Ch 1 - Global Interconnection

term 1

International trade

The exchange of goods services and financial capital between countries

Open economy

An economy that engages in trade and financial flows with other countries

Exports

Goods and services sold by residents to overseas buyers

Imports

Goods and services purchased by residents from overseas sellers

Balance of trade

The difference between the value of exports and the value of imports

Net exports

Exports minus imports

Trade intensity ratio

The ratio of total trade to GDP measuring the importance of trade to an economy

Comparative advantage

The ability of a country to produce a good or service at a lower opportunity cost than another country

Absolute advantage

The ability to produce a good or service using fewer resources than another country

Specialisation

The concentration of production on goods and services in which a country has a comparative advantage

Terms of trade

The ratio of export prices to import prices

Net foreign investment

The difference between foreign investment in Australia and Australian investment overseas

Foreign direct investment FDI

Investment by a foreign firm in productive assets such as businesses or infrastructure

Portfolio investment

Investment in financial assets such as shares and bonds without managerial control

Protectionism

Government policies designed to restrict imports and protect domestic industries

Tariff

A tax imposed on imported goods

Quota

A limit on the quantity of a good that can be imported

Subsidy

A government payment to domestic producers to lower production costs

World Trade Organisation WTO

An international organisation that promotes free and fair global trade rules

Most favoured nation principle

A WTO rule requiring equal trading terms to be offered to all member countries

Free Trade Agreement FTA

An agreement between countries to reduce or eliminate trade barriers

Bilateral trade agreement

A trade agreement between two countries

Regional trade agreement

A trade agreement among a group of countries in a region

Trade creation

When a trade agreement leads to more efficient imports replacing higher cost domestic production

Trade diversion

When a trade agreement shifts trade from a lower cost non member to a higher cost member country

Composition of trade

The types of goods and services a country exports and imports

Direction of trade

The countries with which a nation conducts trade

Current account deficit

A situation where imports and other payments exceed exports and income receipts

Globalisation

The increasing integration of economies through trade investment technology and labour movement

Economic growth

An increase in the productive capacity of an economy over time