Chapter 14/15: International Trade

Free Trade

The absence of government intervention of any kind in international trade. Takes place without any barriers between individuals, firms or govs from different countries.

Specialisation

Occurs when an individual, firm or country concentrates its production on one or a few goods or services.

Absolute Advantage

Refers to the ability of one country to produce a good using fewer resources than another country.

Comparative Advantage

Refers to the situation where one country has a lower opportunity cost (relative cost) in the production of a good than another country.

Trade Liberalisation

Involves freeing up trade through the removal of trade restrictions.

Trade Protection 

Involves government intervention in international trade through the imposition of trade restrictions to prevent the free entry of imports into a country (protects the domestic economy). 

Tariffs

Taxes on imported goods.

Import Quotas

Legal limits to the quantity of a good that can be imported over a particular time period.

Production Subsidies 

Payments per unit of output granted by the gov to domestic firms that compete with imports.

Export Subsidies

Payment by the gov per unit of the subsidised good - subsidy is paid for each unit of the good that is exported.

Administrative Barriers

Gov imposed rules and regulations which create obstacles to international trade by increasing the complexity and cost of importing foreign goods and services.

Infant Industry 

A domestic industry that has not had time to establish itself and achieve efficiencies in production. 

Diversification

Change involving greater variety

Dumping

The practice of selling a good in international markets at a price below the cost of producing it.

Balance of payments deficit

When the outflow of money is greater than the inflow. 

Economic Integration

Refers to economic cooperation between countries and coordination of their economic policies.

Preferential Trade Agreements

An agreement between two or more countries to lower trade barriers on particular products with each other.

Trading Blocs

A group of countries that have agreed to reduce tariffs and other barriers to trade to encourage free trade and cooperation.

Free Trade Area Agreement

Consists of a group of countries that agree to eliminate trade barriers between themselves. 

Customs Union

A group of countries that have a free trade area and a common policy towards non-members.

Common Market

A customs union that allows the free movement of factors of production.

Trade Creation

When high cost products are replaced by low cost imports.

Trade Diversion

When low cost imports are replaced by higher cost imports from a member of the trading bloc.

Monetary Union

Greater integration than a common market where members adopt a common currency and a common central bank is responsible for monetary policy - the EU.

World Trade Organisation (WTO)

An organisation for liberalising (freeing up) trade.