International Economics: Trade, Protectionism, Integration, and Exchange Rates

Vocabulary flashcards covering international trade theory, trade barriers, degrees of economic integration, foreign exchange systems, and arguments surrounding protectionism.

Mercantilism

An early economic trade philosophy based on accumulating national wealth through maximizing exports and limiting imports.

Comparative Advantage

The core economic logic where countries specialise in producing what they are relatively most efficient at, and then trade to obtain other goods and services.

Economies of Scale

Cost-saving efficiencies gained from increasing production size and output when supplying larger international markets, facilitated by specialized management and the division of labour.

Export Market Equilibrium (Free Trade)

A market condition occurring when the world price ($P_w$) exceeds the domestic equilibrium price ($P_d$); domestic quantity supplied ($Q_3$) exceeds domestic quantity demanded ($Q_2$), resulting in an exported surplus equal to $Q_3 - Q_2$.

Import Market Equilibrium (Free Trade)

A market condition occurring when the world price ($P_w$) is lower than the domestic equilibrium price; domestic quantity demanded ($Q_3$) exceeds domestic quantity supplied ($Q_2$), with the shortfall ($Q_3 - Q_2$) satisfied by foreign imports.

Trade Protectionism

Government intervention in international trade through the imposition of trade restrictions or barriers to prevent the free entry of imports into a country.

Tariff

A tax placed on imported goods designed to protect domestic industries from foreign competition and raise revenue for the government.

Tariff Market Diagram

An economic model showing the implementation of a tariff, raising the import price from $P_w$ to $P_w + t$, which increases domestic supply, reduces domestic demand, generates government tax revenue, and creates deadweight welfare loss.

Import Quota

A physical legal limit placed on the quantity of a good that can be imported into a country over a specific period of time.

Quota Market Diagram

A supply and demand diagram illustrating an import quota, where the domestic supply curve shifts rightward by the quota limit ($S_d + \text{Quota}$), raising market price and restricting imports without directly creating government revenue.

Production Subsidy

A direct financial payment provided to a domestic firm by the government for each unit of output produced, lowering domestic production costs.

Export Subsidy

A financial payment made by a government to domestic producers for every unit of output exported, boosting domestic exporter competitiveness at the expense of government budgets and foreign competitors.

Administrative Barriers (Red Tape)

Bureaucratic procedures, complicated paperwork, legal formalities, and remote port designations designed to increase costs and delay import entry.

Embargo

An extreme form of quota that completely bans imports from or trade with a specific country, typically used as an economic sanction or political punishment.

Economic Integration

The process through which countries coordinate and link their economic policies by reducing trade barriers and harmonizing fiscal and monetary policies.

Preferential Trading Area (PTA)

A trade agreement where designated products from specific member nations receive preferential access through reduced tariffs rather than their complete elimination.

Free-Trade Area (FTA)

An integration stage where internal tariffs and barriers are eliminated between member states, while each member retains autonomy over tariffs applied to non-member countries.

Customs Union

An economic agreement where member countries trade freely among themselves and adopt a common external tariff/barrier against imports from non-member nations.

Common Market

A customs union that integrates common product regulations and allows the free movement of goods, services, capital, and labour among member countries.

Economic and Monetary Union

A common market that adopts a unified common currency and a shared central bank, such as the euro zone.

World Trade Organization (WTO)

An international body that administers trade agreements, provides a forum for multilateral trade negotiations, and resolves disputes among member nations.

Exchange Rate

The value or price of one national currency expressed in terms of another currency on foreign exchange markets.

Floating Exchange Rate System

An exchange rate regime where the external value of a currency is determined entirely by market forces of demand and supply without government or central bank intervention.

Currency Appreciation (Supply and Demand)

An increase in the equilibrium value of a currency within a floating regime, driven either by an outward shift in currency demand ($D_1 \rightarrow D_2$) or an inward shift in currency supply ($S_1 \rightarrow S_2$).

Currency Depreciation (Supply and Demand)

A decrease in the equilibrium value of a currency within a floating regime, caused either by an inward shift in currency demand ($D_1 \rightarrow D_2$) or an outward shift in currency supply ($S_1 \rightarrow S_2$).

Fixed Exchange Rate System

A regime where a currency's value is pegged to another currency, a basket of foreign currencies, or a commodity like gold, maintained via active central bank intervention.

Managed Exchange Rate System

A system where exchange rates float to long-term market equilibriums, but central banks intervene periodically within undisclosed bands to minimize extreme short-term volatility.

Devaluation

The deliberate administrative downward adjustment of a currency's pegged value by a government or central bank in a fixed exchange rate regime.

Revaluation

The deliberate administrative upward adjustment of a currency's pegged value by a government or central bank in a fixed exchange rate regime.

SPICED

An economic mnemonic stating: Strong Pound, Imports Cheaper, Exports Dearer.

Infant Industry Argument

The rationale that emerging domestic industries lack economies of scale and need temporary protection against foreign competitors until they mature.

Over-specialisation (Protectionism Argument)

The vulnerability of relying too heavily on producing narrow product lines, leading nations to protect domestic production to maintain strategic self-sufficiency.

Strategic Reasons (Protectionism Argument)

The argument for shielding critical sectors such as steel, energy generation, and agriculture during conflicts so that a nation remains secure and independent if cut off from imports.

Dumping

The practice where foreign producers sell substantial quantities of a product abroad at prices below their domestic production cost.

Retaliation (Trade Barriers)

The counter-imposition of trade restrictions by an affected trading partner, often escalating into damaging trade conflicts such as the $25\%$ steel and $10\%$ aluminium tariff disputes.