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174 Cards in this Set

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countries tend to specialize in different types of products; exchanges of goods and services among individuals enables them to specialize in what they do best (trade offers the benefits of specialization, more efficiency and individuals can produce more than they could without trade and increasing the living standards for all)
exchange rate
is the price of one currency in terms of another
export subsidy
where a govt pays exporters a sum of money for each unit of the product they export in order to make them more competitive abroad
tax on an imported commodity
import quota
places a maximum limitation on the amount of the commodity that may enter the country
voluntary export restraint (VER)
is an agreement b/t an exporting and an importing country of a cetain commodity, under which the first agrees to resrict exports to the 2nd country. B/c it restricts supply, it raises the price in the importing country. VERs are being phased out under a WTO agreement.
nontraded goods
makes up a substantial part of the GDP such as construction activities and personal services, which never enter intl trade; accounts for disaggregation
export industries
> 15 to 20 % of the ratio of exports to output; aircraft, chemicals, and computers are examples in the US
import-competing industries
> 15 to 20 % of the ratio of imports to consumption; steel and motor vechicles are examples in the US
exchange control
where a country (India) restricts the ability of its citzens to convert their money (rupees) to foreign currencies, such as the US dollar
service transactions
are expanding rapidly; services make up over 2/3 of the GDP in the industrial countries; the US is the leading importer and exporter of commercial services - shipping, tourism, travel, banking & insurance, communications, pro services
the euro
a currency of 12 European countries
international economics
deals with flows across natl boundaries of goods, services, capital, and labor. It is the conduct of trade, rather than the benefits that flow from it, that distinguishes intl from domestic transactions
commercial policies
are governmental measures designed to influence the country's intl economics
Examples of commercial policies
tariffs, import quotas, export subsidies, exchange controls
describes a process by which a country, its businesses, and citizens become integrated into the intl econ. One manifestation is that intl trade and direct foreign investment are expanding faster than global output.
multilateral trade organization provides a framework for trade negotiatons and lays down ground rules for the conduct of intl trade; superseded the GATT in 1995; 147 member countries
makes financial resources available to members in need and supervises the intl currency system; 184 member countries
World Bank
intl financial institution offers lonas for development to LDCs from subsciption capital as well as from funds raised on the word's capital markets; it is NOT an intl central bank
The European Union (EU)
cohesive regional grouping of 25 Euro countires w/ a population of 450 million and a GDP equal to that of the US. Headquartered in Brussels, Belgium. 12 of its members formed the European Money Union (EMU) and have euro as common currency.
Group of Ten
10 major industrial countires that pursue consulations on economic matters and attempts to coordinated economic policies. US, UK, Japan, Germany, France, (G5) Italy, Canada, (G7) Belgium, Netherlands, Sweden
concerns intl matters of trade and development
Organization for Economic Cooperation & Development (OECD)
30 developed countries in N.A., Western Europe, Japan, Korea, Oceania, and Mexico; adresses economic matters
regional FTA b/t the US, Canada, & MX
direct foreign investment
the establishment of manufacturing plants in foreign countries
Comparative advantage
refers to the degree of advantage. Country A can have an absolute advantage over B in commodities X and Y. But if the degree of advantage is greater in X, we say that it has a comparative adv in X, and comparative disadv in Y. The opposite is true for Country B.
country "in isolation"
without trade; when the 2 domestic cost ratios are equal there are no advantages to trade.
terms of trade
is the export price divided by the import price.
demand consideration
Production costs determine the limits, while the reciprocal demand determines what the actual exchange ratios will be within these limits. The further apart the 2 domestic cost ratios, the more room there is for mutually advantageous trade, and the larger the benefits that can be derived from trade by both countries.
relative wage rates
anti-inflationary trade
far from being inflationary, trade is anti-inflationary when the prices of imports as well as exports are considered.
absolute advantage
Country A has an absolute advantage over Country B if it can produce the commodity cheaper.
static gains from trade
reallocating an unchanged quantity of resources
dynamic gains from trade
a country that is integrated into the econ is likely to enjoy the benefits of technological spillover from inventions developed in other countries; economies of scale; innovation is often held back when competition is lacking
opportunity cost
the price ratio of one good to the other within each country, is a guide to comparative advantage. It requires only a comparison of the internal cost ratios between the 2 countries.
direction of trade
C.A. determines the directions of trade and the limits to mutually beneficial trade.
calls for the promotion of exports to acquire gold. Trade cannot benefit both countries.
complete specialization
means that the country produces only its export good and none of its imported commodity.
differentiated products
each commodity has various gradations of quality, siz, flavor, and so on, and even differences in packaging & brand names are important. In such circumstances it is no longer true that identical cost ratios would result in no trade. Gains from increased variety may be large.
unit production cost
measured in currency, is the inverse of productivity
relative opportunity COST
shows the direction of trade and the limits to mutually beneficial exchange
sustainable exchange rate
C.A. can be expressed in terms of the currencies of both countries (namely opp cost), thereby embodying labor as well as other production costs. This yields the limits to a sustainable exchange rate.
ranked internally
all goods produced by each country are ranked in this manner in the order of their domestic costs.
rank all commodities by degree of C.A.; once ranked in that order, the exchange rate determines which commodities are exported and which are imported
auto and steel (example)
the US lost C.A. in steel and autos as these commodities dropped in the inverse ranking by labor production costs of US industries
trade & income distribution
trade redistributes income in society
Corollary of the Factor Proportions Model
Domestic income distribution: trade benefits the country's abundant factor & harms the scarce factor. But the benefit exceeds the damage. Intl factor price equalization: trade equalizes factor prices b/t countries.
factor proportions (or endowment) theory
introduced by Heckscher & Ohlin; under the FEM, each country exports the commodity that is intensive in its relatively abundant factor
capital-intensive products
one that requires a higher capital/labor ratio for its manufacture (wheat) relative to another commodity such as textiles.
capital-abundant country
when a country has a higher capital to labor ratio
labor intensive-products
one that requires a higher labor/capital ratio for its manufacture (textiles) relative to another commodity such as wheat.
labor-abundant country
is one that possesses larger endowment ratio of labor to capital than the endowment of another country (US)
interindustry trade
an exchange b/t countries of totally different products; explained by the factor-endowment theory
intraindustry trade
an exchange b/t countries of highly similar goods; explained by the economies of scale model and yields a dual benefit to consumer: cheaper goods & greater variety
direct foreign investment
when a country (US) establishes factories and produces within other countries they can bypass the tariff wall
product cycle
stresses the standardization process of products. According to this hypothesis, highly sophisticated economies are expected to export nonstandardized goods (most research is done in US, Germany, and Japan), while less sophisticated countries specialize in more sophisticated goods.
product variety
results from economies of scale and monopolistic competition.
monopolistic competition
industry structure characterized by many firms producing differentiated products, ensuring that economic profits will be zero in the long run. Expansion of the market has 2 beneficial effects for consumers: it produced a larger # of firms producing a wider range of varieties of the (differentiated product); and b/c each firm would produce a large output, at a lower avg. cost, each variety would be available at a lower price.
dynamic changes in C.A.
C.A of a country changes as its factor endowment and/or tech change. Application: industrialization of LDCs. Changes in Japan: Japan's postwar development is an example of the dynamic nature of C.A.: it changed from labor-intensive to capital-intensive to high-tech products.
factor price equalization
markets raise earnings of the migrating factor in the land of departure (source country) and lower it in the land of arrival (host country)
Leontief scarce-factor paradox
refers to the discovery that US exports relatively labor-intensive products and imports relatively-capital intensive products. Since the U.S is relatively capital abundant, this contradicts the factor-endowment model.
export-biased growth
if the growth is disproportionately large in direction of the country's exports, the country's terms of trade would deteriorate (pg 54)
sector-specific model
2 sectors: agriculture (land is fixed, labor is variable) & manufacturing (captial is fixed, labor); labor is mobile across industries: W = MPL
import-biased growth
if the production possibilities curve expands disproportionately in the direction of the country's imports, the country's terms of trade would improve (pg 54)
resource endowment
Example: Since the US possesses a higher capital to labor ratio than Germany, it is the relatively capital-abundant country while Germany is the relatively labor-abundant country
economies of scale
means that cost per unit of output declines as the scale of operations (all inputs increase).
terms of trade
if your terms of trade goes up, that is good; means your trade position improves
nontariff barriers (NTBs)
NTBs are more harmful to the national economy than tariffs. And w/in NTBs, VERs are more harmful than import quotas.
import quotas
sets an absolute limit on the quantity of a proudct that may enter the country. Quotas are common in developing countries; & on agricultural products in industrial countries.
quota rents
The price increase caused by the quota times the quantity of imports admitted under the quota. Unless the gov't auctions the imports licenses the rents accrue to the importers.
auctioning import licenses
Only by auctioning the import license can the government recoup the rents.
equivalence of a tariff & a quota
A quota and a tariff are equivalent if demand and supply are stationary, perfect competition exists in all markets, & the gov't auctions the import licenses.
primary and secondary boycotts (FN3)
quality upgrading
describes a tendency by exporters to switch to a higher-quality version of the product. It is caused by import quotas &/or VERs
cost per job saved
Protection is an expensive way to save jobs. (One reason for the increased use of VERs and other NTBs is the desire of politicians to save domestic jobs that would otherwise be destroyed by imports).
Int'l Commodity Agreements (ICAs)
is an accord b/t the producing and consuming countries of a commodity to stabilize its price or otherwise interfere w/ market forces. The most common type is a buffer stock.
buffer stocks
an ICA which tries to stabilized a commodity price (it sets a min and max price) by buying and selling out of central stocks. This systmes creates inefficiencies and is beset with problems.
compensatory financing
is a mechanism by which the IMF compensates countries for an abrupt decline in their export earnings.
Multifibre Agreement
is an agreement b/t textile producing and consuming countries to restrict trade in textile. It was abolished on Jan 1, 2005. Example of an ICA that was over 50 countires.
Int'l Cartel
is a group of corporations located in dif't countries or a group of gov'ts that agree to restrict trade in a commodity. It includes only suppliers.
Organization of Petroleum Exporting Countries (OPEC)
is a cartel of oil exporting countries.
local content requirement
specify a minimum portion of the value of a product that must be produced domestically.
indirect taxes
are those levied on the product at some stage of its manufacture or sale, such as the excise or sales taxes in American states and the value-added taxes. The tax is levied directly on products, & only in an indirect manner is it shifted to individuals. Although the WTO forbids export subsidies (including rebates of domestic taxes), it allows rebate of indirect taxes to exporters (export rebates).
border tax adjustment
consist of a tax on import of a commodity, & a rebate (subsidy) on its export, which equal the domestic indirect taxes.
value-added tax (VAT)
is the sale of a commodity abroad at a price lower than what it fetches in the home country. Often it is a result of a monopolist discriminating b/t the domestic & foreign markets.
sporadic dumping
is disposal on foreign markets of an occasional surplus or overstock; its effects are neglible.
predatory dumping
occurs when a large homebased firm sells abroad at a reduced price in order to drive out competitors & gain control over the market, at which time it intends to reintroduce higher prices and use its newly acquired monopoly power to exploit that market. Potential rivals may then be discouraged from entering the field by the fear of a repeat performance on the part of the monopolist. Most harmful form
persistent (long-run) dumping
direct outgrowth of profit-maximizing behavior by monopolists. To maximize his overall net return, he would charge a lower price abroad where he must meet competition than that charged at home where competitive pressure is lacking. Such dumping is harmful to the producers in the country receiving the dumped product, but this damage may be more than offset by the benefit to its consumers from the lower price.
dumping margin
is the price differential b/t the home & foreign markets.
antidumping duty
which equals the dumping margin, is a special duty that the importing country may impose to offset dumping.
export subsidy
is a payment by a gov't to a domestic firm for each unit of the product that it exports. (2 types of losses; 1 deadweight welfare loss caused by the distortion in the ranking by C.A.; 2 if the subsidizing country is large, it incurs an added cost: the increase in its net exports reduces the world price, & hence its terms of trade deteriorate). Can take the form of low interest loans to the foreign purchaser. Farm-product exports are often subsidized.
countervailing duties
is the special tariff the importing country may impose to offset a subsidy by the exporting country. It is distinguishable from antidumping duty in that it is limited to offsetting a gov't subsidy.
strategic trade policy
consists of gov't taxes &/or subsides designed to increase the global market share of the country's own oligoplistic firms, so as to increase their oligopoly profit at the expense of the foreign firms. Oligoply is a market structure in which a few firms make up the industry & where economic profits are attained & maintained
monopoly rents
tariff equivalent of NTBs
The excess of domestic over foreign price can be regarded as the implicit tariff equivalent of the nontariff barrier. (P domestic- P foreign)/P Foreign
tariff quota
one tariff rate imposed up to a certain quantity of imports and a higher rate on imports above that level
quota effects
b/c it makes the commodity scare, a quota raises price in the importing country in a way similar to a tariff. And the % increase in price is the tariff equivalent of the quota.
shifts in D & S
If domestic demand rises or supply declines, the welfare loss (measured by the deadweight triangles) under a quota is greater than under a tariff.
Monopoly Effect
A domestic monopolist can cause more harm to the economy under a quota than under a tariff.
Discrimination under VERs
VERs tend to discriminate b/t sources of supply. Their effects are similar to those of a quota except that the exports receives the rents.
Multilateral contracts
specify a maximum price at which producing countries are obliged to sell stipulated quantities to consuming countries & a min price at which consuming countries are obliged to purchase stipulated quantities from producing countries.
tariff protection
revenue tariff
most tariffs provide protection to the domestic industry & yield govt revenue
ad valorem tariff
a tariff calculated as a % of price; fixed % of the value of the commodity, as when imported cars are taxed as 5% of value
specific tariff
is a fixed # of dollars per unit of the product.
compound tariff
a combination of the 2, as when a car is taxed at $50 per unit plus 2% of value
F.O.B. Price
free on board & indicates the price of the commodity on board ship at the port of embarkation (if shiploading coats, are excluded we obtain the F.A.S. or free alongside price). The US uses the F.O.B. price for computing the tariff, while most European countries employ the C.I.F. value.
C.I.F. Price
cost, insurance, and freight and covers the cost of the commodity up to the port of entry. It includes ocan freight & other intercountry transportation costs, which the F.O.B. price excludese.
small country
defined as a country that cannot, by its own action, affect world market prices and hence its terms of trade. In a small country, the domestic price rises by the full amount of the tariff. Its tariff does not change its terms of trade.
large country
a country that can, by its own action, affect world market prices and hence its terms of trade. The US is one of the only large countries. The domestic price rises by a portion of its tariff, the other portion is a decline in foreign export price. Its tariff improves its terms of trade by the amount of the duty paid by foreigners.
effective tariff
tariff escalation
steep escalation of effective rates in industrial countries by degree of processing discourages industrialization of developing countries.
deepening of production
the country begins to deepen domestic production by manufacturing the inputs at home & according them high protection. What the gov't often does not realize is the fact that by imposing tariffs on imported inputs it actually lowers the level of effective protection accorded the final product. By that very action it may render the final assembly plant unprofitable.
export rebate
To compensate the producers for the increased cost of input caused by the tariff would require that the producers receive an export subsidy. Such subsidies (that is, rebates of the tariff paid on imported materials) are often practiced in the developing countries to protect their export position.
domestic resource cost (DRC)
of foreign exchange earned by exports or saved by import substitution. Every dollar so earned (or saved) by a developing country costs a certain amount in domestic currency (representing a bundle of domestic resources) expended on processing & other activities. The activities that should be supported are those in which the cost of a dollar eanred or saved is least. The ranking of the industries from the high to low domestic currency cost per dollar earned would produce an ordering roughtly similar to the ranking from hihg to low effective protection. In both cases, it is the low-ranking industries that deserve support & encouragement to expand.
"scientific" tariff
is a rate that would equalize wage rates across countries. It makes no allowance for productivity differentials; hence, there is nothing scientific about it. The US says they cannot compete w/ countries in which wage rates are a fraction of its own.
"The Petition of the Candlemakers"
is a satire about the cost of keeping out cheap imports.
"Petition of the Mathmeticians"
is a global organization that sets ground rules for intl trade & provides a framework for liberalzing trade. One of its rule is non-discrimination b/t sources of supply known as the MFN.
customs union
involves 2 ore more countries abolishing trade restrictions among themselves & setting up a common & uniform tariff against outsiders.
consumers' surplus
the difference b/t what consumers would have been willing to pay and the market price they actually pay
volume of trade
when you have a tariff, this will reduce the volume of trade; sometimes it can actually improve the terms of trade for large countries, but never for small countries.
producers' surplus
the difference b/t the price that sellers would have required to part with the product, and the market price they actually receive
welfare triangles
deadweight loss
the net welfare loss from the tariff is therefore equal to the sum of the areas of the welfare triangles. Apart from this net loss, the tariff results in income distribution away from the consumers to the govt and the producers of the protected commodity.
optimum tariff
is the tariff rate that maximizes the difference b/t the gain from improved terms of trade & the loss from reduced volume of trade. For a small country, the optimum tariff is 0 b/c there is no improvement in trade.
nominal tariff rate
free-trade area (FTA)
both Cus
EU or European Community (EC)
CU of 25 countries & trade among members is free of restrictions, nonmembers must pay the common external tariff
involves 2 ore more countries abolishing trade restrictions among themselves but each keeping its own tariff rates against outsiders.
trade creation
in a CU is displacement of inefficient production in a member country by imports from another member; is favorable to world welfare b/c it rationally reorganizes the production within the union.
trade diversion
is a displacemtn of imports from a nonmember by imports from a member country; is unfavorable, b/c it reorganizes world production less efficiently. Production shifts from the most effectient locations in C to less efficient ones inside the union. The larger the CU, the smaller is the scope for trade diversion & the better is the chance that the CU will have a favorable efffect.
consumption effect
is a static effect of a CU that represents the increase in domestic consumption
infant industry
argument for protection suggest that an industry should be protected to allow it to grow in size at which point it can compete. In practice it is often abused.
unconditional Most Favored Nation (MFN) Principle
"New" products
2002 US tariff on steel
the tariff on steel products was up to 30%; enraged foreign exporters & the WTO; protected domestic steel producers enabling them to raise prices; but it harmed the domestic steel-using industries, such as automobiles, by forcing them to pay higher prices for steel inputs
Reciprocal Trade Agreements Act
has been the cornerstone of American commercial polcy since 1934. On one hand, it has permitted the continual tariff reductions on US imports. On the other hand, most extensions of the law embody measures to "safeguard" the interest of domestic industry.
safeguard provisions
a mechanism which prevents shifts of resources from inefficient import-competing industries into those with a competitive advantage. By protecting industries from import competition, they perpetuate allocative inefficiency & are therefore in direct conflict w/ what the act first sets out to accomplish.
escape clause
But the country must offer (import) liberalization of some other products to offset this action.
national security clause
permits withdrawal of concessions inc cases where the affected domestic industry is essential to natl security.
trade-adjustment assistance (TAA)
a govt program that assists workers & businesses hurt by import competition to shift to new lines of production.
offshore assmebly provision
products assembled abroad out of parts exported from the US, and then reimported into the US, pay tariff only on the value added abroad.
Generalized System of Preferences (GSP)
part of the Trade Expansion Act of 1962 offered to developing countries. It granted duty-free entry to the exports of manufactures, semimanufactures, & selected other products from developing countries & territories. Purpose was to help promote the exports and economic development of developing countries.
301 provison
controversial item of the US trade legislation that requires the administration to publish once a year a list of countries that trade unfairly with the US and negotiate the removal of such practices.
political economy of protectionism
explains why protection from foreign competition is so common. Despite the damage it inflicts, protectionism is common b/c the gains from protection are concentrated, & the benefits to each gainer are sizable & visible; while the losses (although larger in total than the gains) are diffused and hidden.
industrial policy
is a policy designed to move resources to industries which the govt considers important. It is not practiced widely in the US b/c the market is viewed as a better guide than the govt to "the industries of the future."
trade promotion provision
All us trade negotiations are conducted under this. Congress votes on a negotiated trade agreement (up or down) w/o introducing amendments.
mutual recognition
each EU member recognizes the product standards applied by other member countries. It cannot bar a product from its marked just b/c these standards are different from its own. In US-EU relations, inspection, testing, and certification of IT & telecommunications are mutually recognized.
transition economies
after a decline of several years, real GDP in the "transition economies" is now on a growth path, & several of them joined the EU. Emplyed 2 types of strategies: 1) shock therapy 2) gradual approach
shock therapy vs. gradualism
shock: prices & trade were liberalized fast, inflation was chocked by tight monetary policy, & the privatization and demonopolization of industry was started quickly (Poland, Czech Rebup, Estonia); gradual (Russia & China); W/in Euro it appeas that countries following the shock therapy approach suffered smaller falls in output & returend to growht more quickly than the "gradualists."
WTO & the envt
There are areas in which envmental and WTO rules conflict. This often causes public resentment against the WTO, & requires attempts to harmonize these sets of intl rules.
"our" country will treat "your" country's firms in the same way that "your" country will treat "our" country's firms.
intl environmental agreements
The WTO rules may conflict with intl envtmental agreemtns. Or otherwise prevent the enforcement of envtmental measures when trade is involved. 3 ways in which the envt issues become intlized include the impact of envtmental policies on 1) intl competitiveness 2) the assertion of jurisdiction over the other nations' envt policies, and 3) the transborder spillover of pollution into another country or the global commons.
Keiretsu & chaebols
Issues that remain involved include the domestic anticompetitive practices that also restrict imports. Clusters of companies in Japan (keiretsu) and Korea (chaebols) control much economic activity. Companies w/in a cluster buy from each other, to the exclusion of other, foreign as wel as domestic suppliers. Should the WTO est. rules to limit or outlaw such exclusionary practices?
trade promotion
the US Congress votes on negotiated trade agreements "up or down" w/o amendments (known as "fast track" rule), last granted to the Bush II administration.
less gov't intervention in business
Natl treatment
requires a counry to treat foreign firms operating within its borders in the same manner it treats its own firms.
Uruguay & Doha rounds
UR went well beyond tariff reductions & covered agricultural liberalization, phase-out of the Multifibre Agreement, trade-related investment rules, etc. It also est the WTO to replace the GATT.
Kyoto treaty
an intl treaty mandates signatories to reduce pollution below the 1990 level. The US did not ratify it, and several Euro countries will fail to meet their obligation under the treaty.
import substitution
a development strategy that has failed. When a country imposes high tariffs and nontariff barriers to imports, & behind this shelter it expands domestic production to replace imports. Fails b/c much capital is invested in industries that could not have survived w/o protection.
a development strategy that has succeeded in stimulating investment, employment, and GDP growth.
is a UN forum where developing countries press their demands in the areas of trade & development.
short-run commodity price fluctuations
developing countries are concerned about violent short-run price fluctuations in their exports, which in turn generated wide swings in export earnings & in domestic economic activity. Economic growth is said to be the casualty.
integrated commodity program (or common fund)
developing countries request that the prices of primary commodities (which they export) be stabilized by means of intl commodity agreements lumped into 1 program called the "ICP". Several industrial countries are opposed.
beneficiary & donor countries
the trade-creation effect: tariffs are reduced on imports from the beneficiary (receiving) countries, which then displace some inefficient domestic production in the donor (giving) country.
Generalized System of Preferences (GSP)
in the area of manufactured exports the developing countries receive preferential access to the markets of the industrial countries. But the GSP scheme of each industrial country (the US, EU, Japan, etc.) contains severe restrictions on the free or preferential access.
rules of origin
mandates that the product be wholly manufactured w/in the beneficiary country; or, if imported material & components are used, these must undergo "substantial transformation" in that country - a requirement that the value added must account for at least 35% of the value of the finished proudct
refers to the tendency of economic activity within an integrating region to gravitate toward the most developed cities in the region
developments in China & India
As both countries adopted market economies, they have been growing rapidly.
is a tax leving on a commodity when it crosses an intl border. Mostly, it is imposed on an imported good: it is designed to rasie the price of the imports, thereby making the domestic industry producing a similar good more competitive.
effective rate of protection
is the protection accorded to the domestic value added: It depends on the tariff rates levied on the final product & on the imported inputs & on the share of the imported inputs in the final product.
Guides to C.A.
Ranking industries by effective protection is inversely related to their ranking by C.A. Another guide to C.A. is ranking industries by the domestic resource cost (DRC) of a dollar earned by exports or saved by imports.