LM6: international trade

Comparative advantage

The ability of a country to produce a good at a lower opportunity cost than another country, allowing for gains from trade through specialization

Gains from trade

The increase in total economic welfare resulting from specialization, exchange, and more efficient allocation of resources

Income inequality (trade-related)

The uneven distribution of income caused by trade, where some industries and workers benefit while others are adversely affected

Import competition

The pressure faced by domestic firms when competing with foreign producers, often leading to restructuring or job losses

Tariff

A tax imposed on imported goods that raises domestic prices, reduces imports, increases domestic production, and generates government revenue

Import quota

A restriction on the quantity of a good that can be imported, leading to higher prices and reduced imports, with uncertain distribution of economic benefits depending on who controls the quota licenses

Voluntary export restraint (VER)

A trade restriction in which exporting countries agree to limit exports, resulting in higher prices in the importing country and economic rents accruing to foreign producers

export subsidy

A government payment to domestic producers to encourage exports, which increases domestic prices, boosts exports, and reduces national welfare due to fiscal costs

Deadweight loss (trade)

The loss of economic efficiency when trade restrictions reduce total surplus in the economy

Free trade area (FTA)

An agreement among countries to eliminate tariffs and trade barriers between members while maintaining independent trade policies with non-members

Customs union

A trade bloc that includes a free trade area and a common external tariff applied to non-member countries

Common market

A customs union that also allows free movement of labor and capital among member countries

Economic union

A common market with coordinated or unified economic policies among member countries

Monetary union

An economic union in which member countries share a common currency and monetary policy