IB Economics HL - The Global Economy Definitions

international trade

the exchange of goods and services between countries

comparative advantage

the theory that a country should specialize in goods that it can produce at the lowest opportunity cost

absolute advantage

when a country is able to produce a product using fewer factors of production than another country

protectionism

when a country seeks to limit free trade in order to protect themselves.

tariff

a tax on imported goods and services allowing more inefficient domestic firms to increase their production and market share

quota

a physical limit on imports usually set below the free market level

exchange rate

the price of one currency in terms of another

floating exchange rate

where the forces of demand and supply determine the rate at which one currency is exchanged for another

fixed exchange rate

where the country’s Central Bank intervenes in the currency market to fix the exchange rate in relation to another currency

managed exchange rate

where the exchange rate is allowed to fluctuate within a specific band around a desired valuation

Balance of payment

a record of all the financial transactions that occur between a country and the rest of the world

the current account

all transactions related to goods and services along with payments related to the transfer of income

goods

visible exports and imports

services

invisible exports and imports

the capital account

a record of small capital flows between countries

the financial account

a record of all transactions associated with changes of ownership of the countries foreign financial assets and liabilities

revenue rule

in order to increase revenue firms should lower prices for products that are price elastic in demand

marshall-lerner condition

if the combined elasticity of exports divided by imports is less than 1 a depreciation (fall in price) will actually worsen the current account balance

J-curve effect

the explanation that it takes time for firms and consumers to respond to a change in price

economic integration

occurs as countries reduce trading barriers and become more interdependent

trading bloc

a group of countries who come together and agree to reduce or eliminate barriers to trade that exist between them

free trade areas

a trading bloc in which countries agree to abolish trade restrictions between members but maintain their own restrictions with other countries

customs union

an agreement between countries in which all goods and services produced by a member are traded tariff free and countries agree on common tariff rates on imports from all external countries

common market

an agreement between countries in which all goods and services produced by a member are traded tariff free and all factors of production flow freely between member countries

monetary union

all goods and services are traded tariff free and all factors of production flow freely but a common Central Bank and currency are established

real GDP

the value of all goods and services produced in an economy in one year and adjusted for inflation

Gross National Income

the income earned by citizens operating outside the country + the GDP

purchasing power parity (PPP)

a conversion factor that shows the number of units of a country’s currency that are required to buy a product in the local economy

institutional framework

the functions of government including the legal system, law enforcement, banking, tax structures and property rights

import substitution

aims to increase domestic production and output by moving consumers away from imports by using tariffs or quotas

export promotion

aims to increase the level of exports through subsidies or connecting local firms with international buyers

increasing diversification

when a country is able to increase the number of products that it offers for export

social enterprise

a focus on meeting specific social objectives

interventionist policies

strategies put in place by governments to correct the failings of the free market and promote development

merit goods

goods which are beneficial to society but are under-provided in the market

inward foreign direct investment (FDI)

when investment by foreign firms results in more than a 10% share of ownership of domestic firms

Bilateral ODA (official development assistance)

government aid that promotes the economic development and welfare of developing countries.

multilateral ODA (official development assistance)

aid from a development agency that promotes the economic development and welfare of developing countries.

market oriented approaches

measures which aim to reduce government intervention and free up private-sector economic activity so that national output increases