International Trade Definitions

Question 1

Factor Endowments

Answer 1

The factors of production that a country possesses, or is ‘endowed’ with; differing factors forms the basis for comparative advantage.

Question 2

Comparative Advantage (HL)

Answer 2

A country has a comparative advantage in producing a good over another country if the opportunity cost (or relative cost) of producing that good is lower. (HL Only)

Question 3

Absolute Advantage (HL)

Answer 3

The ability of an individual, firm or country to produce a good using fewer resources than others. So the country is most efficient at producing something. (HL Only)

Question 4

Free Trade

Answer 4

Trade in which goods can be imported and exported without any barriers in the form of tariffs, quotas, or other restrictions – often seen as engine of growth because it encourages countries to specialize in activities in which they have a comparative advantage.

Question 5

Foreign Direct Investment

Answer 5

Long term overseas investment by multinational corporations in fixed capital and financial investments like stocks and bonds, in order to gain income.

Question 6

Protectionism

Answer 6

The strategy where governments impose trade barriers to protect domestic industries from import competition

Question 7

Embargo

Answer 7

The total ban on trade on trade imposed from outside or internally.

Question 8

Tariff

Answer 8

A government tax or duty applied to a price of an import as it comes into a country. A tariff is an ad valorem tax (percentage).

Question 9

Quota

Answer 9

A physical limit imposed on the amount of goods which may be imported, expressed as the number of unit of the good.

Question 10

Voluntary Export Restraints

Answer 10

Where the exporting country agrees to a voluntary quota of exports into another country.

Question 11

Exchange Controls

Answer 11

Limit the amount of foreign currency available to imports.

Question 12

Import Licensing

Answer 12

A license to import; needs to be obtained from the government. Oftentimes a country makes in very difficult to get the permit.

Question 13

Administrative Barriers

Answer 13

Barriers set up to make it expensive for imports to compete.

Question 14

Subsidy

Answer 14

a payment (or tax incentive) by a government or other authority to producers in an industry to which has the effect of lowering prices and increasing output.

Question 15

Dumping

Answer 15

The practice of selling a good in international markets at a price that is below the cost of producing it, usually due to a government subsidy.

Question 16

Infant industries

Answer 16

A new domestic industry that has not had time to establish itself and achieve efficiencies in production.

Question 17

Exchange Rate

Answer 17

The value of a currency in terms of another. Currencies are traded in the foreign exchange market (FOREX).

Question 18

Floating Exchange Rate

Answer 18

An exchange rate that is exposed to market forces.

Question 19

Fixed or Pegged Currency

Answer 19

An exchange rate where the value is determined by a Central Bank (government policy), and are not free to fluctuate on the international money market. The value is usually set to a specific currency or to an index of currencies.

Question 20

Managed Exchange Rate or Soft Peg

Answer 20

A currency that is exposed to market forces, but also has the intervention of a country’s central bank to help determine its value.

Question 21

Depreciation

Answer 21

A FALL in the value of a currency under a free floating mechanism, relative to another currency.

Question 22

Appreciation

Answer 22

A RISE in the value of the currency under a free floating mechanism, relative to another currency

Question 23

Devaluation

Answer 23

is a decision made by a central bank or government where the value of a currency is decreased relative to another currency under a fixed exchange mechanism.

Question 24

Revaluation

Answer 24

is a decision made by a central bank or government where the value of a country is increased relative to another country under a fixed exchange mechanism.

Question 25

Speculators

Answer 25

in order to make short term profits, will move money around to anticipate exchange rate movement, so if they believe a currency is overvalued they will sell (leads to a depreciation), and vice versa. This is the main reason for day to day fluctuations in currencies (80% of all currency changes are caused by speculators)

Question 26

Purchasing Power Parity

Answer 26

The purchasing power of a country’s currency: the number of units of that currency required to purchase the same basket of goods and services in another country. The PPP theory states that movements in relative exchange rates will be exactly offset by movements in exchange rates.

Question 27

The Carry Trade

Answer 27

The borrowing from one country with relatively low interest rates to invest in an economy with higher interest rates.

Question 28

The Balance of Payments

Answer 28

A systematic record of all economic transactions between one country and the rest of the world over a given period of time, usually one year

Question 29

Current Account

Answer 29

is a measure of the flow of funds from trade in goods and services (value of exports minus imports), plus net income flows (profits, interest, wages, rents) and net transfers of money (foreign aid, grants, pensions, etc).

Question 30

Financial Account

Answer 30

is the (net) balance arising from):
• flows of foreign direct investment
• flows of portfolio investment
• changes in reserve assets.

Question 31

Capital Account

Answer 31

The record of asset transactions across international borders.

Question 32

The Balance of Merchandise Trade (a.k.a. the balance of trade)

Answer 32

The difference between the export and import of goods, also called visibles.

Question 33

Invisible Balance

Answer 33

The difference between the export and import of services. Examples: tourism, banking and insurance

Question 34

Capital Inflow

Answer 34

The sum of all foreign purchases of long-term and short-term assets. Long-term assets are domestic companies, farms, shops bought by foreigners. Short-term assets are bonds and bank deposits.

Question 35

Current Account Deficit/Surplus

Answer 35

If the debits generated from the buying of goods and services and from income and unrequited transfers exceed the credit from selling goods and services and from receiving income and requited transfers then the current account is in deficit. Surplus is the opposite.

Question 36

Capital Account Deficit/Surplus

Answer 36

When long-term and short-term capital outflow exceeds long-term and short-term capital inflow. A capital account surplus is the opposite.

Question 37

Expenditure Switching (HL)

Answer 37

The imposition of protectionist policies such as tariffs to reduce the size of the import bill or depreciating/devaluing the currency to improve the balance of payments. (HL Only)

Question 38

Expenditure Changing (HL)

Answer 38

Deflationary policies used to reduce national income and therefore reduce imports and improve the balance of payments. (HL Only)

Question 39

Marshall-Lerner Condition

Answer 39

In general a depreciation of a currency will improve the balance of payments if elasticities (PED) for exports and imports are high, and worsen if they are low.

Question 40

The J-Curve effect

Answer 40

Theory that the balance of payments will worsen before it improves when there is depreciation of a currency. (HL Only)

Question 41

Globalization (Economically)

Answer 41

Increased openness of economies to international trade, financial flows, and direct foreign investment. Broader: is a process by which the economies of the world become increasingly integrated, leading to a global economy and, increasingly global economic policy making, for example, through international agencies like the WTO.

Question 42

Trading Bloc

Answer 42

A group of countries that have joined together to benefit from free trade and economic integration.

Question 43

Free Trade Area

Answer 43

A trading bloc where the countries eliminate trade barriers between themselves.

Question 44

Preferential Trade Agreement

Answer 44

A type of economic integration that removes (or reduces) trade barriers for certain products to countries that are in the agreement.

Question 45

Customs Union

Answer 45

Individual country eliminate trade barriers and act as a group in all trade negotiations.

Question 46

Common Market

Answer 46

All of a customs union, but include the addition of a free flow of factors of production.

Question 47

Trade Creation

Answer 47

Causes total economic welfare to increase as a result of a new trade grouping.

Question 48

Trade Diversion

Answer 48

When a country may have already been benefiting from low cost goods on the world market but upon joining a trading group, have to pay a higher cost from a trading bloc member.

Question 49

The World Trade Organization

Answer 49

The Geneva based WTO is intended to oversee trade agreements and settles trade dispute among member states. In 1995 the WTO was established to replace the 47 year old General Agreement on Tariffs and Trade (GATT). There are around 160 member countries.

Question 50

Fair Trade

Answer 50

Producers must be small scale and part of a co-operative, and they deal directly with MDCs companies. Producers are paid substantially higher. It can save these farmers from bankruptcy. Around 500,000 small scale farmers are benefiting in 36 of the world’s poorest countries.

Question 51

Terms of Trade (HL)

Answer 51

Prices of exported goods relative to the prices of imported goods.

Question 52

Improving terms of trade (HL)

Answer 52

When export prices rise relative to import prices

Question 53

Worsening terms of trade (HL)

Answer 53

When import prices rise relative to export prices

Question 54

Measurement of terms of trade: (HL)

Answer 54

like retail price index a weighted index of export and import prices is determined depending on their percentage value. 100 is set as the base year, and is the reference point for future years.

index of export prices x 100 = terms of trade
index of import prices 1