Theme 4 definitions

Globalisation

From an economic perspective, the ever-increasing integration of the world’s local, regional and national economies into a single international market.

Multinational Corporation (MNC)

A company with significant production operations in at least two countries.

Transfer Pricing

An accounting technique used by multinational companies to reduce tax on profits by selling goods internally at a low price from a high-tax country to another part of the company in a low-tax country.

Absolute Advantage

Exists when a country is able to produce a good more cheaply in absolute terms than another country.

Comparative Advantage

Exists when a country is able to produce a good more cheaply relative to other goods produced domestically than another country.

Theory of Comparative Advantage

Countries will find it mutually advantageous to trade if the opportunity costs of producing goods differ.

Terms of Trade

The ratio of export prices to import prices.

Index of Terms of Trade

(Index of export prices / Index of import prices) x 100

Trading Bloc

A group of countries that has signed an agreement to reduce or eliminate tariffs, quotas and other protectionist barriers between them.

Regional Trade Agreement

An agreement between at least two countries to reduce or eliminate tariffs, quotas and other protectionist barriers between them.

Bilateral Trade Agreement

A regional trade agreement between two countries.

Preferential Trading Area

A treaty between two or more countries to lower or abolish some protectionist barriers, such as tariffs, on trade between members.

Free Trade Area

A group of countries between which there is free trade in goods and services, but where member countries are allowed to set their own tariffs against non-member countries.

Customs Union

A group of countries between which there is free trade in products and which imposes a common external tariff on imported goods from outside the market.

Common Market

A customs union where, in addition, both labour and capital have freedom of movement within the area, and product standards and laws concerning the free movement of goods and services are common between countries.

Monetary Union

A group of countries which share a common currency, for example the euro.

Trade Creation

Trade is redirected within the union as a result of the formation of a trading bloc which removes protectionist barriers between members.

Trade Diversion

Trade is redirected away from non-members as a result of the formation of a trading bloc which removes protectionist barriers between members.

Trade Liberalisation

The move towards greater free trade through the removal of protectionist barriers to trade.

Protectionism

The use of economic policies to regulate trade between countries, mainly to reduce imports and protect domestic producers from international competition.

Free Trade

International trade conducted without the existence of barriers to trade, for example tariffs or quotas.

Trade Barriers

Any measure which artificially restricts international trade.

Quota

A physical limit on the quantity of imports.

Tariff, Import Duty or Customs Duty

A tax on imported goods which raises the domestic price of imports and restricts demand for them.

Dumping

The sale of goods at less than cost price by foreign producers in the domestic market.

Balance of Payments

A record of all external financial transactions between one economy and the rest of the world. It includes the current account, financial account and capital account.

Foreign Direct Investment (FDI)

Flows of money between countries where one firm buys or sets up another firm in another country. Technically, it is defined as purchasing a controlling interest in a foreign firm, defined as 10% or more of the shares of a firm.

Exchange Rate

The value of one currency in terms of another currency.

Appreciation of a Currency

When the value of a currency rises because of free market forces.

Depreciation of a Currency

When the value of a currency falls because of free market forces.

Revaluation of a Currency

When a government or central bank officially fixes a new higher exchange rate for the currency in a fixed exchange rate system.

Devaluation of a Currency

When a government or central bank officially fixes a new lower exchange rate for the currency in a fixed exchange rate system.

Floating Exchange Rate System

An exchange rate system where the value of a currency is determined by free market forces and changes from day to day.

Fixed Exchange Rate System

An exchange rate between at least two currencies which is kept constant over a period of time.

Managed Exchange Rate System

An exchange rate system where free markets determine the value of a currency, but central banks intervene from time to time to influence its value.

J Curve Effect

In the short term, a devaluation is likely to lead to a deterioration in the current account position before it starts to improve.

Marshall-Lerner Condition

Devaluation will lead to an improvement in the current account so long as the combined price elasticities of demand for exports and imports are greater than 1.

International Competitiveness

The ability of a country to compete effectively in global markets.

Absolute Poverty

Exists when individuals do not have the resources to consume sufficient necessities to survive.

Relative Poverty

Poverty defined relative to existing living standards for the average individual.

Lorenz Curve

A graphical representation of the degree of income or wealth inequality in society.

Gini Coefficient

A statistical measure of income inequality. Its value ranges from 0, where there is perfect equality, to 1, where income is highly unequal, with one person having all the income and everyone else having none.

Human Development Index (HDI)

A measure calculated by the United Nations to assess the economic and social welfare of countries based on life expectancy, educational attainment and standard of living.