Balance Of Payments And Protectionism

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Balance of Payments

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A record of all transactions of a country with the rest of the world over a period of time.

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Current Account

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The section of the balance of payments statment that includes trade in visibles (goods) and invisibles (services, transfers, and net investment. A current account deficit exists if the value of imports of goods and services exceeds the value of exports of goods and services.

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Trade Balance

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The difference between the value of exports and imports of goods (and sometimes services).

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Invisible Account

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Includes trade in services, net investment income (investment income from abroad minus investment income paid abroad) and net transfers

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Capital Account

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The Capital Account (transactions in external assets and liabilities) includes changes in short term and long term (external) assets and liabilities of a country. In the short run category movements of short term financial capital (say, bonds, with maturities of less than a year) is recorded. The long term section records changes in the holdings of longer term assets and includes FDI (foreign direct investment). In addition official financing is included (changes in official reserves as well as official borrowing and lending) and, lastly, the ‘balancing item’ (which is there only because of ‘errors and omissions’).

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Exchange Rate

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The price of a currency expressed in terms of another currency; the number of units of a foreign currency required to purchase a unit of the domestic currency.

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Fixed (Pegged) Forex System

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If the authorities (usually the Central Bank) maintain through intervention the exchange rate at a pre-announced level.

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Floating Forex System

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A foreign exchange rate which is determined by the forces of supply and demand.

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Managed Float Forex System

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Usually refers to a floating system where authorities (the central bank) intervene to maintain the exchange rate between a price ceiling and a price floor (also known as a "price band").

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Appreciation

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An increase in the exchange rate (in the value, in the foreign price of a currency) within a flexible exchange rate regime

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Revaluation

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An increase in the exchange rate (in the value, in the foreign price of a currency) within a fixed exchange rate regime

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Depreciation

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A decrease in the exchange rate (in the value, in the foreign price of a currency) within a flexible exchange rate regime

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Devaluation

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A decrease in the exchange rate (in the value, in the foreign price of a currency) within a fixed exchange rate regime

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Capital Flows

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Investment flows; portfolio and FDI

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Speculation

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Buying and selling forex, only to resell it later (usually a short time later) in hope of making a profit.

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Foreign Exchange Reserves

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The value of foreign exchange holdings held at the Central Bank of a country. Necessary to hold some amount so that flow of imports is not disrupted. Within a fixed er system authorities are forced to hold greater reserves in order to intervene if necessary.

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Terms of Trade

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The ratio of the average price of exports over the average price of imports expressed as index numbers times 100.

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Improving ToT

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If the ratio rises (which will be the case if the relative price of exports rises) then there is an improvement in the sense that the same volume of exports it can attain a greater volume of imports or to attain the same volume of imports it must now import a smaller volume of exports.

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Worsening ToT

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If the ratio of export to import prices falls over time.

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Factor Endowments

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The land, labor, human capital, physical capital and entrepreneurship a country has at its disposal

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Specialization

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When a factor of production is employed in the production of only one good or even a part of a good; results in increased levels of output.

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Economies of Scale

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Cost/unit goes down as production numbers increase.

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Absolute Advantage

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A country is said to have an absolute advantage in the production of X if it can produce more of it with the same resources (or, if it can produce a certain amount with fewer resources) compared to another country.

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Comparative Advantage

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A country is said to have an absolute advantage in the production of good X if it can produce it at a lower opportunity cost i.e. by sacrificing fewer units of good Y (in the 2 country, 2 good case) compared to another country.

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Free Trade

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Refers to international trade (exporting and importing of goods and services) that is not subject to any form of protectionism (to any type of trade barriers). In terms of volume, trade has become more free as a result of the success of the GATT and its successor the WTO. World trade volume has increased by about 17 times since the early in the past 50 years. Also, world exports as a proportion of world output (GDP) had more than doubled since 1950.

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Protectionism

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Refers to the set of government policies that aim at restricting, or even eliminating, the flow of imports into a country and/or creating an artificial advantage to exporting firms.

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Tariff

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A tax on imports (goods and services produced abroad) as a result of which the domestic price of the product rises, the level of domestic production rises, the level of domestic consumption drops and the volume of imports is restricted. A tariff also generates revenues for a government. In the ‘small’ country case the world price is unaffected. The effect of a tariff on the volume of imports is not certain as it depends on the price elasticity of demand for the good / service

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Quota

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A quantitative restriction of imports. As a result of the restriction on supply, the price of the product will rise in the domestic market. A quota also results in increased levels of domestic production as well as in ‘quota rents’ (profits resulting merely from the right to import the given quantity)

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Export Subsidy

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A payment granted by a government to domestic firms to strengthen their competitiveness against foreign producers.

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VER

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Same as quota (= quantitative restriction) but the exporting firms ‘voluntarily" agrees to limit the volume of exports of a good (to avoid possible worse restrictions by the importing country); analyzed the same way as a quota.

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Administrative Obstacles (Regulatory Barriers)

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Government or administrative regulations / requirements that result in lower levels of imports; a most famous example is the case of French video imports from Japan that were required to pass inspection at the city of Poitiers. Often they purportedly aim to protect public health or the environment or workers’ welfare while the true aim is to protect domestic businesses from foreign competition

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Infant Industry Argument

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The argument that the only way a developing country can create a competitive domestic industrial sector is if it blocks all competing imports with prohibitive tariffs until it becomes sufficiently efficient for trade barriers to be eliminated.

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Diversification of Exports

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A policy initiative to move away from commodity concentration of exports; instead of relying on only one or two exports to broaden the range of exported goods and services so that various risks are reduced.

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Dumping

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Selling goods below cost. This might be done to destroy the industry in another country in the short terms to create a monopoly in the long term.

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Anti-Dumping Duties

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These refer to duties (taxes) that purportedly aim to create a ‘level playing field’.

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Regional Economic Integration

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When countries become members of regional trading blocks; more generally, the dismantling of trade and investment barriers coupled with the advances in communications, the internet and the lower cost of transport have accelerated the process of economic integration

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Globalization

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The widening, intensifying, speeding up, and growing impact of world-wide interconnectedness encompassing trade, finance and investments, production, ideas and culture etc

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World Trade Organization

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An international organization with 149 member countries which aims at further liberalizing trade (see my trade and development package of notes) through conducting multilateral trade negotiations and which is the arbitrator on trade related disputes. It was established in 1995 and grew out of the GATT.

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Factor Endowments

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The land, labor, human capital, physical capital and entrepreneurship a country has at its disposal

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Specialization

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When a factor of production is employed in the production of only one good or even a part of a good; results in increased levels of output.