The Global Economy

Question 1

Free Trade

Answer 1

free trade refers to the absence of government intervention of any kind of international trade, so trade takes place without any restrictions between individuals, firms or governments of different countries

Question 2

Specialisation

Answer 2

occurs when an individual, firm or country concentrates production on one or a few goods and services

Question 3

absolute advantages

Answer 3

when a country is able to produce a good using fewer resources than another country

Question 4

comparative advantage

Answer 4

when a country has a lower opportunity cost in the production of a good than another country

Question 5

factor endowments

Answer 5

quality and quantity of factors of production, and levels of technology

Question 6

trade liberalisation

Answer 6

the removal or reduction of barriers on the free exchange of goods between nations

Question 7

trade protection

Answer 7

government intervention in international trade through imposition of trade restrictions preventing free entry of imports into a country

Question 8

tariff

Answer 8

taxes on imported goods, a.k.a. ‘customs duties’

Question 9

quota

Answer 9

legal limit to the quantity of a good that can be imported over a particular period of time

Question 10

export/ production subsidy

Answer 10

payment by the government to a firm for each unit of output produced/exported (depending if its production or export subsidy)

Question 11

administrative barriers

Answer 11

trade protection measures taking the form of administrative procedures to prevent free flow of imports into a country. Often considered a form of ‘hidden’ trade protection. Imposing obstacles on imports to reduce their quantity.

Question 12

infant industry

Answer 12

a new domestic industry that has not had time to establish itself and achieve economies of scale (had not time to become efficient producers)

Question 13

dumping

Answer 13

practice of selling a good in international market at a price lower than its production cost

Question 14

diversification

Answer 14

change involving greater variety

Question 15

unfair competition

Answer 15

practices that countries may use in order to gain a competitive advantage over other countries in order to unfairly increase their exports at the expense of other countries.

Question 16

economic integration

Answer 16

economic co-operation between countries and co-ordination of their economic policies

Question 17

Preferential Trade Agreement (PTA)

Answer 17

agreement between two or more countries to lower trade barriers on particular products in trade between each other.

Question 18

bilateral trade agreement

Answer 18

agreement between two countries

Question 19

multilateral trade agreement

Answer 19

agreement between many countries

Question 20

regional trade agreement

Answer 20

trade agreements between a group of countries that are within a geographical region

Question 21

trading bloc

Answer 21

group of countries that have agreed o reduce tariff and other barriers to trade for the purpose of encouraging free or freer trade and co-operation between them.

Question 22

Free Trade Area (FTA)

Answer 22

group of countries that agree to gradually eliminate trade barriers between themselves

Question 23

customs union

Answer 23

group of countries with FTA requirements and in addition adopt a common policy towards all non-member countries

Question 24

common market

Answer 24

group of countries that continue to have common external policy (as in a customs union) and in addition, they agree to eliminate all restrictions on movements of any factors of production within them.

Question 25

trade creation

Answer 25

situation where higher cost products (imported or domestically produced are replaced by lower cost imports)

Question 26

trade diversion

Answer 26

situation where lower cost imports are replaced by higher cost imports from a member after the formation of the bloc.

Question 27

monetary union

Answer 27

further integration that a common market and occurs when the member countries of a common central bank adopt a common currency and a common central bank responsible for monetary policy

Question 28

exchange rate

Answer 28

value of one currency expressed in terms of another $1 = £X

Question 29

floating exchange rate system

Answer 29

in a floating exchange rate system, the equilibrium exchange rate are determined by eh demand and supply at the point where the quarry of a currency demanded equals quantity supplied, without any government or central bank intervention

Question 30

appreciation

Answer 30

increase in the value of a currency in a floating exchange rate system

Question 31

depreciation

Answer 31

a fall in the value of a currency in a floating exchange rate system

Question 32

remittances

Answer 32

transfer of Monet from one country to another, in most cases by foreign workers who send money from their earnings in the country of residence to their family back home.