exchange controls, devaluations and revaluations.

As also understood from the information given, the answer is E. All of them are the instruments of the expenditure-switching policies.

The main motive for international trade is to increase the economic gains or benefits not only for the individuals but also for the whole society. At this point, some critical questions arise: How does international trade increase the economic gains ofthe trade partners? How are these economic gains shared? What are the welfare effects of international trade? International trade theories answer these questions. 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.

When the imports and exports of a country are examined, it would probably be surprising to notice that country imports the commodities which it could produce by itself. So, why do this country imports the commodity instead of producing at home? The answer is simple: A country cannot produce everything because its economic resources are limited. Thus it should produce the most effective commodities. Such a concentration on the most effective commodities and production would lead to specialization and specialization increases the total output and welfare.

International trade which has deeply penetrated to our ordinary daily life has a comprehensive theory dating back to the seventeenth century. Starting with the economic philosophy called mercantilism, the international trade theory seeks to respond the basis for and the pattern of international trade between the trading countries and the economic gains of the trading countries from international trade.

As also understood from the information given, the answer is E. All of them are the questions answered by international trade theories.

International trade which has deeply penetrated to our ordinary daily life has a comprehensive theory dating back to the seventeenth century. Starting with the economic philosophy called mercantilism, the international trade theory seeks to respond the basis for and the pattern of international trade between the trading countries and the economic gains of the trading countries from international trade. In order to understand the economic gains from international trade, we assume a hypothetical world with two countries, namely Sunland and Lakeland. So as to provide simplicity for the analysis, it is assumed that the countries are producing only two commodities, corn and wheel under increasing opportunity costs.

Autarky is the absence of international trade. At the autarky, production possibilities frontier (PPF) and the consumption possibilities frontier (CPF) of a country are identical. In other words, production and consumption points are the same and they are both on the same frontier. It is impossible to consume at an outer point of the PPF. Nevertheless, international trade enables consumers to consume at a point which is outer than the PPF. It means that the CPF of a country is at an outer level than its PPF with international trade.

As also understood from the information given, the answer is E. All of the statements related to the economic gains from international trade in the options are correct.

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

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.

As also understood from the information given, the answer is E. All of the statements related to Production possibilities frontier (PPF) and Consumption possibilities frontier (CPF) in the options are correct.

The definitions for the terms in the options are as follows:

As also understood from the definitions given, the answer is E. All of them are correct.

It is acknowledged that economics as a science is born with the publication of the famous book of Adam Smith in 1776, entitled The Wealth of Nations. Nevertheless, the essays and writings about economics precede the publication of the distinguished book of Smith. These early writings are mostly on international trade. Thus, international trade is presumed as the precursor of economics.

The essays and writings which precede the Smith’s theory of absolute advantage are mostly the views and explanations of the merchants, government officials, bankers and businessmen. These studies are advocated an economic philosophy, called mercantilism.

Mercantilists argue that the way for a country to become powerful and rich is to export more but import less. Such a policy entails a protectionist trade policy.

Mercantilism acknowledged international trade as a zero-sum game. It means that with international trade a country can gain in the expense of its trade partner.

According to Adam Smith, mutually beneficial trade can take place with absolute advantage. In this respect, the earliest international trade theory that proves a mutually beneficial trade is the theory of Adam Smith, namely the theory of absolute advantage. The 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.

As also understood from the information given, the answer is E. All of the statements related to early trade theories in the options are correct.

The theory of absolute advantage and the theory of comparative advantage are criticized for being supply oriented. After the addition of demand by the standard theory of international trade, the analysis became more realistic. The demand is exhibited by the community indifference curves while the supply is represented by the PPFs. Thus, the standard theory of international trade has been introduced. The standard theory of international trade provides a simple ground to analyze the basis for and the gains from international trade.

As also understood from the information given, the answer is E. All of the statements related to early trade theories in the options are correct.

The standard theory of international trade does not explain the reason of the differences in the relative commodity prices in autarky. This weakness of the standard theory is accomplished by the Heckscher-Ohlin theory. 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. Factor intensity refers to intensity of the factors of production used in the production of a certain commodity. 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.

As also understood from the information given, the answer is E. All of the statements related to the Hecksher-Ohlin theory in the options are correct.

The theories which are proved after the Heckscher-Ohlin theory are known as the new trade theories. These are the theories that compensate the weaknesses of the previous ones and explain the international trade in a more realistic way. The new trade theories base a great deal of international trade flows on differences in the development and spread of new technologies among the countries, economies of scale and imperfect competition. These are the facts which the early trade theories did not take into consideration. Nevertheless, it should be noted that the new theories are the complementary theories which do not reject the early trade theories. Instead, they improve them by adding new assumptions. Early trade theories assume that the trading countries use the same technology in production. It is obvious that this assumption is not a realistic one in today’s world. The differences in the level and the usage of technology can even be a basis of the comparative advantage today.

Thus, new trade theories are improved so as to explain international trade which depends on the technology differences among countries. One of the assumptions of the early trade theories is that there is constant returns to scale in production. However, international trade can also be based on increasing returns to scale. New trade theories examine the effects of increasing returns to scale, or in other words, the positive economies of scale on international trade.

As also understood from the information given, all of the statements in the options related to the comparison of the early trade theories and new trade theories are correct.

The theories which are proved after the Heckscher-Ohlin theory are known as the new trade theories. These are the theories that compensate the weaknesses of the previous ones and explain the international trade in a more realistic way. The new trade theories base a great deal of international trade flows on differences in the development and spread of new technologies among the countries, economies of scale and imperfect competition. These are the facts which the early trade theories did not take into consideration. Nevertheless, it should be noted that the new theories are the complementary theories which do not reject the early trade theories. Instead, they improve them by adding new assumptions.

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

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

Thus, new trade theories are improved so as to explain international trade which depends on the technology differences among countries. One of the assumptions of the early trade theories is that there is constant returns to scale in production. However, international trade can also be based on increasing returns to scale. New trade theories examine the effects of increasing returns to scale, or in other words, the positive economies of scale on international trade.

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.

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

Early trade theories presume that there is perfect competition in the commodity markets. Nevertheless, perfect competition defines the ideal and extreme type of a market structure. In the real world, we often meet imperfect competition in commodity markets. New trade theories extent the analysis through imperfect competitive markets.

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.

Countries restrict their international trade by using restrictive trade instruments. Restrictive trade instruments are examined into two groups: Tariffs and non-tariff restrictions. A tariff is a tax or duty levied on the traded commodity as it crosses a national boundary. A non-tariff restriction is any action other than a tariff that restricts international trade. Non-tariff restrictions can be classified into three different categories:

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

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.

A tariff on imported commodities make them more expensive for domestic consumers. Domestic price of a commodity increases with the tariff. Thus, the imported commodities are less preferred at the domestic market. In other words, they lose their competitiveness. With the imposition of a tariff, two traditional trade restriction aims are attained: Protection of domestic producers and collection of revenue.

As also understood from the information given, the answer is E. All of the statements related to international trade policy are correct.

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.

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

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.

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

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

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

As also understood from the information given, the answer is E. All of the definitions in the options related to international trade policy are coreect.

Apart from the exchange rate and exchange rate systems, balance of payments is the other main component of the monetary side of international economics. Balance of payments (BOP) of an economy is a summary statement of all the economic transactions made by the foreign currency. Balance of payments displays the economic transactions recorded during a particular period of time which is usually a calendar year.

The main function of the balance of payments is to give information to the government about the international situation of the country. Being informed about the foreign exchange transactions and international situation, the government decides on the implementation of the adequate economic policy. Furthermore, countries which would like to trade with a country might consult to the balance of payments of this prospective trade partner to see its international trade situation. Last but not least, balance of payments data is sufficient to the banks, firms and individuals who would like to make an international transaction. Thus, balance of payments provides information not only to the government but also to the trade partners, banks, firms and individuals of the country.

Balance of payments are recorded depending upon basic principles referred to balance of payments accounting principles. International transactions of an economy are classified as credits and debits. Credit international transactions are those that embrace the receipt of payments from foreigners. Debit international transactions are those that embrace the making of payments to foreigners. Credit international transactions are recorded in the balance of payments with a positive (+) sign while debit international transactions with a negative (-) sign.

As also understood from the information given, the answer is E. All of the statements in the options related to balance of payment are correct.

Balance of payments has two main accounts namely the Current Account and Capital and Financial Account. These main accounts have various sub-accounts. Current Account: It is the account which embraces the exports and imports of the commodities and services, net interest and dividend incomes and unilateral transfers. If the net result of the Current Account is negative, then, there is a Current Account deficit within the economy. On the opposite side, if the net result of the Current Account is positive, then,  there is a Current Account surplus.

Capital and Financial Account: It consists of two sub-accounts, Capital Account and Financial Account. Patent rights, intellectual property rights and licenses are recorded under the Capital Account. It constitutes the smaller part of the whole account. Financial Account is the main sub-account of the Capital and Financial Account. Foreign direct investments (FDI) and portfolio investments are recorded under the Financial Account. 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. Portfolio investments, on the other hand, are financial properties and assets such as bonds, Treasury bills and stocks. In portfolio investments, the investor expects an earning as a return of its lending. This return of earning is simply the price of its investment, the interest.

As also understood from the information given, the answer is E. All of the definitions in the options related to main accounts and functioning of balance of payments are correct.

Import is a commodity or a service purchased from foreign sources. The correct option is C.

Internal Equilibrium refers to the full employment of the economy with price stability. The correct option is D.