Unit 3 International Economics

Question 1

absolute advantage

Answer 1

where a country is able to produce more output than other countries using the same input of factors of production

Question 2

administrative barriers

Answer 2

any administrative requirement that might prevent or reduce the amount of imports

Question 3

anti-dumping

Answer 3

legislation to protect an economy against the importing of a good at a price below its unit costs of production

Question 4

appreciation

Answer 4

an increase in the value of a country’s currency in a floating exchange rate system

Question 5

balance of payments

Answer 5

accounting record of all transactions (debits and credits) between the households, firms and government of one country, and the rest of the world

Question 6

common market

Answer 6

customs union with common policies on product regulation, and free movement of goods, services, capital and labour

Question 7

comparative advantage

Answer 7

where a country is able to produce a good at a lower opportunity cost of resources than another country

Question 8

current account (of the BoP)

Answer 8

measure of the international flow of funds from trade in goods and services, plus net investment income flows (profit, interest and dividends) and net transfers of money (foreign aid, grants and remittances)

Question 9

current account deficit

Answer 9

where revenue from the exports of goods and services and income flows is less than the expenditure on the import of goods and services and income flows in a given year

Question 10

current account surplus

Answer 10

where revenue from the exports of goods and services and income flows is greater than the expenditure on the import of goods and services and income flows in a given year

Question 11

customs union

Answer 11

an agreement made between countries, where the countries agree to work towards free trade among themselves and they also agree to adopt common external barriers against any country attempting to import into the customs union

Question 12

depreciation

Answer 12

decrease in the value of a country’s currency in a floating exchange rate system

Question 13

deterioration in the terms of trade

Answer 13

where the index of the average price of exports falls relative to the index of the average price of imports

Question 14

dumping

Answer 14

selling of a good in another country at a price below its unit cost of production

Question 15

economic integration

Answer 15

refers to economic interdependence between countries, usually achieved by agreement between countries to reduce or eliminate trade barriers between them

Question 16

exchange rate

Answer 16

value of one currency expressed in terms of another currency

Question 17

financial account (of the BoP)

Answer 17

measure of the net change in foreign ownership of domestic financial assets, including foreign direct investment, portfolio investment and changes in foreign reserves

Question 18

fixed exchange rate

Answer 18

exchange rate regime where the value of a currency is fixed to the value of another currency

Question 19

floating exchange rate

Answer 19

exchange rate regime where the value of a currency is allowed to be determined solely by the demand for, and supply of, the currency on the foreign exchange market

Question 20

free trade area

Answer 20

agreement made between countries, where the countries agree to work towards free trade among themselves, but are able to trade with countries outside the free trade area in whatever way they wish

Question 21

improvement in the terms of trade

Answer 21

where the index of the average price of exports rises relative to the index of the average price of imports

Question 22

International Monetary Fund IMF

Answer 22

organization working to foster global monetary cooperation, secure financial stability, facilitate international trade and reduce poverty

Question 23

international reserves

Answer 23

foreign currencies held by governments (central banks) as a result of international trade

Question 24

J-curve

Answer 24

suggests that in the short term, a fall in the value of the currency will lead to a worsening of the current account deficit, before things improve in the long term

Question 25

Marshall-Lerner condition

Answer 25

states that a depreciation, or devaluation, of a currency will only lead to an improvement in the current account balance of the elasticity of demand for exports plus the elasticity of demand for imports is greater than one

Question 26

monetary union

Answer 26

where two or more countries share the same currency and have a common central bank

Question 27

overvalued currency

Answer 27

when the value of a currency is believed to be higher than what is perceived to be its market equilibrium value

Question 28

preferential trade agreement

Answer 28

where a country agrees to give preferential access, e.g. reduced tariffs, to certain products from one or more trading partners

Question 29

purchasing power parity PPP

Answer 29

special exchange rates between currencies that makes the buying power of each currency equal to their buying power of US$ 1 and therefore equal to each other

Question 30

quota

Answer 30

import barriers that set limits on the quantity or value of imports that may be imported into a country

Question 31

revaluation

Answer 31

increase in the value of a country’s currency in a fixed exchange rate system

Question 32

speculation (in exchange rates context)

Answer 32

where foreign traders make a decision to buy or sell a currency based on their expectations of future exchange rate movements

Question 33

tariff

Answer 33

duty (tax) that is placed upon imports to protect domestic industries from foreign competition

Question 34

terms of trade

Answer 34

index that shows the value of a country’s average export prices relative to their import prices

Question 35

trade

Answer 35

exchange of goods or services

Question 36

trade barriers

Answer 36

anything which prevents free trade between two countries, e.g. tariffs, quotas

Question 37

international trade

Answer 37

exchange of goods or services between two countries

Question 38

trade bloc

Answer 38

any association of one or more countries where an agreement is made to reduce trade barriers

Question 39

trade creation

Answer 39

occurs when the entry of a country into a customs union leads to the production of a good moving from a high-cost producer to a low-cost producer

Question 40

trade diversion

Answer 40

occurs when the entry of a country into a customs union leads to the production of a good moving from a low-cost producer outside the union to a high-cost producer inside the union

Question 41

undervalued currency

Answer 41

when the value of a currency is believed to be lower than what is perceived to be its market equilibrium value

Question 42

World Bank

Answer 42

organization whose main aims are to provide aid and advice to developing countries, as well as reducing poverty levels and encouraging international investment

Question 43

World Trade Organization WTO

Answer 43

international body that sets the rules for global trading and resolves disputes between its member countries; it also hosts negotiations concerning the reduction of trade barriers between its member nations