The Global Economy

Question 1

Free trade

Answer 1

The absence of government intervention/protectionism in any kind of international trade, so that trade takes place without any restrictions or barriers between countries

Question 2

Protectionism/trade barriers

Answer 2

Government intervention in international trade through the imposition of trade restrictions/barriers to prevent the free entry of imports into a country and protect the domestic economy from foreign competition

Question 3

Trade war

Answer 3

Imposition of a trade barrier by one country which can trigger a series of retaliatory (protectionist) policies by trade partner(s)

Question 4

Tariff

Answer 4

Taxes on imported goods, most common form of trade restriction (to protect against foreign competition or raise govt revenue)

Question 5

Quota

Answer 5

A type of protection that involves setting a legal, physical limit on the quantity or value of a good that can be imported into a country over a particular time period

Question 6

Subsidy

Answer 6

A form of protection against imports, resulting when the govt gives money to an industry to reduce COP, increase output of a good, protect producers from foreign imports, reduce the price of a product (for free trade)

Question 7

Administrative barriers

Answer 7

Trade protection measures taking the form of administrative procedures that countries may use to prevent the free flow of imports into a country (eg customs procedures involving inspections and valuation, controls on packaging, etc)

Question 8

Dumping

Answer 8

Selling a good in international markets at a price below the cost of producing it or below the price charged in the home market (anti-dumping is an argument used to justify trade protection, and is deemed illegal)

Question 9

Infant/sunrise industry

Answer 9

A new domestic industry that has not had time to establish itself and benefit from economies of scale, therefore likely being unable to compete with older competitor firms from abroad and requiring protection to compete with imports (arguments for protectionism)

Question 10

Economic integration

Answer 10

Economic interdependence between countries, usually achieved by an agreement between countries to reduce or eliminate trade and other barriers between them

Question 11

Trading bloc

Answer 11

A group of countries that have agreed to reduce tariffs and other trade barriers for the purpose of encouraging the development of free/freer trade and cooperation between them

Question 12

Regional trade agreement

Answer 12

A trade agreement between several countries that are located within a geographical region (eg NAFTA, ASEAN)

Question 13

Preferential trade agreement

Answer 13

An agreement between two or more countries to lower trade barriers between them on particular products, resulting in easier access to the markets of other members for selected products, compared with the actress of countries that are not members

Question 14

Bilateral trade agreement

Answer 14

Any trade agreement involving 2 trading partners, aiming to lower trade barriers and increase trade (usually 2 countries, but a large group of countries that act as a single unit, eg EU, can also count)

Question 15

Multilateral trade agreement

Answer 15

A trade agreement between many countries (currently within the framework of the WTO)

Question 16

Free trade area

Answer 16

A type of trading bloc, whereby a group of countries agree to eliminate trade barriers between themselves but each have their own external policy towards non-members

Question 17

Customs union

Answer 17

A type of trading bloc, where members trade freely amongst themselves and adopt common external policies with non-members; act as a group in trade negotiations

Question 18

Common market

Answer 18

A type of trading bloc in which countries that have a free trade agreement between them, have a common external policy, and allow free movement of FOPs (esp labour and capital), eg EU

Question 19

Monetary union

Answer 19

A high form of economic integration, involving the adoption by a group of countries of a common currency, eg euro zone, being members of a common market and having a common central bank

Question 20

WTO

Answer 20

An international organisation that provides the institutional and legal framework for the trading system that provides the institutional and legal framework for the trading system that exists between member nations worldwide, responsible for liberalising trade, operating a system of trade rules and providing a forum for trade negotiations between governments, and for settling trade disputes

Question 21

Multinational corporation (MNC)

Answer 21

A company that has productive units in more than once country; carries out FDI in another country (at least 10% of firm in host country)

Question 22

Foreign direct investment (FDI)

Answer 22

Long-term investment in another country carried out by MNCs, representing at least 10% ownership; investment in productive facilities; part of financial account

Question 23

Exchange rate

Answer 23

The value of one currency expressed in terms of another currency
Price of another currency

Question 24

Fixed exchange rate

Answer 24

Exchange rate that is fixed by the central bank against another currency, a basket of currencies or gold, and cannot change in response to changes in currency supply and demand; constant intervention by central bank or govt

Question 25

Floating exchange rate

Answer 25

Exchange rate determined entirely by market forces (supply and demand for the currency), with no govt intervention to influence the value of the exchange rate

Question 26

Appreciation

Answer 26

An increase in the value of a currency in terms of another currency (floating exchange rate system) - more units of another currency are needed to exchange for a unit of the appreciated currency

Question 27

Depreciation

Answer 27

Decrease in the value of a currency (floating exchange rate system), due to market forces

Question 28

Revaluation

Answer 28

An increase in the value of a currency (fixed exchange rate system) set by the central bank - deliberate increase in its value

Question 29

Devaluation

Answer 29

A decrease in the value of a currency (fixed exchange rate system), as a result of govt/central bank intervention

Question 30

Balance of payments

Answer 30

BoP = current + capital + financial accounts = 0
Current = - (capital + financial)

Question 31

Current account

Answer 31

Balance of trade of goods and services (X-M), inflows-outflows of income and current transfers
Include funds for gifts, foreign aid, pensions
4 components: goods, services, income, current transfers

Question 32

Current account surplus/deficit

Answer 32

When the balance on the current account (which measures the net value of trade of goods and services, net income flows and net transfers) is positive/negative
Inflows larger/smaller than outflows

Question 33

Capital account

Answer 33

(Inflows - outflows) of funds for capital transfers and the purchase or use of non-produced natural resources
2 components
Debt forgiveness, non-life insurance claims
Intangibles: mineral/forestry/fishing rights, airspace, patented entities

Question 34

Financial account

Answer 34

Net balance arising from flows of FDI, portfolio investment, changes in reserve assets and official borrowing
Net change in foreign ownership of domestic financial assets
4 components
FDI: purchase of (part of a) firm from another country
Portfolio: shares, bonds, derivatives, trading of commodities and currencies (only from the purchase not income derived from investment - eg buying a stock vs receiving dividend)
Reserve assets: foreign currency held by central banks (paper money, deposits, govt bonds, securities)
Official borrowing: when govt borrows or lends money from the IMF, World Bank or foreign govt

Question 35

Remittances

Answer 35

Transfer of money from one country to another, often by foreign workers who send their earnings in the country of residence to their family in their home country

Question 36

Current expenditures

Answer 36

In gov’t budget: spending on day-to-day items that are recurring and items that are used up as the good/service is provided
Eg wages for govt employees, spending for supplies/equip for day-to-day operation of govt activities (eg medical supplies), provision of subsidies, interest payments of govt loans

Question 37

Current transfers

Answer 37

Item in current account of the balance of payments, referring to inflows and outflows of funds between government, not in exchange for a good or service (eg foreign aid)

Question 38

Credit item

Answer 38

Payments received from other countries, entering BoP with a + sign; inflow of foreign exchange into a country
Eg foreigners purchasing local assets, businesses, property, domestically produced goods

Question 39

Debit item

Answer 39

Payments made to other countries, entering BoP accounts with - sign; represent outflow of foreign exchange from a country
Eg money leaving for investments, imports, aid, purchase of foreign businesses

Question 40

Development

Answer 40

Something multidimensional: improvement in the economic wellbeing of a population, like standard of living, income, health, education

Question 41

Sustainability

Answer 41

Development that meets the needs of the present generation without compromising the ability of future generations to meet their needs;
development that doesn’t cause excessive external costs and/or resource depletion

Question 42

Economic development

Answer 42

A broad concept, involving an improvement in the standards of living, reduction in poverty/unemployment, improved health/education, greater equality in income distribution, env protection, increased freedom and economic choice

Question 43

Human development index

Answer 43

A composite indicator measuring health (through life expectancy), education (through mean and expected years of schooling), and standard of living (through GNI per capita at $PPP).

Question 44

Poverty trap

Answer 44

Any linked combination of factors which causes poverty to be self-perpetuating with low income/poverty as the cause
Low income → low saving → low investment → low growth → low income
Low income → low levels of human capital → low productivity → low income

Question 45

Diversification

Answer 45

A process resulting in the production of a greater variety of goods and services that a country produces; strategy to avoid overspecialisation

Question 46

Privatisation

Answer 46

When the govt sells state-owned/public enterprises, firms, assets to the private sector

Question 47

Human capital

Answer 47

The contribution of labour (knowledge, skills and physical effort) to the production process.