International economics

Question 1

administrative barriers

Answer 1

• trade protection measures in the form of administrative procedures that countries can use to prevent free flow of imports into a country (NOTE: not the obvious trade protection measures like tariffs)
  ex) controls on packaging, customs procedures like inspections

Question 2

anti-dumping

Answer 2

• justifies trade protection policies
• if a country’s trading partner practices dumping, the country can impose trade protection measures to limit quantities of dumped good

Question 3

appreciation of a currency

Answer 3

-increase in the value of a currency in a floating exchange rate system or managed exchange rate system

Question 4

automatic stabilisers

Answer 4

• factors that automatically work toward stabilizing the economy by reducing the short term fluctuations of the business cycle
• include progressive income taxes and unemployment benefits

Question 5

balance of payments

Answer 5

• a record of all transactions between the residents of a country and the residents of other countries, showing all payments received from other countries (credits), and all payments made to other countries (debits)
• sum of credits should be equal to sum of debits

Question 6

balance of trade in goods

Answer 6

the value of exports of goods minus the value of imports of goods over a specific time (usually a year)

Question 7

balance of trade in services

Answer 7

the value of exports of services minus the value of imports of services over a specific time (usually a year)

Question 8

balance on capital account

Answer 8

the sum of inflows minus outflows of funds in the capital account of the balance of payments

Question 9

balance on current account

Answer 9

the sum of inflows minus outflows of funds in the current account of the balance of payments

Question 10

balance on financial account

Answer 10

the sum of inflows of funds minus outflows in the financial account of the balance of payments

Question 11

bilateral trade agreement

Answer 11

any trade agreement involving two trading partners, usually two countries. It can also involve a trade agreement between one country and another group of countries when this group acts as a single unit
Ex) European Union

Question 12

common market

Answer 12

a type of trading bloc in which countries that have formed a customs union proceed further to eliminate any remaining tariffs in trade between them; they continue to have a common external policy, and agree to eliminate all restrictions on movements of any factors of production
Ex) European Economic Community (EEC), the precursor of the present European Union

Question 13

credit items

Answer 13

the payments received from other countries, entering the balance of payments accounts with a plus sign; they represent an inflow of foreign exchange into a country

Question 14

current account

Answer 14

-includes the balance of trade (exports o minus imports of goods) plus the balance on services (exports of services minus imports of services), plus inflows minus outflows of income and current transfers

Question 15

current account deficit

Answer 15

occurs when the current account balance has a negative value, meaning that debits are larger than credits (there is excess of debits)

Question 16

current account surplus

Answer 16

occurs when the current account balance has a positive value, meaning that credits are larger than debits (there is excess of credits)

Question 17

current expenditures

Answer 17

• refers to government spending on day-to-day items that are recurring and items that are consumed as a good or service is provided
• include wages and salaries (for gov’t employees), spending for supplies and equipment for daily operation of gov’t activities (ex. school supplies and medical supplies), provision of subsidies, and interest payments on gov’t loans

Question 18

current transfers

Answer 18

an item in the current account of the balance of payments, refers to inflows and outflows of funds for items including gifts, foreign aid, and pensions

Question 19

customs union

Answer 19

-a type of trading bloc, consisting of a group of countries that fulfil the requirements of a free trade area (eliminating trade barriers) and adopt a common policy towards all non-member countries
-achieves a higher degree of economic integration than a free trade area, but lower than a common market
Ex) European Union

Question 20

debit items

Answer 20

payments made to other countries, entering the balance of payments accounts with a minus sign; they represent an outflow of foreign exchange from a country

Question 21

deficit

Answer 21

the deficiency of something compared with something else

1. In the balance of payments, a ‘deficit’ in an account occurs when the credits (inflows of money from abroad) are smaller than the debits (outflows of money to other countries)
2. In the case of government budget, a ‘deficit’ occurs when government revenues are smaller than government expenditures

Question 22

depreciation

Answer 22

decrease in the value of currency in the context of a floating exchange rate system or managed exchanged rate system

Question 23

devaluation

Answer 23

decrease in the value of currency in the context of a fixed exchange rate system

Question 24

direct investment

Answer 24

in the balance of payments, refers to inflows or outflows of funds for the purpose of foreign direct investment

Question 25

diversificatoin

Answer 25

change involving greater variety, and is used to refer to increasing the variety of goods and services produced and/or exported by a country
Note: OPPOSITE of “specialization”

Question 26

dumping

Answer 26

the practice of selling a good in international markets at a price that is below the cost of producing it (usually by providing export subsidies); while it is illegal according to international trade rules, many countries practice it anyway.

Question 27

errors and omissions

Answer 27

refers to an item that is included to account for possible omissions and errors in items that have been included or excluded, in order to ensure that the balance of payments balances

Question 28

exchange rate

Answer 28

the rate at which one currency can be exchanged for another, or the number of units of foreign currency that correspond to the domestic currency; can be thought of as the ‘price’ of a currency, which is expressed in terms of another currency

Question 29

financial account

Answer 29

refers to inflows minus outflows of funds due to foreign direct investment, portfolio investment and changes in reserve assets

Question 30

foreign exchange

Answer 30

refers to foreign national currencies

Question 31

free trade

Answer 31

the absence of government intervention of any kind in international trade, so that trade takes place without any restrictions (or barriers) between individuals or firms in different countries

Question 32

free trade area

Answer 32

• a type of trading bloc, consisting of a group of countries that agree to eliminate trade barriers between themselves; it is the most common type of integration area, and involves a lower degree of economic integration than a customs union or common market
• each member country can pursue its own trade policy towards non-member countries
  ex) NAFTA

Question 33

freely floating exchange rate

Answer 33

• an exchange rate determined entirely by market forces, or the forces of supply and demand
• no gov’t intervention in the foreign exchange market to influence the value of the exchange rate

Question 34

freely floating exchange rate system

Answer 34

an exchange rate system where exchange rates are determined entirely by market forces

Question 35

income

Answer 35

in the current account of the balance of payments, it refers to inflows of wages, rents, interest and profits earned abroad minus the same income factors that are sent abroad

Question 36

infant industry

Answer 36

a new domestic industry that has not had time to establish itself and achieve efficiencies in production, and may therefore be unable to compete with more ‘mature’ competitor firms from abroad

Question 37

managed exchange rates

Answer 37

• exchange rates that are mostly free to float to their market levels over long periods of time
• but central banks periodically intervene to stabilize them over the short term

Question 38

managed exchange rate system

Answer 38

also known as the “managed float”

Question 39

multilateral trade agreement

Answer 39

• a trade agreement between many countries

- mainly carried out within the framework of the WTO and involve agreements between WTO member countries

Question 40

non-produced, non-financial assets

Answer 40

a part of the capital account of the balance of payments, which includes a variety of items such as mineral rights, forestry rights, fishing rights and airspace