IB Economics - Global Economics HL

free trade

the absence of government intervention of any kind in international trade, so that trade takes place without any restrictions between individuals or firms in different countries

specialisation

occurs when a firm or a country concentrates production on one or a few goods and services

absolute advantage

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

comparative advantage

the ability of a country to produce a good at a lower opportunity cost than another country

theory of comparative advantage

as long as opportunity costs in two or more countries differ, it is possible for all countries to gain from specialisation and trade according to their comparative advantage, resulting in greater global output and consumption

theory of absolute advantage

if countries specialise in and export the goods in which they have an absolute advantage in, there results in an improvement in resource allocation and increased production and consumption in each country

tariff

a tax on imported goods

import quota

a legal limit on the quantity of a good that can be imported over a particular period of time

export subsidy

a payment by the government to an exporter per unit of the subsidised good

administrative barriers

trade protection measures taking the form of administrative procedures that countries may use to prevent the free flow of imports into a country

infant industry

a new domestic industry that has not had time to establish itself and achieve efficiencies in production, and therefore may be unable to compete with more mature competitor firms from abroad

production subsidy

a per-unit of output payment granted by the government to domestic firms that compete with imports

diversification

change involving greater variety, and is used to refer to increasing the variety of goods and services

economically least developed countries (ELDC)

developing countries with very low incomes that have low levels of human capital and a high degree of economic vulnerability

anti-dumping

if a country's trading partner is suspected of practising dumping, then the country should have the right to impose trade protection measures to limit imports of the dumped good

dumping

selling a good in international markets at a price below the cost of producing it, illegal according to international trade rules

preferential trade agreement (PTA)

an agreement between two or more countries to lower trade barriers on particular goods in trade with each other

economic integration

the economic cooperation between countries and coordination of their economic policies and economic links between them

forms of economic integration

trade agreements, trading blocs, monetary unions

bilateral trade agreement

a trade agreement between two countries

multilateral trade agreement

a trade agreement between multiple countries

regional trade agreement

a trade agreement between countries in a specific geographical area

trade liberalisation

the policy of liberalising international trade by eliminating trade protection and barriers to trade

trading bloc

a group of countries that have agreed to reduce tariffs and other barriers to trade for the purpose of encouraging the development of free or free trade and cooperation between them

free trade area

a type of trading bloc consisting of a group of countries that agree to eliminate trade barriers between themselves

customs union

a type of trading bloc consisting of a group of countries that fulfills the requirements of a free trade area and in addition adopts a common policy towards all non-member countries

common market

a type of trading bloc in which countries that fulfills the requirements of a customs union and in addition eliminates all restrictions on factors of production within them

monetary union

a high form of economic integration, involving the adoption of a single currency by a group of countries and common monetary policy carried out by a single central bank

strength of the economic integration of trading blocs

free trade area < customs union < common market

trade creation

the replacement of higher cost products, imported or domestically produced, by lower cost imports that results when a trading bloc is formed and trade barriers are removed

trade diversion

the replacement of lower cost products, imported or domestically produced, by higher cost imports that results when a trading bloc is formed and trade barriers are removed

world trade organisation (WTO)

an organisation that provides the institutional and legal framework for the trading system that exists between member nations worldwide

responsibilities of the WTO

liberalising trade, operating a system of trade rules and providing a forum for trade negotiations between governments and for settling trade disputes

primary products

all products produced in the primary sector of an economy

foreign exchange

foreign national currencies

exchange rate

the value of one country's currency in terms of another

free floating exchange rate system

an exchange rate system where exchange rates are determined entirely by market forces

appreciation

the increase in the value of one currency in terms of another in a free floating exchange rate system

depreciation

the decrease in the value of a currency in terms of another in a free floating exchange rate system

foreign direct investment

the investment by firms based in one country into the productive capacities of another country, with control of at least 10% of the firm in the host country

portfolio investment

financial investment, including investment in stock and bonds

remittances

a transfer of money from one country to another, in most cases by foreign workers who send money from their earnings in the country of residence to their home country

speculation

the buying and selling of something in the hope of making a profit

currency speculation

buying and selling currencies based on expectations of changes in the value of a currency in order to make a profit in the future

fixed exchange rate system

an exchange rate system where exchange rates are fixed by the central bank of each country

devaluation

the decrease in the value of a currency in terms of another in a fixed or managed exchange rate system

revaluation

the increase in the value of one currency in terms of another in a fixed or managed exchange rate system

managed exchange rates

when an exchange is allowed to float within certain upper and lower limits

determinants of free floating exchange rates

tastes and preferences, relative interest rates, relative price levels, speculation, changes in income

overvalued currency

a currency that has a value that is too high relative to its free market value

undervalued currency

a currency that has a value that is too low relative to its free market value

pegged exchange rate

when an exchange is allowed to float within a certain range of the dollar or euro

tools that central banks use to stabilise their currencies

official reserves, changing interest rates and contractionary policies

balance of payments

a record of all transactions between a country's residents and all other countries

credits

all payments received from other countries, inflows

debits

all payments paid to other countries, outflows

balance of payments formula

current account + capital account + financial account = 0 = balance of payments

components of the current account

balance of trade in goods and services, income from abroad, current transfers

balance of trade in goods

part of the balance of payments, it is the value of exports of goods minus the value of imports of goods over a specific period of time

balance of trade in services

part of the balance of payments, it is the value of exports of services minus the value of imports of services over a specific period of time

current transfers

an item in the current account of the balance of payments, refers to the inflows and outflows of funds for gifts, foreign aid and pensions

current account

the balance of trade + the balance on services + inflows minus outflows of income and current transfers

current account surplus

credits > debits

current account deficit

credits < debits

components of the capital account

capital transfers including debt forgiveness, non-life insurance claims, investment grants and non-produced, non-financial assets like mineral rights

financial account

inflows minus outflows of funds due to foreign direct investment, portfolio investment, changes in reserve assets and changes in official borrowing

financial account components

foreign direct investment, portfolio investment, reserve assets and official borrowing

reserve assets

foreign currency reserves that the central bank maintains and can buy or sell to influence the value of the country's' exchange rate

official borrowing

government borrowing from abroad

capital flight

the large scale transfer of privately-owned financial capital to another country resulting from fear and uncertainty of holding domestic assets

credit rating

an assessment of the ability of a borrower to pay back loans

expenditure reducing policies

policies, including contractionary fiscal and monetary policies, that involve reducing expenditures in the domestic economy so as to bring about a decrease in imports in order to correct a current account deficit

expenditure switching policies

policies that involve switching consumption away from imported goods and towards domestically produced goods, in order to correct a current account deficit

Marshall-Lerner Condition

a condition stating when depreciation or devaluation of a country's currency will lead to an improvement in that country's balance of trade

trade balance improves after depreciation or devaluation

PEDx + PEDm > 1

trade balance worsens after depreciation or devaluation

PEDx + PEDm < 1

trade balance remains the same after depreciation or devaluation

PEDx + PEDm = 1

J-curve effect

a curve that plots the balance of trade against time, showing that a country with a devaluing or depreciating currency may see a worsening in its trade balance in the period immediately following the devaluation or depreciation, while in a later period the trade deficit will begin to shrink

benefits of international trade

increased competition, greater efficiency in production, lower prices for consumers, greater choice for consumers, acquiring needed resources, source of foreign exchange, access to larger markets, economies of scale in production, increased domestic production and consumption due to specialisation, more efficient resource allocation, new ideas and technology, interdependence reduces hostilities between countries, trade can be an engine for growth

unrealistic assumptions of comparative advantage

factors of production are fixed, technology is fixed, perfect mobility of resources within the country, full employment of all resources, free trade, homogeneous products, transportation costs are ignored, perfectly symmetrical information

weaknesses of the theory of comparative advantage

specialisation may prevent structural changes to the economy and overspecialisation may increase dependence on the exports of certain goods

acceptable arguments for trade protection

protecting infant industries, national security, health and safety, diversification (especially for LEDCs)

questionable arguments for trade protection

anti-dumping, unfair competition, correction of balance of payment deficits, source of government revenue, protecting domestic jobs

advantages of trading blocs

trade creation, increased competition, expansion into larger markets, economies of scale, lower prices, greater choice for consumers, increased investment, better use of factors of production, stronger bargaining power

disadvantages of trading blocs

trade diversion, trading blocs may be a challenge to WTO trade negotiations, unequal distribution of gains and possible losses, economic integration involves a loss of sovereignty

criticisms of the WTO

accused of promoting trade rules that do not favour developing countries, no agreement on agricultural protection, treats all countries the same, accused of ignoring environmental and labour issues, unequal bargaining power among member states