MGCR 382 - Quiz Flashcards

International Trade

International trade refers to the voluntary exchange of goods, services, assets, or money between persons or organizations across national borders. Its roots date back to ancient civilizations where trade began as a barter system and evolved through the establishment of trade routes, such as the Silk Road, facilitating cultural and material exchange.

Absolute Advantage

Introduced by economist Adam Smith in the 18th century, absolute advantage defines the ability of a country to produce a good more efficiently than another country. This concept implies that if one country can produce more of a product with the same resources as another, it has an absolute advantage in producing that product.

Comparative Advantage

Developed by economist David Ricardo in the early 19th century, comparative advantage occurs when a country specializes in producing goods for which it has the lowest opportunity cost compared to other goods. This allows for greater overall efficiency in production and trade, as countries benefit from specializing.

Mercantilism

A dominant economic theory from the 16th to the 18th centuries, mercantilism emphasizes the importance of accumulating wealth, primarily gold and silver, through a favorable balance of trade. Governments encouraged exports and discouraged imports through tariffs and regulations, leading to early protectionist policies.

Heckscher-Ohlin Theory

Proposed by Eli Heckscher and Bertil Ohlin in the 20th century, the Heckscher-Ohlin theory posits that a country will have a comparative advantage in producing goods that intensively use resources it has in abundance, focusing on factor endowments like labor, land, and capital.

Foreign Direct Investment (FDI)

FDI occurs when an individual or firm invests directly in a foreign country to gain control over assets. Historically significant post-World War II, FDI often includes the establishment of production facilities or acquiring local businesses, leading to increased globalization.

Protectionism

Protectionism refers to policies designed to restrict international trade to support domestic industries. Historically, such practices were common during economic downturns and were prominent during the Great Depression, leading to the imposition of tariffs and quotas.

Trade Barriers

Trade barriers are government regulations that increase the cost and limit the quantity of imported goods. These may include tariffs, quotas, and import licenses, which have been utilized throughout history to protect local industries from foreign competition.

Subsidies

Subsidies are financial assistance provided by governments to support local businesses and industries. They can take the form of tax breaks or direct financial support, often used to enhance competitiveness in international markets.

Tariffs

Tariffs are taxes imposed by a government on imported and exported goods, historically used to protect domestic industries and generate government revenue. The Smoot-Hawley Tariff Act of 1930 exemplifies how high tariffs can decrease international trade.

The World Trade Organization (WTO)

Established in 1995, the WTO is an international body that regulates and facilitates international trade agreements. It replaced the General Agreement on Tariffs and Trade (GATT) and aims to ensure that trade flows as smoothly and predictably as possible.

Exchange Rate

The exchange rate is the price of one currency expressed in terms of another currency. Exchange rates fluctuate due to economic factors, speculation, and geopolitical stability, impacting international trade dynamics.

Spot Rate

The spot rate is the current exchange rate at which a currency can be exchanged immediately. Spot transactions are conducted for immediate delivery and settlement, representing a snapshot of market conditions.

Forward Rate

The forward rate is an agreed exchange rate for a currency transaction that will occur at a future date. It is used to hedge against currency fluctuations and provide certainty in financial planning.

Bid Rate

The bid rate is the price at which a foreign exchange dealer is willing to buy a currency. It reflects market demand and liquidity, and traders use it to gauge entry points for currency transactions.

Ask Rate

The ask rate is the price at which a foreign exchange dealer is willing to sell a currency. The difference between the bid and ask rates, known as the spread, represents the dealer's profit margin.

Arbitrage

Arbitrage is the simultaneous buying and selling of the same asset in different markets to profit from price differences. This practice plays a crucial role in maintaining market equilibrium and efficiency.

Triangular Arbitrage

Triangular arbitrage involves exploiting discrepancies in exchange rates among three currencies. Traders can profit by converting one currency to another and then to a third, ultimately returning to the original currency at a favorable rate.

The Impossible Trinity

The Impossible Trinity is an economic principle that states a country cannot simultaneously maintain a fixed foreign exchange rate, have free capital movement, and an independent monetary policy. This challenge affects global financial systems and economic strategies.

Eurocurrency

Eurocurrency refers to domestic currencies held on deposit in banks outside their country of origin. This financial instrument arose from the need for foreign exchange facilities and contributed to the expansion of international finance.

Capital Mobility

Capital mobility is the ability to move capital in and out of a country without restrictions. High capital mobility can influence exchange rates and investment flows, impacting domestic economies.

Economic Rationale for Trade Intervention

The economic rationale for trade intervention includes reasons such as fighting unemployment, protecting infant industries, and maintaining essential industries. Historical protectionist measures often aimed to shield these sectors from global competition.

Non-Economic Rationales for Trade Intervention

Non-economic rationales for trade intervention include preserving national culture, promoting acceptable practices abroad, and maintaining spheres of influence. These motives can drive government policies beyond mere economic concerns.

Quotas

Quotas are government-imposed limits on the quantity of a specific good that can be imported or exported during a given timeframe. They serve to protect domestic industries by restricting foreign competition.

Voluntary Export Restraint (VER)

A VER is a self-imposed limitation on the quantity of a good that an exporting country is willing to export. This practice, existing to avoid stricter trade barriers, has been utilized in various industries, including automobiles and textiles.

Embargo

An embargo is a government order that restricts commerce or trade with a specific country or the exchange of certain products. Embargoes have been historically employed as political tools to exert pressure on nations.

Linder's Country Similarity Theory

Linder's Country Similarity Theory, developed by economist Staffan Linder, posits that countries with similar income levels are more likely to trade with each other. This theory highlights the role of demand in driving trade patterns.

New Trade Theory

New Trade Theory, articulated by economists like Paul Krugman in the late 20th century, emphasizes increasing returns to scale and network effects. This theory suggests that market size can significantly influence trade behavior and industry structure.

Classical Trade Theories

Classical Trade Theories, including those by Smith, Ricardo, and Heckscher-Ohlin, focus on country-specific advantages and factor endowments in determining trade patterns, providing a foundation for modern international economics.

Firm-Based Trade Theories

Firm-Based Trade Theories emphasize the role of individual firms in international trade, particularly through intra-industry trade, explaining how firms' strategies and capabilities shape globalization dynamics.

Balancing Trade

Balancing trade refers to the practice of ensuring that the value of imports and exports activities aligns to maintain economic stability and avoid excessive trade deficits or surpluses.

The Balance of Payments

The Balance of Payments is a comprehensive statement summarizing all transactions between residents of a country and the rest of the world over a specific period. It includes the trade balance, capital flows, and financial transfers.

Leontief Paradox

The Leontief Paradox, named after economist Wassily Leontief, refers to the observation that the United States, which was expected to export capital-intensive goods due to its abundant capital resources, actually exported labor-intensive goods and imported capital-intensive goods. This paradox challenges traditional trade theory and reflects the complexities of factor endowments and technological advancements.