Definitions!

Definitions:

 Factor endowments- factors of production specific country to country that affects which goods and services a country is fit to produce.
 Specialization- a country that had comparative advantage to produce a good produces only that good and trades to get other goods and services.
 Absolute advantage- a country, using the same input factors of production, can produce more of a good than other countries.
 Comparative advantage- a country produces a good at a lower opportunity cost than other countries.
 Free trade- international trade with no barriers (tariffs, quotas, subsidies)
 Tariff- a tax place on imported goods to decrease demand by increasing the price of a good to product domestic firms and increase government revenue.
 Quota- a quantitative limit on the amount of a good that can be imported so that demand increases for domestic goods.
 Subsidy- money paid to firms form the government to off set the costs of production to decrease prices and keep them in the market. (Wheat)
 Voluntary export restraint- an agreement between exporting and importing countries to limit the volume of trade of a good.
 Infant industry argument-says that new industries should be protected form foreign competition until the are large enough to compete.
 Dumping-selling a good in another country below the unit cost of product to push domestic industries out of the market. (China/US poultry)
 Anti-dumping-legislation the protect a economy from dumping (china/US poultry)
 Free trade area- Sovereign countries belonging to a free trade area trade freely amongst themselves but have individual trade barriers with countries outside the free trade area.
 Customs union- In a Customs Union, countries have free trade amongst themselves, as in a Free Trade Area, but they are no longer fully sovereign over trade policy. There will be some degree of standardization of trade policies. They will have a common external tariff (CET), which is applied, to all countries outside the customs union (EU).
 Common market- This trading bloc is a customs union, which has, in addition, the free movement of factors of production such as labor and capital between the member countries without restriction.
 Trade creation- Trade creation is the increased trade that occurs between member countries of trading blocs following the formation or expansion of the trading bloc. This comes about as the removal of trade barriers allows greater specialization according to comparative advantage. This means that prices can fall and trade can thus expand.
 Trade diversion- Trade diversion is the decrease in trade following the formation of a trading bloc as trade replaces trade with low cost non-trading bloc members with relatively high cost trading bloc members.
 World trade organization- an international trade organization that sets rules for global trading and settle disputes between member countries.
 Balance of payments-a record of the value of all the transactions between residents of a country with the world over a year.
 Balance of trade- the measure of the revenue from the exports minus the imports of tangible goods over a year.
 Invisible balance-a measure of the revenue received from exports minus imports of services over a year.
 Current account-a measure of the 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).
 Capital account-the buying and selling of assets between countries
 Current account surplus-when revenues from exports of goods and services and income flow is greater than the expenditure on imports over a year.
 Current account deficit- when revenues from exports of goods and services and income flow is less than the expenditure on imports over a year.
 Expenditure-switching policies- policies implemented so switch expenditure from imports to domestic goods and services.
 Expenditure-reducing policies- policies implemented to decrease overall expenditure in an economy including imports.
 Marshall-Lerner condition-depreciation/devaluation of a currency will only improve the current account balance if the elasticity for exports plus the elasticity of demand for imports is greater than one.
 J-Curve-a theory that suggests that in the short term, a fall in the value of a currency will lead to a worsening of the current account deficit before it improves in the long term.
 Exchange rate- the value of a currency expressed in terms of another
 Fixed exchange rate-an exchange rate system where the value of a currency is pegged to another currency, or to an average value of several currencies, or to the value of a commodity such as gold. (China)
 Floating exchange rate- a system where the value of currency is allowed to be determined solely by supply and demand for the currency on the world market. (US)
 Depreciation-a fall in the value of a currency in terms of another
 Appreciation- an increase in the value of a currency in terms of another
 Devaluation- a decrease in the value of a currency in terms of another in a fixed exchange rate system
 Revaluation- an increase in the value of a currency in terms of another in a fixed exchange rate system
 Purchasing power parity theory-under a floating exchange rate system, rate adjust to offset differing rates of inflation between count rue that are trading partner in order to restore the balance of payments to equilibrium.
 Terms of trade- an index that shows the value of a countries average export prices relative to their average import prices.
 Deteriorating terms of trade- where the average price of exports falls to that of imports.
 Elasticity of demand for exports- the measure of the responsiveness to the quantity demanded of exports when there is a change in price.
 Elasticity of demand for imports- t he measures of the responsiveness to the quantity demanded of imports when there is a change in price.

Advertisement