IB The Global Economy Definitions

Free Trade

The absence of government restrictions to trade between countries.

Absolute Advantage

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

Comparative Advantage

When a country can produce a product at a lower opportunity cost than another country.

Protectionist Measures

Measures involving government intervention to restrict trade between countries.

Tariff

Tax on imports.

Quota

Physical limit on the number of goods that can be imported into a country.

Dumping

Selling of goods in another country at a price below the production cost.

Anti-dumping

Action against the export of goods at a price below their production costs.

Trade War

The imposition of a trade barrier which can trigger off a series of retaliations by trade partners.

Infant Industries

New industries that do no benefit from economies of scale.

Exchange Rate

The price of a currency expressed in terms of another currency

Floating Exchange Rate

Exchange rate that is determined by market forces and not government intervention.

Fixed Exchange Rate

When a currency’s value is fixed by the central bank of a country, and does not fluctuate with the currency’s supply and demand.

Managed Exchange Rate

Periodic intervention by a central bank to influence the exchange rate when it fluctuates outside a set range.

Appreciation

A rise in the price of a currency in a floating exchange rate system.

Depreciation

A decrease in the exchange rate of a currency in a floating exchange rate system.

Devaluation

A decrease in the value of a currency due to government intervention in a fixed exchange rate system.

Overvalued Currency

A currency whose exchange rate is maintained above the equilibrium or floating rate value.

Bilateral Trade Agreement

Trade agreement between two countries aiming to lower trade barriers and increase trade.

Preferential Trade Agreement

Economic integration that reduces trade barriers for certain products to countries that are in the agreement.

Free Trade Area

When a trading bloc abolishes trade barriers between member countries, but each member can maintain its own trade barriers towards non-member countries.

Customs Union

Form of trade agreement where members trade freely amongst themselves and have common external tariffs with non-members.

Monetary Union

A form of economic integration between countries where they can trade freely amongst themselves, have common external tariffs with non-members, and have one central bank with common currency.

World Trade Organisation

An international body which hosts negotiations concerning the reduction of trade barriers between its member nations.