International Trade and Global Economic Systems

Vocabulary-style flashcards covering trade theories, policy instruments, international organizations, regional integration, FDI, and development strategy based on lecture notes.

Absolute Advantage

A concept by Adam Smith ($1776$) where a country has an advantage if it can produce more of a good per unit of input than another country, often based on natural endowments or acquired skills.

Comparative Advantage

A theory by David Ricardo ($1817$) stating that countries gain from trade by specialising in goods for which their opportunity cost is lowest, even if one country is absolutely more efficient at producing everything.

Natural Endowments

An inherited stock of natural resources, climate, geography, and arable land that serves as given factors of production.

Factor Abundance (Heckscher-Ohlin Theory)

A theory from $1933$ stating that a country will export goods that intensively use their abundant factor (capital, labour, or land) and import those using their scarce factor.

Physical Definition of Factor Abundance

A quantitative definition of factor abundance based on the ratio of capital-to-labour ($K/L$) in factor endowments.

Price Definition of Factor Abundance

A definition based on relative factor prices in autarky where a country is capital-abundant if capital is cheap relative to labour.

Porter's Diamond

A framework from $1990$ by Michael Porter identifying four determinants of national competitive advantage: factor conditions, demand conditions, related and supporting industries, and firm strategy, structure, and rivalry.

Leontief Paradox

Wassily Leontief's $1953$ empirical finding that the US, despite being capital-abundant, was exporting labour-intensive goods and importing capital-intensive goods.

Trade Policy Instruments

Measures, regulations, or procedures applied by governments to control a country's international trade, divided into tariff and non-tariff barriers.

Ad valorem tariff

A tax on imports calculated as a percentage of the customs value, such as $10\%$ on a $\$100$ good.

Specific tariff

A tax on imports set as a flat amount per unit, such as $\$2$ per kg.

Effective Rate of Protection (ERP)

The actual level of protection provided to the value added in domestic production, which accounts for tariffs on both finished goods and inputs.

Tariff escalation

A trade policy where higher duties are placed on processed goods than on raw materials to protect domestic manufacturing.

Quota

A quantitative limit on the volume, weight, or value of imports that often generates quota rents for licence holders.

Voluntary Export Restraint (VER)

A measure where an exporting country capped its exports under threat, exemplified by the Japan-US auto VER from $1981\text{--}1994$.

Sanitary and Phytosanitary Measures (SPS)

WTO-governed rules regarding food safety and animal or plant health that must be based on scientific evidence and necessity.

GATT (General Agreement on Tariffs and Trade)

A multilateral treaty established in $1947$ to provide rules for trade in industrial goods via tariff protection and non-discrimination.

Uruguay Round

The $8^{th}$ GATT round ($1986\text{--}1994$) that resulted in the Marrakesh Agreement and the creation of the WTO.

WTO (World Trade Organisation)

A permanent international organisation established in $1995$ to administer trade agreements, handle disputes, and monitor national trade policies.

Most-Favoured-Nation (MFN) Treatment

The principle requiring WTO members to extend any favourable trade treatment granted to one partner to all other members.

National Treatment

The rule that foreign products must be treated no less favourably than equivalent domestic products once they have cleared customs.

TRIPS Agreement

A WTO agreement setting minimum standards for protecting intellectual property like patents, copyrights, and trademarks.

GATS Mode 1: Cross-border supply

A mode of service supply where the service itself crosses the border, such as online consulting or telemedicine.

GATS Mode 2: Consumption abroad

A mode of service supply where the consumer crosses the border, such as tourism or foreign students.

GATS Mode 3: Commercial presence

A mode of service supply where a firm crosses the border to establish a branch or franchise, essentially functioning as FDI.

GATS Mode 4: Movement of natural persons

A mode of service supply where an individual professional crosses the border to provide a service, such as a consultant or musician on tour.

Doha Round

The $9^{th}$ multilateral trade round launched in $2001$ with a development focus, which eventually stalled over agricultural disagreements.

Free Trade Area (FTA)

A level of integration with zero internal tariffs while members maintain their own separate external tariffs, requiring Rules of Origin.

Customs Union

A level of integration featuring zero internal tariffs and a Common External Tariff (CET) against non-members.

Trade Creation

A welfare gain occurring when integration shifts production from a high-cost domestic producer to a lower-cost producer within the member group.

Trade Diversion

A welfare loss occurring when integration shifts imports from a lower-cost non-member to a higher-cost member because of the common external tariff.

Foreign Direct Investment (FDI)

Cross-border investment where an investor establishes a lasting interest and significant influence, defined by a threshold of $\ge 10\%$ voting power.

Foreign Portfolio Investment (FPI)

Investment below the $10\%$ voting power threshold, often considered volatile "hot money" focused only on financial returns.

Greenfield Investment

A mode of FDI entry where a firm builds new production capacity from scratch in a foreign country.

Prebisch-Singer Hypothesis

The theory that primary-commodity prices decline over the long term relative to manufactured goods due to differing income elasticities of demand.

Flying Geese Model

A model of Asian development where countries follow each other up the value chain, shifting industries from leaders to latecomers as comparative advantages change.

Special and Differential Treatment (S&DT)

WTO provisions that grant developing countries longer transition periods and lower levels of commitment.

Balance of Payments (BoP)

A systematic record of all economic transactions between residents of a country and the rest of the world within a specific period.

Absolute Advantage

A principle introduced by Adam Smith in 1776, which states that a country possesses an absolute advantage when it can produce more of a good or service with the same quantity of inputs compared to another country. This concept often relates to natural resources or specialized skills inherent to a nation.

Comparative Advantage

A theory proposed by David Ricardo in 1817 arguing that countries should specialize in producing goods where they have the lowest opportunity cost, allowing them to trade and benefit mutually, even if one country is more efficient in all areas of production.

Natural Endowments

These are the innate qualities and resources a country possesses, including mineral wealth, climate conditions, geographical features, and the availability of arable land, all of which may influence its economic capabilities.

Factor Abundance (Heckscher-Ohlin Theory)

This theory, articulated in 1933, explains that a country will export goods that heavily utilize its abundant factor of production (like labor, capital, or land) and import goods that require factors in which it is less endowed.

Physical Definition of Factor Abundance

A method for measuring factor abundance by evaluating the ratio of capital to labor (K/L) to determine how resources are allocated and utilized in production.

Price Definition of Factor Abundance

This definition assesses factor abundance through relative factor prices in autarky, indicating that a country is capital-abundant when capital costs are comparatively lower than labor costs.

Porter's Diamond

A framework proposed by Michael Porter in 1990 that identifies four key determinants influencing national competitive advantage: the availability of factors of production, the nature of domestic demand, the presence of related and supporting industries, and the strategy, structure, and rivalry among firms.

Leontief Paradox

Discovered in 1953 by Wassily Leontief, this finding noted that the United States, typically classed as capital-abundant, was exporting labor-intensive goods while importing capital-intensive products, contradicting standard trade theories.

Trade Policy Instruments

The regulations and methods employed by governments to direct international trade practices, which can be categorized into two main types: tariff and non-tariff barriers, affecting how goods cross borders.

Ad valorem tariff

A type of import tax calculated as a percentage of the customs value of the goods, for example imposing a 10% tariff on a good valued at $100.

Specific tariff

A fixed import tax charged at a set amount per unit of goods, such as imposing a charge of $2 for every kilogram of an imported product.

Effective Rate of Protection (ERP)

Represents the actual protection level afforded to domestic production after considering tariffs applied to both the finished goods and the inputs used in production, offering a more nuanced view of trade protection.

Tariff escalation

A trade strategy where higher tariffs are imposed on processed or manufactured goods relative to raw materials, designed to protect domestic industries from foreign competition.

Quota

A legally enforced limit on the amount of goods that can be imported, often creating a financial benefit known as quota rents for those who hold the right to import.

Voluntary Export Restraint (VER)

A trade restriction where an exporting country limits the quantity of its exports to another country, as was seen in the agreement between Japan and the US regarding automobiles from 1981 to 1994.

Sanitary and Phytosanitary Measures (SPS)

Regulations established by the World Trade Organization (WTO) that dictate food safety and the health standards for plants and animals, demanding these measures be scientifically justified and necessary.

GATT (General Agreement on Tariffs and Trade)

An international treaty created in 1947 aimed at promoting trade by reducing tariffs and other trade barriers across various industrial sectors.

Uruguay Round

This was the 8th round of trade negotiations under GATT, held from 1986 to 1994, culminating in the Marrakesh Agreement and leading to the establishment of the WTO.

WTO (World Trade Organisation)

Founded in 1995, this international organization aims to oversee global trade agreements, manage and resolve trade disputes, and ensure that trade flows as smoothly and predictably as possible.

Most-Favoured-Nation (MFN) Treatment

A principle within the WTO framework that mandates that any favorable trade terms offered by one member to another must be extended to all other member nations, ensuring equal trading opportunities.

National Treatment

A rule that requires imported goods to be treated no less favorably than domestically produced goods after customs clearance, promoting fair competition.

TRIPS Agreement

The Agreement on Trade-Related Aspects of Intellectual Property Rights, which sets minimum global standards for protecting intellectual property, such as patents, copyrights, and trademarks, under WTO regulations.

GATS Mode 1: Cross-border supply

A service delivery mode where services are provided across national borders, exemplified by online consulting or telemedicine, without physical presence.

GATS Mode 2: Consumption abroad

In this mode, the consumer travels to another country to consume a service, as seen in tourism or education, where foreign students come to study abroad.

GATS Mode 3: Commercial presence

Involves a company or firm establishing a physical presence in another country to offer services, similar to foreign direct investment (FDI).

GATS Mode 4: Movement of natural persons

This mode involves individual professionals traveling across borders to provide services, such as consultants or musicians performing in different countries.

Doha Round

The 9th multilateral trade negotiation round launched in 2001 aimed at addressing trade issues with a focus on developing countries; it ultimately stalled due to disputes mainly over agricultural policies.

Free Trade Area (FTA)

A form of trade bloc that allows goods to move freely between member countries without internal tariffs while maintaining distinct external tariffs against non-member countries.

Customs Union

An advanced type of trade agreement where member countries not only eliminate internal tariffs but also adopt a common external tariff (CET) for trade with non-members.

Trade Creation

A benefit arising from trade integration that occurs when lower-cost producers within the member countries replace higher-cost domestic producers, leading to increased overall economic welfare.

Trade Diversion

A negative outcome from trade integration when imports shift from a lower-cost supplier outside the bloc to a higher-cost producer within the bloc due to the imposition of common external tariffs.

Foreign Direct Investment (FDI)

Investment made by a company or individual in one country into business interests located in another country, characterized by a significant degree of control and influence, typically defined as having a voting power of at least 10%.

Foreign Portfolio Investment (FPI)

Investment in financial assets such as stocks and bonds in a foreign country which does not grant the investor significant control, often regarded as 'hot money' due to its volatile nature.

Greenfield Investment

A type of FDI where a company establishes a new operation in a foreign country from the ground up, building new production facilities and infrastructure as opposed to acquiring existing operations.

Prebisch-Singer Hypothesis

This economic theory postulates that the prices of primary commodities decline relative to the prices of manufactured goods over the long term, primarily due to differing income elasticities of demand for these products.

Flying Geese Model

An economic model describing the development patterns in Asia where leading countries innovate and shift mature industries to newer economies that follow in their developmental footsteps.

Special and Differential Treatment (S&DT)

Provisions within WTO regulations designed to offer developing countries more lenient terms in trade agreements, including longer adjustment periods and lower obligations.

Balance of Payments (BoP)

An organized record of a country's financial transactions with the rest of the world over a specific time frame, detailing trade balance, capital flows, and financial transfers.

Frictional Unemployment

A type of unemployment that occurs when workers are temporarily between jobs or are entering the workforce for the first time, often considered a natural part of a healthy economy.

Structural Unemployment

Resulting from economic shifts, this unemployment arises when workers' skills no longer match the demands of the job market, often due to technological advancements or changing industry needs.

Cyclical Unemployment

Unemployment linked to the economic cycle, typically rising during recessions and falling during periods of economic expansion, as businesses hire more when demand increases.

Seasonal Unemployment

A type of unemployment that occurs when individuals are out of work during certain seasons or periods of the year due to the nature of their jobs, like harvesting in agriculture.

Demand-Pull Inflation

This monetary phenomenon occurs when the demand for goods and services exceeds their supply, driving prices up during periods of strong economic growth.

Cost-Push Inflation

Occurs when the overall price levels rise due to increases in the cost of wages and raw materials, reflecting reduced aggregate supply in an economy.

Hyperinflation

An extremely high and typically accelerating rate of inflation, often exceeding 50% per month, resulting in a rapid erosion of a currency's real value and destabilizing the economy.

Deflation

The reduced general price level of goods and services in an economy, often accompanied by a decrease in consumer spending and investment, leading to an economic slowdown.

Stagflation

An economic condition characterized by stagnant economic growth, high unemployment, and high inflation occurring simultaneously, presenting challenges for economic policymakers.

Monetary Policy

Actions undertaken by a nation's central bank to control the money supply and interest rates with the aim of influencing economic growth and stability.

Fiscal Policy

Government spending and tax policies used to influence economic conditions, including aggregate demand, employment, and inflation.

Public Debt

The total amount of money that a government owes to creditors, which can impact a nation’s economy due to interest payments and reliance on external financing.

Subsidies

Financial assistance provided by governments to businesses or consumers to encourage production and consumption of specific goods or services, often to manage market prices.

Minimum Wage

The lowest remuneration that employers are legally required to pay their workers, intended to protect worker incomes and ensure a basic standard of living.

Currency Depreciation

A decrease in the value of one currency relative to another currency, reducing the currency's purchasing power in foreign exchange markets.

Currency Appreciation

An increase in the value of a currency compared to other currencies, making exports more expensive and imports cheaper for domestic consumers.

Trade Deficit

A situation that occurs when a country's imports of goods and services exceed its exports, often signaling economic challenges such as reliance on foreign production.

Trade Surplus

When a country exports more goods and services than it imports, providing a positive balance of trade and indicating potential economic strength.