International Trade Definitions Flashcards
Factor Endowments
The factors of production that a country possesses, or is ‘endowed’ with; differing factors forms the basis for comparative advantage.
Comparative Advantage (HL)
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)
Absolute Advantage (HL)
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)
Free Trade
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.
Foreign Direct Investment
Long term overseas investment by multinational corporations in fixed capital and financial investments like stocks and bonds, in order to gain income.
Protectionism
The strategy where governments impose trade barriers to protect domestic industries from import competition
Embargo
The total ban on trade on trade imposed from outside or internally.
Tariff
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).
Quota
A physical limit imposed on the amount of goods which may be imported, expressed as the number of unit of the good.
Voluntary Export Restraints
Where the exporting country agrees to a voluntary quota of exports into another country.
Exchange Controls
Limit the amount of foreign currency available to imports.
Import Licensing
A license to import; needs to be obtained from the government. Oftentimes a country makes in very difficult to get the permit.
Administrative Barriers
Barriers set up to make it expensive for imports to compete.
Subsidy
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.
Dumping
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.
Infant industries
A new domestic industry that has not had time to establish itself and achieve efficiencies in production.
Exchange Rate
The value of a currency in terms of another. Currencies are traded in the foreign exchange market (FOREX).
Floating Exchange Rate
An exchange rate that is exposed to market forces.
Fixed or Pegged Currency
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.
Managed Exchange Rate or Soft Peg
A currency that is exposed to market forces, but also has the intervention of a country’s central bank to help determine its value.
Depreciation
A FALL in the value of a currency under a free floating mechanism, relative to another currency.
Appreciation
A RISE in the value of the currency under a free floating mechanism, relative to another currency
Devaluation
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.
Revaluation
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.
Speculators
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)
Purchasing Power Parity
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.
The Carry Trade
The borrowing from one country with relatively low interest rates to invest in an economy with higher interest rates.
The Balance of Payments
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
Current Account
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).
Financial Account
is the (net) balance arising from):
• flows of foreign direct investment
• flows of portfolio investment
• changes in reserve assets.
Capital Account
The record of asset transactions across international borders.
The Balance of Merchandise Trade (a.k.a. the balance of trade)
The difference between the export and import of goods, also called visibles.
Invisible Balance
The difference between the export and import of services. Examples: tourism, banking and insurance
Capital Inflow
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.
Current Account Deficit/Surplus
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.
Capital Account Deficit/Surplus
When long-term and short-term capital outflow exceeds long-term and short-term capital inflow. A capital account surplus is the opposite.
Expenditure Switching (HL)
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)
Expenditure Changing (HL)
Deflationary policies used to reduce national income and therefore reduce imports and improve the balance of payments. (HL Only)
Marshall-Lerner Condition
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.
The J-Curve effect
Theory that the balance of payments will worsen before it improves when there is depreciation of a currency. (HL Only)
Globalization (Economically)
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.
Trading Bloc
A group of countries that have joined together to benefit from free trade and economic integration.
Free Trade Area
A trading bloc where the countries eliminate trade barriers between themselves.
Preferential Trade Agreement
A type of economic integration that removes (or reduces) trade barriers for certain products to countries that are in the agreement.
Customs Union
Individual country eliminate trade barriers and act as a group in all trade negotiations.
Common Market
All of a customs union, but include the addition of a free flow of factors of production.
Trade Creation
Causes total economic welfare to increase as a result of a new trade grouping.
Trade Diversion
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.
The World Trade Organization
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.
Fair Trade
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.
Terms of Trade (HL)
Prices of exported goods relative to the prices of imported goods.
Improving terms of trade (HL)
When export prices rise relative to import prices
Worsening terms of trade (HL)
When import prices rise relative to export prices
Measurement of terms of trade: (HL)
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
