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82 Cards in this Set
- Front
- Back
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absolute advantage
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A nation has absolute advantage compared to trading partners when it can produce more output w/ equal amount of inputs.
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opportunity cost (OC)
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sacrifice you are willing to make to get something you want.
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comparative advantage
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a nation has a comparative advantage when it can produce an item for a lower opportunity cost than its trading partner.
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PPF Graph
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Production Possibilities Frontier
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Ricardian Model of Comparative Advantage
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A country should export what it does most best or least worst and import what it does least best or most worst.
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product cost
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wage/productivity
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NAFTA
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North Atlantic Free Trade Agreement
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autarky
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economic condition where international trade is prohibited, causing the state to depend solely on domestic production.
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gains from trade
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trade according to comparative advantage makes a country better off by allowing it to consume more than it can produce itself (consume outside PPF)
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consumer surplus
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Area which determines the economic gains of consumers when a product is at a given price. Area C on the image on supply and demand graph, the area above the equilibrium price and below the demand curve.
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producer surplus
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Area which determines the economic gains of the producer at the given price. Area H on the diagram on supply and demand graph, the area below the equilibrium price and agove the supply curve.
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Terms of Trade (TOT)
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(Price of exports / price of imports) x 100
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immiserizing growth
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an increase in export productivity can lower national welfare if the negative impact on TOT exceeds positive impact on costs/output
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3rd Wave of Globalization
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1980- : characterized by new entries to the market (China, Southeast Asia), as well as massive movement of capital abroad, as LDC's harnessed abundance of labor to gain comparative advantages in labor intensive goods, which has led to outsourcing.
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agglomeration economies
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wealthy country specialization in manufacturing niches that gain productivity by having multiple factories close together to create one advanced product, such as planes or cars. This was not available to LCD's, due to lack of capital.
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outsourcing
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process by which certain aspects of a product's manufacture are performed in more than one country in order to reduce costs.
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openness
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a rough measure of the importance of international trade in a nation's economy. openness = (I+x)/GDP
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mercantilists
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European writers between 1500 and 1800 who were concerned with the concept of nation building. Asserted that the solution to national wealth lay in a strong foreign trade sector, by which a favorable trade balance could be reached (surplus of exports over imports).
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price-specie-flow doctrine
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written by David Hume, and asserted that favorable trade balances could only be achieved in the short run. This was because an excess of exports would yield to increased money supply, which would increase national price level. This would result in citizens buying foreign goods because they would be cheaper. This would eventually balance out trade surplus, as imports would increase until price levels balanced.
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Adam Smith
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famous economist who advocated free trade and wrote the Wealth of Nations, where he asserted that wealth is not fixed, and that countries could simultaneously get richer through specialization.
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MITI
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Ministry of International Trade and Industry - powerful Japanese economic beaurocracy that determines industrial policy for Japan. The existence of such control is an example of the command aspect of Japanese capitalism, due to the unchallenged control that MITI has on influencing the Japanese economy.
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keiretsu
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Japanese business grouping whose members are bound together by mutual trust and long term relationship among major firms, suppliers, and distribution networks. At the heart of these groupings is a bank that supplies credit and influences economic strategy. There are horizontal keiretsu, which are bound major firms that share profits and thus influence each others decisions. There are also vertical keiretsu's, which consist of a major parent manufacturer and tons of smaller companies that act as subcontractors - an example of such a company being Toyota. Such policies have been criticized by American economists, because generate oligopolies and economies of scale difficult to rival and also make FDI very resisted.
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"New Economic Paradigm"
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term for the shift in the US economy in the 1980's and 1990's that encouraged globalization through supporting deregulation, open markets, and minimal government intervention.
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market oriented capitalism
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economic system in the United States where the purpose of economic activity is to benefit consumers while maximizing wealth creation. Distribution of wealth holds a secondary importance. This is furthered through competition promotion and free trade, which come through increased exposure to global markets. State intervention into the economy is kept at a minimum under this system, as compared to other capitalist forms such as Germany or Japan.
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social market capitalism
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capitalist model found in present day Germany, this system emphasizes the role of the global market, but uses interventionist forces from both government and banks to ensure a high level of social welfare. This emphasis on state intervention is believed to have risen out of Germany's late industrialization, which occurred through state catch up policy as opposed to through more organic means such as happened in Britain and the United States.
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National Economic Council
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US economic agency created by Bill Clinton in 1993, it serves the government by formulating domestic and international economic policy.
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neoclassical convergence theory
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theory that economic interdependence and forces of globalization will force a convergence in economic performance among national economies as ates of economic growth, productivity, and national incomes move toward one another.
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Underwood Tariff Act
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Passed in 1913, and proposed the first federal income tax following the passage of the Sixteenth Amendment. Additionally, it reduced tariffs from 40 to 25%.
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Corn Laws
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British corn tariffs that were in effect between 1815 and 1846 and greatly helped domestic production of corn. Were most significant in their elimination, due to the emphasis on international trade that emerged from such a move. Can be seen as one of the earliest attempts at free trade between nation-states, and heralded the period of rapid industrialization and openness of the late 19th century.
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Cobden-Chevalier Treaty
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Free trade treaty signed between France and Britain in 1860.
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Kennedy Round
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held between 1964 and 1967, this sixth trade round of the GATT was successful in slashing 40 billion dollars worth of global tariffs, improving the strength of the global market.
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Tokyo Round
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1973-1979 - agreed upon trade openness and the elimination of over 300 billion in tariffs.
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Navigation Laws
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series of laws which, beginning in 1651, restricted the use of foreign shipping in the trade of England (later the Kingdom of Great Britain and its colonies). Repealed in 1828 during the period of internationalism fostered by the British.
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Imperial Preference
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proposed system of reciprocally-levelled tariffs or Free trade agreements between different Dominions and colonies within the British Commonwealth of Nations. The purpose of such practices was to promote the mutual prosperity, and thus unity, of allied imperial nations.
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intra-industry trade
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exchange of similar commodoties between similarly endowed countries. Has rapidly grown to account for a huge amount of foreign trade due to the expansion of economies of scale, causing large firms to expand to foreign markets to ensure continued growth. Automobiles constitute a clear example of an economy of scale, which explains why the United States is both a major importer and exporter of cars. (has less to do with comparative advantage and more to do with the expansion and influence of large firms)
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portfolio investment
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represents passive holdings of securities such as foreign stocks, bonds, or other financial assets, none of which entails active management or control of the securities' issuer by the investor.
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foreign direct investment
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defined as "investment made to acquire lasting interest in enterprises operating outside of the economy of the investor." The FDI relationship consists of a parent enterprise and a foreign affiliate which together form a transnational corporation (TNC). In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate. The UN defines control in this case as owning 10% or more of the ordinary shares or voting power of an incorporated firm or its equivalent for an unincorporated firm.
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expansionary monetary policy
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lowering interest rates lowering federal Reserve rate buying bonds goal is to increase the money supply.
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expansionary fiscal policy
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increasing taxes increasing government spending
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contractionary monetary policy
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increasing interest rates increasing federal reserve rate selling bonds goal is to reduce the money supply in the market.
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contractionary fiscal policy
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lowering taxes lowering government spending
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monetary system
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refers to the world system of interacting currencies when dealing with trade in real goods.
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financial system
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refers to the world system of interacting currencies when dealing with portfolio investments.
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seignorage
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refers to the bonuses that an economic hegemon maintains when commanding a global currency. These bonuses include the ability to print money, to be immune from collapse since currency is widely dispersed, etc.
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beggar thy neighbor policies
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refers to the policies of competitive devaluation that occurred during the early part of the 20th century - with the intention of artificially lowering prices to in effect command a larger share of global exports.
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gold standard
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international monetary standard used between Bretton Woods and 1973. Within this system, the dollar was denoted as the international currency and all countries were pegged to the exchange rate of the dollar. The dollar was pegged at 35 dollars an ounce based on gold reserves, that helped maintain ER stability. Broke down in 1973 when the U.S. moved to a floating ER.
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Tobin tax
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tax on short term financial investments proposed by economist James Tobin.
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SDR's
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special drawing rights - alternative to gold standard. Is essentially an IMF bond.
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moral hazard
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risk associated with uncertain behavior that fluctuates depending on the degree of safety net. Can be counterintuitive, due to the fact that more safety nets can increase the ammount of risky behavior.
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International Economics
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the study of the flows between countries of goods, services, and financial assets.
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small trading country
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when a country is too small in a given market for its trade to affect world prices.
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large trading country
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when a country is large enough in a given market for its trade to affect world prices.
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total cost
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Indicates the cost for producers to produce a given product. On supply and demand graph, the area below the supply curve and the equilibrium quantity.
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total revenue
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P*Q on supply and demand graph, the area enclosed by the equilibrium price and the equilibrium quantity.
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total market surplus
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The total ammount of surplus on a supply and demand graph. consumer surplus + producer surplus
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DC/LDC
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Developed Country/Lesser Developed Country
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HO Model - A,B,K,L
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Hecksher-Ohlin trade model A: Advanced goods B: Basic goods K: Capital L: Labor HO Theorem - Each country tends to export good which make relatively intensive use of the country's relatively abundant factors of production
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Leontief Paradox
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contradiction to the HO model based on empirical data which illustrates that countries tend to spend more domestically on the production of non-specialized goods than specialized goods
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Import-substitution Industrialization (ISI)
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A labor abundant country produces more capital-intensive goods - attempt to avoid advance goods dependency by LDC's
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economic interdependence
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economic reality of the 21st century, in which even the largest and wealthiest nations are dependent upon trade and movements of the global market.
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1st Wave of Globalization
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1870-1914: decreases in tariff barriers and new technologies (steam engine, transcontinental railroads) resulted in reduced transportation costs.
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2nd Wave of Globalization
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1945-1980: characterized by a continued reduction of trade barriers, but also through agglomeration economies, which allowed for wealthier countries to begin specializing on advanced goods, leaving developing countries far behind.
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The Stolper-Samuelson (SS) Theorem
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globalization raises real income of a country's abundant factor and lowers real income of a country's scarce factor.
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Quantitative Restrictions (QR)
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Non-tariff barrier to trade, in which the home country gives out a set amount of import licenses to other countries for trade.
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Voluntary Export Restraints (VERs)
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home country "persuades" other countries to put a limit on export amounts to prevent excess exports from flooding domestic markets.
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Tariffication
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The process of phasing out QR's and VER's due to their damaging effect on international trade, in favor of tariffs. This has been occurring at a high rate recently, with VER's phased out by 1999 and QR's by 2001.
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Dumping (Economics)
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Loophole within Export subsidies, where price abroad is cheaper than domestic price, causing companies to buy goods abroad and then simply resell them domestically for a profit, thereby skipping any production phase.
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4 gains from trade
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1. Efficiency/Specialization based on factor endowments. 2. New products/technology/innovation 3. Diffusion of new technology leading to rapid development 4. Product variety, intraindustry trade/differing products
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Factor-price equalization (FPE) theorem
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Globalization tends to make factor prices converge across countries.
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PPP
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Purchasing Power Parity - the difference in currencies ability to buy the same product.
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4 Elements of Economic Development Policy
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1. Sustainable development has many objectives
2. Development policies are interdependent 3. Governments play a vital role 4. Processes are just as important as policies |
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social capital
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refers to the networks and relationships that both encourage trust and reciprocity and shape the quality and quantity of a society's social interactions.
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sustainable development
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development strategy that, in addition to focusing on improving the quality of life of various poor regions, emphasizes intergenerational equity so that the developments experienced now will also impact the lives of the future generations of people in the regions in which they are implemented.
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HDI
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Human Development Index - measures average achievements in basic human development in one simple composite index and produces a ranking of countries.
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GDI
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Gender-related Development Index - measures achievements in the same dimensions as the HDI, but takes into account the inequality in achievement of men and women.
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GEM
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Gender Empowerment Measure - measures gender inequality in economic and political opportunites.
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HPI
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Human Poverty Index - measures deprivations in the dimensions that define the HDI
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Solow Model / Neoclassical Growth Theory
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Assumptions:
1. Inputs of Labor and Capital 2. Diminishing returns to each output 3. All resources fully utilized Results: 1. Population growth reduces income 2. Capital growth increases income 3. Long-run growth only possible from technology Policy implications: Increase savings, increase investment, increase K |
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Lewis Model of Structural Change
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Agricultural Sector Assumptions:
1. MPL = 0 2. Agriculture Wage = APL 3. Subsistence Sector Industrial Sector Assumptions: 1. Fixed wage by firms (higher than rural wage) 2. All wages spent on consumption goods 3. All profits by firms are reinvested Results: 1. Development occurs only through expansion of manufacturing sector 2. Expansion occurs only through migration of surplus labor from rural to urban sector |
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MPL
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Marginal production of labor
Extra output obtained by hiring an extra worker while keeping other inputs fixed. |
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APL
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Average production of labor
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capital shallowing
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situation where there is not enough capital to distributed to each unit of labor
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