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Economics NCEA 2

Trade and Inflation

QuestionAnswer
Describe what is meant by resource (factor) endowments. The natural resources within a region.
What is regional trade? Trade between regions (cities etc...) in the same country under the same government.
What is international trade? Trade across national borders.
Explain how resource endowments in different parts of New Zealand have led to regional specialisation and trade. Different regions have different natural resources, they specialise in producing particular products and trade their surplus with other regions to get other products they want.
Identify assumptions made when using the two-country trade model. Only two countries, no transport costs, prices set in one currency, no trade barriers, ceteris paribus.
Why is it necessary, when using a two-country trade model illustrating trade in a product, to use the same currency on both diagrams? So the relative prices in each country can be compared.
Describe why New Zealand has a comparative advantage in the production of primary products for the world market. NZ has abundant natural resources for farming; a high degree of farming skills; we have better technology in those industries. The opportunity cost is lower than in overseas countries.
Identify items the two-country trade demand and supply model is useful for illustrating changes to. Factors affecting supply and demand in either country, prices in either country, quantities exported and imported, quantities supplied and demanded in either country.
Explain how a higher exchange rate causes an exporter's profits to decline. It means exporters receive fewer dollars when selling goods overseas so their profits fall; the higher prices generate a fall in quantity demanded therefore fewer profits.
If manufacturing exporters shift their production overseas, explain how it could impact on economic growth. Growth will fall as exports fall and imports rise.
Explain how the loss of exports caused by an outbreak of mad-cow disease would have flow on effects on the domestic economy. There would be lower income for farmers; less spending by farmers means lower demand for goods and services, lower economic growth and higher unemployment; decreased current account balance.
Explain how profits act as a financial incentive to relocate capital form industries experiencing falling demand to industries experiencing increasing demand. Industries with falling demand experience falling profit, so will reallocate capital to produce gods for which demand is increasing and therefore becoming relatively more profitable.
Describe what happens in an industry when it contracts. Firms close down; workers are laid off; profits fall; sales fall; revenue falls; employment falls; production falls.
Describe what is meant by the domestic market. The New Zealand market; the country's market.
Explain why exporters profits are reduced when the exchange rate appreciates. They receive fewer dollars when they exchange the foreign currency they are paid in; It makes New Zealand-made goods more expensive for overseas buyers so quantity demanded falls.
Describe actions that an exporting firm with reduced profits can take to stay in business when there is a downturn i the local economy. Lay off staff; diversify into other products; focus more on developing products for domestic maket; lower prices; cut costs.
What are the most important commodities (by dollar value) that are imported into NZ? Motor vehicles, oil, electronic goods, clothes.
What are the most important commodities (by dollar value) that are exported from NZ? Dairy products, meat, wood (forestry) products, machinery and equipment.
What is meant by the theory of comparative advantage? A country should specialise in the production of those goods that it is relatively more efficient at producing.
List the assumptions that the theory of comparative advantage is based on. Two goods only, no transport costs, free trade, mobility of resources within a country and constant costs - no diminishing returns; i.e., a straight line production possibility curve.
Why is the world supply curve drawn horizontally? The small size of the NZ market relative to world supply means that the rest of the world will meet NZ's requirements at the same price.
Outline factors, other than exchange rate movements, that will influence the demand for NZ's exports. Quality of NZ made products/ overseas countries' income/ overseas countries' tastes and preferences.
What contributes to the balance on goods? Export of goods minus import of goods. Goods include: cheese, wool, timber, oil, equipment etc...
What contributes to the balance on services? Export of services minus import of services. Services include: transport, insurance, tourism, government services etc...
What contributes to the balance on income? Income form investment abroad minus income from foreign investment. Income includes: dividends, interest, profit transmitted between countries.
What contributes to the balance on current transfers? Inflow of current transfers minus outflow of current transfers. Current transfers include: gifts of goods and services, foreign aid and money sent to relatives overseas.
What contributes to the balance on current account? Balance on goods, services, income and transfers.
What contributes to the balance on capital account? Non-produced, non-financial assets. Capital account inflow minus capital account outflow.
What contributes to the balance on financial account? Foreign investment in NZ minus NZ investment abroad. Finances include: trade between NZ and the rest of the world in existing assets, investment in new or existing business operations, loans, loan repayments etc...
What contributes to the balance of payments? Current account plus capital account plus financial account.
What contributes to the net errors and omissions? The opposite figure of the balance of payments to make the accounts equal zero. Eg if B of P equals -$540m, this equals $540m.
What is the difference between a firm and an industry? A firm is a single business while and industry is the sum of all firms which produce one type of product.
What is a sunrise industry? An expanding industry where prospects and profits are likely to be improving.
What is a sunset industry? A declining industry where resources will be shifted away into other industries where their prospects are better and the returns to the owners are higher.
Created by: caitlinrox