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IB Econ - International Economics

Terms in this set (77)

absolute advantage
Refers to the ability of a country to produce a good using fewer resources than another country, or, what is the same thing, the ability of a certain amount of resources in a country to produce more than the same resources can produce in another country.
administrative barriers
Trade protection measures taking the form of administrative procedures that countries may use to prevent the free fl ow of imports into a country; these may include customs procedures involving inspections and valuation, controls on packaging, and others. Often considered to be a kind of 'hidden' trade protection as they don't involve obvious trade protection measures such as tariffs and quotas.
anti-dumping
An argument that justifies trade protection policies: if a country's trading partner is suspected of practising dumping, then the country should have the right to impose trade protection measures (tariffs or quotas) to limit quantities of the dumped good; see dumping. appreciation (of a currency) Refers to an increase in the value of a currency in the context of a floating (or flexible) exchange rate system or managed exchange rate system (compare with revaluation, which refers to an increase in currency value in the context of a fixed exchange rate system).
appropriate technology
Technologies that are well-suited to a countrys particular economic, geographical, ecological and climate conditions. Often used in connection with labour-abundant developing countries that require labour intensive (as opposed to capita- intensive) technologies.
balance of payments
A record (usually for a year) of all transactions between the residents of a country and the residents of all other countries, showing all payments received from other countries (credits),and all payments made to other countries (debits). In the course of a year, the sum of all the credits must be equal to the sum of all the debits.
balance of trade in goods
Part of the balance of payments, it is the value of exports of goods minus the value of imports of goods over a specific period of time (usually a year).
balance of trade in services
Part of the balance of payments, it is the value of exports of services minus the value ofimports of services over a specific period of time (usually a year)balance on capital account The sum of inflows minus outfl ows of funds in the capital account of the balance of payments. See capital account.
balance on current account
The sum of inflows minus outflows of funds in the current account of the balance of payments. See current account. Balance on financial account The sum of infl ows of funds minus outflows in the financial account of the balance of payments. See financial account.
bilateral trade agreement
Any trade agreement (or agreement to lower international trade barriers) involving two trading partners, usually two countries. It may also involve a trade agreement between one country and another group of countries when this groups acts as a single unit (such as the European Union). May be contrasted with regional trade agreement and multilateral trade agreement.
capital account
In the balance of payments, refers to the inflows minus outflows of funds for (i) capital transfers'(including such things as debt forgiveness and non-life insurance claims), and (ii) the purchase or use of non-produced natural resources (such as mineral rights, forestry rights, fishing rights and airspace); it is a relatively unimportant part of the balance of payments.
capital expenditures
With reference to government expenditures, these include public investments, or the production of physical capital, such as building roads, airports, harbours, school buildings, hospitals, etc.
capital liberalisation
Refers to the free movement of financial capital in and out of a country, occurring through the elimination by the government of exchange controls (government restrictions on the quantity of foreign exchange that can be bought by domestic residents of a country).
capital transfers
A part of the capital account of the balance of payments, they include inflows minus outflows for such things as debt forgiveness, non-life insurance claims, and investment. See capital account.
closed economy
An economy that has no international trade (no imports and exports); usually appears in connection with economic theories and models as virtually no economy in the real world is a closed economy. To be contrasted with open economy.
common market
A type of trading bloc in which countries that have formed a customs union proceed further to eliminate any remaining tariffs in trade between them; they continue to have a common external policy (as in a customs union), and in addition agree to eliminate all restrictions on movements of any factors of production within them; factors affected are mainly labour and capital, which are free to cross all borders and move, travel and find employment freely within all member countries. The best-known common market is the European Economic Community(EEC, the precursor of the present European Union).
comparative advantage
Arises when a country has a lower relative cost, or opportunity cost, in the production of a good than another country. Forms the basis of the theory of comparative advantage.
credit items
In the balance of payments, refer to payments received from other countries, entering the balance of payments accounts with a plus sign; they represent an inflow of foreign exchange into a country.
current account
In the balance of payments, this includes the balance of trade (recording exports minus imports of goods) plus the balance on services(recording exports of services minus imports of services), plus inflows minus outfl ows of income and current transfers. The most important part of the current account inmost countries is the balance of trade.
current account balance
See balance on current account. current account deficit Occurs when the current account balance has a negative value, meaning that debits are larger than credits (there is an excess of debits).current account surplus Occurs when the current account balance has a positive value, meaning that credits are larger than debits (there is an excess of credits).
current expenditures
In the government budget, refers to government spending on day-to-day items that are recurring(i.e. repeat themselves) and items that are used up or 'consumed' as a good or service is provided. Include wages and salaries (for all government employees);spending for supplies and equipment for the day-to-day operation of government activities (for example, school supplies and medical supplies for public schools and public health care services); provision of subsidies; and interest payments on government loans.
Current transfers
An item in the current account of the balance of payments, refers to inflows and out flows of funds for items including gifts, foreign aid, and pensions.
customs union
A type of trading bloc, consisting of a group of countries that fulfil the requirements of a free trade area(elimination of trade barriers between members) and in addition adopt a common policy towards all non-member countries; members of a customs union also act as a group in all trade negotiations and agreements with non-members. It achieves a higher degree of economic integration than a free trade area, but lower than a common market.
debit items
In the balance of payments, they refer to payments made to other countries, entering the balance of payments accounts with a minus sign; they represent an outflow of foreign exchange from a country.
depreciation
(of a currency) Refers to a decrease in the value of a currency in the context of a floating (or flexible) exchange rate system or managed exchange rate system (to be compared with devaluation, which is a decrease in currency value in a fixed exchange rate system). (Note that depreciation also refers to capital goods that become worn out and are discarded.)
deterioration in the terms of trade
A decrease in the value of the terms of trade index. See terms of trade.
devaluation (of a currency)
Refers to a decrease in the value of a currency in the context of a fixed exchange rate system (to be compared with depreciation, which is a decrease in currency value in the context of a floating (or flexible) or managed exchange rate system).
direct investment
In the balance of payments, refers to inflows or outflows of funds for the purpose of foreign direct investment. See foreign direct investment.
diversification
Generally refers to change involving greater variety, and is used to refer to increasing the variety of goods and services produced and/or exported by a country; it is the opposite of specialisation.
Dumping
The practice of selling a good in international markets at a price that is below the cost of producing it (usually by providing export subsidies); while it is illegal according to international trade rules, many countries practise it anyway. Forms the basis of the anti-dumping argument in favour of trade protection. See also anti-dumping
economic integration
Refers to economic interdependence between countries, usually achieved by agreement between countries to reduce or eliminate trade and other barriers between them. There are various degrees of integration, depending on the type of agreement and the degree to which barriers between countries are removed; see trading bloc, free trade area, customs union, common market, monetary union.
errors and omissions
In the balance of payments, refers to an item that is included to account for possible omission sand errors in items that have been included or excluded, in order to ensure that the balance of payments balances, i.e. that the sum of credits and debits is equal to zero.
exchange rate
The rate at which one currency can be exchanged for another, or the number of units of foreign currency that correspond to the domestic currency; can be thought of as the 'price' of a currency, which is expressed in terms of another currency.
expenditure-reducing policies
Policies that involve reducing expenditures in the domestic economy so as to bring about a decrease in imports in order to correct a current account deficit; they include contractionary fiscal and monetary policies. expenditure-switching policies Policies that involve switching consumption away from imported goods and towards domestically produced goods, in order to correct a current account deficit; include trade protection policies and depreciation.
export promotion
Refers to a growth and trade strategy where a country attempts to achieve economic growth by expanding its exports. As a trade strategy, it looks outward towards foreign markets and is based on stronger links between the domestic and global economies. To be contrasted with import substitution.
factor endowments
The factors of production that a country is 'endowed with', or possesses. Differing factor endowments among countries suggests that different countries are better suited to the production of certain kinds of goods and services than others, or, to put it differently, they are more efficient in the production of some things rather than others. Differing factor endowments form the basis of the theory of comparative advantage. (Also known as 'resource endowments'.) factors of production All resources, or inputs (land, labour, capital, entrepreneurship) used to produce goods and services.
financial account
In the balance of payments, refers to inflows minus outflows of funds due to foreign direct investment, portfolio investment and changes in reserve assets. financial account balance
Fixed exchange rate
Refers to an exchange rate that is fixed by the central bank of a country, and is not permitted to change in response to changes in currency supply and demand. Maintaining the value of a currency at its fixed rate requires constant intervention by the central bank or government.
fixed exchange rate system
An exchange rate system where exchange rates are fixed by the central bank of each country. See fixed exchange rate.
foreign direct investment (FDI)
Refers to investment by firms based in one country (the home country) in productive activities in another country (the host country). Firms that undertake FDI are called multinational corporations.
foreign exchange
Refers to foreign national currencies, i.e. for any country, it refers to currencies other than its own.
free trade
The absence of government intervention of any kind in international trade, so that trade takes place with out any restrictions (or barriers) between individuals or firms in different countries.
free trade area
A type of trading bloc, consisting of a group of countries that agree to eliminate trade barriers between themselves; it is the most common type of integration area, and involves a lower degree of economic integration than a customs union or common market. Each member country retains the right topursue its own trade policy towards non member countries. An example of a free trade area is NAFTA (North American Free Trade Agreement).
freely floating exchange rate
An exchange rate determined entirely by market forces, or the forces of supply and demand. There is no government intervention in the foreign exchange market to influence the value ofthe exchange rate. Also known as 'floating exchange rate' or 'flexible exchange rate'.
freely floating exchange rate system
An exchange rate system where exchange rates are determined entirely by market forces; see freely floating exchange rate.
import substitution
Also known as import-substituting industrialisation, refers to a growth and trade strategy where a country begins to manufacture simple consumer goods oriented towards the domestic market (such as shoes, textiles, beverages, electrical appliances) in order to promote its domestic industry; it presupposes the imposition of protective measures (tariffs, quotas, etc.) that will prevent the entry of imports that compete with domestic producers. To be contrasted with export promotion.
improvement in the terms of trade
An increase in the value of the terms of trade index. See terms of trade.
income
In the current account of the balance of payments, refers to inflows of wages, rents, interest and profits earned abroad minus the same income factors that are sent abroad.
infant industry
A new domestic industry that has not had time to establish itself and achieve efficiencies in production, and may therefore be unable to compete with more 'mature' competitor firms from abroad. The presence of infant industries considered to be one of the strongest arguments in favour of trade protection policies in developing countries.
J-curve effect
A curve that plots the balance of trade (exports minus imports) on the vertical axis and time on the horizontal axis, showing that a country with a devaluing/depreciating currency may see a worsening in its trade balance (an increase in a trade deficit) in the period immediately following the devaluation or depreciation, while in a later period the trade deficit will begin to shrink provided the Marshall-Lerner condition holds (see Marshall-Lernercondition).
managed exchange rate system
The exchange rate system in use since 1973,also known as the 'managed float'; see managed exchange rates.
managed exchange rates
Exchange rates that are for the most part free to float to their market levels (i.e. their equilibrium levels) over long periods of time; however, central banks periodically intervene in order to stabilise them over the short term.
managed float
See managed exchange rates
Marshall-Lerner condition
A condition stating when depreciation or devaluation of a country's currency will lead to an improvement in that country's balance of trade: the sum of the price elasticities of demand for imports and exports must be greater than 1 for the trade balance to improve (for a trade deficit to become smaller). This usually holds over the longer term, but not in the shorter term(see J-curve).
monetary union
A high form of economic integration, involving the adoption by a group of countries of a single currency, such as some of the countries of the European Union ('eurozone' countries) that have adopted the euro. Monetary integration in addition involves the adoption of a common monetary policy carried out by a single central bank, which is necessitated by the use of a single currency.
Non-produced, non-financial assets
Apart of the capital account of the balance of payments, which includes a variety of items such as mineral rights, forestry rights, fishing rights and airspace.
Open economy
An economy that has international trade: (imports and exports) usually appears in connection with economic theories and models as virtually all economies in the real world are open economies (though to varying degrees). To be contrasted with closed economy.
Overvalued currency
A currency whose value is higher than its free-market value; may occur if the exchange rate is fixed (or pegged), or in a managed exchange rate system, but not in a freely floating exchange rate system. To be contrasted with undervalued currency. Parallel market See underground market. per capita Per person, or per head. For example, GDP per capita is total GDP divided by the number of people in the population.
Portfolio investment
Financial investment, including investment in stocks and bonds. Appears as an item in the financial account of the balance of payments.
Preferential trade agreement
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 the selected products, compared with the access of countries that are not members.
purchasing power parity (PPP)
exchange rates Special exchange rates between currencies that makes the buying power of each currency equal to the buying power of US$1, and therefore equal to each other. The use of PPP exchange rates to convert GDP (or GNI or any other output or income variable) eliminates the influence
quota
A type of trade protection that involves setting a legal limit to the quantity of a good that can be imported over a particular time period (typically a year). (More generally, a 'quota' is a limited or fixed number of things.)
regional trade agreement
A trade agreement (or agreement to lower international trade barriers) between several countries that are located within a geographical region (such as NAFTA, or North American Free Trade Agreement). May be contrasted with bilateral trade agreement and multilateral trade agreement.
relative poverty
The inability of an individual or a family to afford an adequate standard of goods and services, where the adequate standard is relative and changes over time; this standard is defined as what is 'typical' in a society, taken to be a particular percentage (often 50%) of society's median income. As incomes increase and the median income rises, the standard also rises.
reserve assets
Refers to foreign currency reserves that the central bank maintains and can buy or sell to influence the value of the country's currency exchange rate; in the balance of payments appears as an item in the financial account. Also known as 'official reserves'.
revaluation (of a currency)
Refers to an increase in the value of a currency in the context of a fixed exchange rate system (compare with appreciation, which is an increase in currency value in the contest of a floating or managed exchange rate system).
Specialisation
Occurs when a firm or a country concentrates production on one or a few goods and services. In international trade theory, specialisation forms the basis for the gains from trade, arising when countries specialise according to their comparative advantage, and when firms specialise in production of goods and services that offer them economies of scale.
speculation (currency)
Buying and selling of something in the hope of making a profit. 'Currency speculation' involves buying and selling currencies based on expectations of changes in the value of a currency (exchange rates) in order to make a profit in the future.
Tariffs
Taxes on imported goods; they are the most common form of trade restriction. Tariffs may serve two purposes: to protect a domestic industry from foreign competition (a protective tariff); or to raise revenue for the government (a revenue tariff). Whatever the purpose, the impacts on the economy are the same.
terms of trade
Relates the prices a country receives for its exports to the prices paid for its imports, and is given by the ratio of index of average export prices to index of average import prices times 100. An increase in the value of this ratio indicates a terms of trade improvement, meaning that a country can now buy more imports for the same amount of exports; a decrease in the value of this ratio indicates a terms of trade deterioration, meaning that a country can now buy fewer imports for the same amount of exports.
theory of absolute advantage
According to this theory, if countries specialise in and export the goods in which they have an absolute advantage (can produce with fewer resources), there results an improvement in resource allocation and increased production and consumption in each country.
theory of comparative advantage
According to this theory (also known as a law), as long as opportunity costs in two (or more) countries differ, it is possible for all countries to gain from specialisation and trade according to their comparative advantage; this results in an improvement in the global allocation of resources, resulting in greater global output and consumption. Is amore powerful explanation of the gains from trade than the theory of absolute advantage.
Trade creation
The replacement of higher cost products (imported or domestically produced) by lower cost imports that results when a trading bloc is formed and trade barriers are removed. (To be contrasted with trade diversion.)
Trade diversion
The replacement of lower cost products (imported or domestically produced) by higher cost imports that results when a trading bloc is formed and trade barriers are removed. (To be contrasted with trade creation.)
Trade liberalisation
The policy of liberalising (freeing up) international trade by eliminating trade protection and barriers to trade (i.e. tariffs, quotas, etc.)
Trade protection
Government intervention in international trade through the imposition of trade restrictions (or barriers) to prevent the free entry of imports into a country and protect the domestic economy from foreign competition.
Trading bloc
A group of countries that have agreed to reduce tariff and other barriers to trade for the purpose of encouraging the development of free or freer trade and cooperation between them. See also free trade area, customs union and common market.
Undervalued currency
A currency whose value is lower than its free-market value; may occur if the exchange rate is fixed (or pegged), or in a managed exchange rate system, but not in a freely floating exchange rate system. To be contrasted with overvalued currency.
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