T4.1.6 - 4.1.9: International Econ P2

Question 1

What is an ad valorem tariff?

Answer 1

An import tariff rate charged as a percentage of the price.

Question 2

What does ‘beggar my neighbour’ refer to?

Answer 2

A policy that seeks to promote a country’s economy at the expense of another country.

An obvious example is the use of tariff barriers.

Question 3

What are countervailing tariffs?

Answer 3

An additional import tariff imposed on imported goods to offset subsidies provided to producers or exporters by the government of the exporting country.

Question 4

What is creeping protectionism?

Answer 4

A period of time where import tariff rates rise and where countries introduce quotas and barriers to the mobility of labour and capital.

Question 5

What is dumping?

Answer 5

When a producer in one country exports a product to another country at a price which is below the price it charges in its home market or is below average costs of production.

Question 6

What is a quota?

Answer 6

A restriction on the volume of exports that can be sold overseas - this acts as a supply constraint in international markets and can lead to higher prices in global markets.

Question 7

What is a tariff?

Answer 7

A tax on the value of imported products - can be specific or ad valorem.

Question 8

What is the capital account in the balance of payments?

Answer 8

Formerly known as the financial account, now a small section of the account which includes effects of debt forgiveness, sale/transfer of patents, copyrights, franchises, leases, and other transferable contracts across borders.

Question 9

What are capital flows?

Answer 9

Movements of capital between countries. Outward capital flows are movements of domestically owned capital abroad; inward capital flows are movement of foreign-owned capital to the domestic economy.

Question 10

What are creditor nations?

Answer 10

Those nations that have a balance of payments surplus on the current account.

Question 11

What is the current account?

Answer 11

Measures the difference between money and credit going in and out of an economy (through exports, imports, and income paid on assets both home and abroad).

Question 12

What is a current account deficit?

Answer 12

The amount by which money relating to trade and investment income going out of a country is more than the amount coming in.

Question 13

What is a current account surplus?

Answer 13

The amount by which money relating to trade and investment income going out of a country is less than the amount coming in.

Question 14

What are debtor nations?

Answer 14

Those nations that have a persistent balance of payments deficit on the current account.

Question 15

What are domestic remittances?

Answer 15

Money received from family members or friends living in a different city of their own country.

Question 16

What are expenditure-reducing policies?

Answer 16

Policies designed to lower real incomes and aggregate demand and thereby cut demand for imports.

E.g. higher direct taxes or increased interest rates.

Question 17

What are expenditure-switching policies?

Answer 17

Policies designed to change the relative prices of exports and imports.

For example - an exchange rate depreciation ought to improve the price competitiveness of exports and also make imports more expensive.

Question 18

What is export revenue?

Answer 18

Sales from selling goods and services overseas.

Question 19

What are export subsidies?

Answer 19

A financial benefit conferred on a firm by the government that is contingent on production.

Question 20

What is external debt?

Answer 20

External debt is owed by governments, households, and businesses in a country to external (overseas) creditors.

Examples include government bonds sold to foreign investors and private sector credit from foreign banks.

Question 21

What is external demand?

Answer 21

The net change in demand for goods and services from exports minus imports (M).

Question 22

What is the financial account in the balance of payments?

Answer 22

Transactions that result in a change of ownership of financial assets and liabilities between residents of different countries.

Question 23

What are financial flows?

Answer 23

Flows of capital across national borders including debt and equity.

Question 24

What is foreign direct investment (FDI)?

Answer 24

FDI is the acquisition of a controlling interest in productive operations abroad by businesses resident in the home economy.

Question 25

What is hot money?

Answer 25

Money that flows freely and quickly around the world looking to earn the best rate of return.

Question 26

What is portfolio investment?

Answer 26

Portfolio investment happens when people or businesses from one country buy shares or other securities such as bonds in other nations.

Question 27

What is primary income in the balance of payments?

Answer 27

The net flow of profits, interest, and dividends from investments in other countries.

Question 28

What are remittances?

Answer 28

When migrants send home part of their earnings in the form of either cash or goods to support their families.

Question 29

What is secondary income in the balance of payments?

Answer 29

Net flow of overseas aid, debt relief, military grants, and so on.

Question 30

What is a structural trade deficit?

Answer 30

A trade deficit that arises due to supply-side weaknesses rather than a change in GDP or currency - caused by poor competitiveness.

Question 31

What is appreciation of currency?

Answer 31

A rise in the external value of one currency against another or a basket of currencies.

Question 32

What is the Big Mac Index?

Answer 32

The Big Mac index is a way of measuring Purchasing Power Parity (PPP) between different countries.

Question 33

What is a clean float?

Answer 33

A currency that floats according to market forces, free from government intervention.

Question 34

What are exchange rates?

Answer 34

The value of one currency in relation to another.

Question 35

Devaluation

Answer 35

When a country tries to devalue its currency to increase its price competitiveness in domestic and overseas markets. However, this often encourages other countries to also devalue leading to only temporary increases in the price competitiveness of exports.

Question 36

Currency reserves

Answer 36

Money or other assets held by a central bank or other monetary authority
so that it can pay if need be its liabilities (debts).

Question 37

Currency union

Answer 37

A group of countries (or regions) using a common currency – for example
19 countries that have entered the single European currency (as of 2019).

Question 38

Depreciation of currency

Answer 38

A fall in the external value of one currency against another.

Question 39

Devaluation of currency

Answer 39

A fall in the external value of a currency inside a fixed exchange rate
system.

Question 40

Fixed exchange rate

Answer 40

An exchange rate that is fixed against other major currencies through
action by governments or central banks, usually within small margins of
fluctuation around the central rate. Likely to involve periodic intervention in
the foreign exchange market by one or more central banks to buy or sell
the currency in question if it moves below or above its margins.

Question 41

Floating exchange rate

Answer 41

free-floating currency where the external value of a currency depends wholly on market forces of supply and demand. IMF classifies as free
floating only those currencies where central bank interventions are limited to no more than three instances in the preceding six months.

Question 42

Foreign exchange reserves

Answer 42

The reserves of gold or foreign currencies (e.g. US dollars or Euros) typically held by central banks on behalf of their national government.

Question 43

J curve effect

Answer 43

The effect of currency depreciation on the trade deficit depends on price elasticity of demand for exports & imports. The J Curve effect says a trade deficit can worsen after depreciation but improve in the medium term if the Marshall-Lerner condition holds.

Question 44

Managed floating currency

Answer 44

floating exchange rate but subject to intervention by the monetary authorities, in order to resist fluctuations that they consider to be undesirable.

Question 45

Marshall-lerner

Answer 45

predicts the circumstances in which a fall in the
exchange rate improves the current account of the balance of payments. A devaluation of a currency improves the BoP only if the sum of price elasticities of demand for imports & exports are greater than one.
(Condition is that: PedX + PedM > 1)

Question 46

Nominal exchange rate

Answer 46

the price of the domestic currency (say the
UK pound) in another foreign currency (say, U.S. dollars), currently about
US $1.55 or so.

Question 47

PPP exchange rate

Answer 47

The rate at which the currency of one country is converted into that of another to purchase the same amount of goods and services in each
country.

Question 48

Purchasing power parity (PPP)

Answer 48

current exchange rate is adjusted so that a basket of goods and services can be bought for the same amount of dollars.

Question 49

Real exchange rate

Answer 49

product of the nominal exchange rate (the dollar cost of a euro, for example) and the ratio of prices between the two countries.

Question 50

Reserve currency

Answer 50

foreign currency such as the US dollar ($) that is held in countries’ official reserves because of its global importance as a medium of exchange and its inherent stability.

Question 51

Revaluation of currency

Answer 51

increase in the external value of a currency inside a fixed exchange rate system.

Question 52

Reverse J curve effect

Answer 52

When an appreciation of the exchange rate initially causes the current account or trade balance to improve.

Question 53

Speculation

Answer 53

This is a risky action in which a person or organisation tries to predict what will happen to the price of an asset and buys / sells accordingly in order to make a profit. A speculator takes advantage of market price fluctuation.

Question 54

Potential output

Answer 54

economy’s maximum productive capacity in a physical sense. The
largest output that could be produced, given the prevailing state of
technology.

Question 55

Potential productivity

Answer 55

Estimates of the productivity of the labour force i.e. output per person
employed or output per person hour. Improvements in productivity have an
important effect on long run aggregate supply and trend growth.

Question 56

Protectionism

Answer 56

Tariff and non-tariff restrictions on imports to protect domestic producers.

Question 57

Relative export prices

Answer 57

A country’s export prices relative to those of a competing economy.

Question 58

Relative unit labour costs

Answer 58

Labour costs per unit of output relative to those in other countries. Relative
unit labour costs will rise when i) A country’s exchange rate appreciates, ii)
wage costs rise relatively faster than other nations and iii) when labour
productivity growth is relatively slower than in other economies.