IMS Test 2

Export

Selling Abroad

Import

Buying from Abroad

Merchandise

Tangible products being traded

Trade Deficit

An economic condition in which a nation imports more than it exports

Trade surplus

An economic condition in which a nation exports more than it imports

Balance of trade

The aggregation of importing and exporting that leads to the country-level trade surplus or deficit

Classical trade theories

The major theories of international trade that were advanced before the 20th century, which consist of (1) mercantilism, (2) absolute advantage, and (3) comparative advantage

Modern trade theories

The major theories of international trade that were advanced in the 20th century, which consist of (1) product life cycle, (2) strategic trade, and (3) national competitive advantage of industries

Theory of mercantilism

A theory that suggests that the wealth of the world is fixed and that a nation that exports more and imports less will be richer

Protectionism

The idea that governments should actively protect domestic industries from imports and vigorously promote exports

Free trade

The idea that free market forces should determine how much to trade with little or no government intervention

Theory of absolute advantage

A theory that suggests that under free trade, a nation gains by specializing in economic activities in which it has an absolute advantage

Absolute advantage

The economic advantage one nation enjoys that is absolutely superior to other nations

Theory of comparative advantage

A theory that focuses on the relative (not absolute) advantage in one economic activity that one nation enjoys in comparison with other nations

Comparative advantage

Relative (not absolute) advantage in one economic activity that one nation enjoys in comparison with other nations

Opportunity cost

Cost of pursuing one activity at the expense of another activity, given the alternatives (other opportunities)

Factor endowment

The extent to which different countries possess various factors of production such as labor, land, and technology

Factor endowment (Heckscher–Ohlin) theory

A theory that suggests that nations will develop comparative advantages based on their locally abundant factors

Product life cycle theory

A theory that accounts for changes in the patterns of trade over time by focusing on product life cycles

Strategic trade theory

A theory that suggests that strategic intervention by governments in certain industries can enhance their odds for international success

Strategic trade policy

Government policy that provides companies a strategic advantage in international trade through subsidies and other supports

Theory of national competitive advantage of industries (“diamond” theory):

A theory that suggests that the competitive advantage of certain industries in different nations depends on four aspects that form a “diamond”

resource mobility

The assumption that a resource used in producing a product for one industry can be shifted and put to use in another industry.

Tariff barrier

Trade barrier that relies on tariffs to discourage imports

Import tariff

A tax imposed on imports

Deadweight cost

Net losses that occur in an economy as a result of tariffs

Trade war

Economic conflict resulting from extreme protectionism in which nations raise or create tariffs or other trade barriers against each other

Nontariff barrier (NTB)

Trade barriers that rely on nontariff means to discourage imports

Subsidies

Government payments to domestic firms

Import quota

Restrictions on the quantity of imports

Voluntary export restraints (VER):

International agreement that shows that exporting nations voluntarily agree to restrict their exports

Local content requirement

Requirement stipulating that a certain proportion of the value of the goods made in one nation (or region) must originate from that nation (or region)

Administrative policy

Bureaucratic rules that make it harder to import foreign goods

Antidumping duty

Tariff levied on imports that have been “dumped” (selling below costs to “unfairly” drive domestic firms out of business)

Export control

Export prohibition and restriction

Infant industry argument:

The argument that if domestic firms are as young as “infants,” in the absence of government intervention, they stand no chance of surviving and will be crushed by mature foreign rivals)

Trade embargo

Politically motivated trade sanction against foreign countries to signal displeasure)

Foreign portfolio investment (FPI):

Investment in a portfolio of foreign securities such as stocks and bonds

Sovereign wealth funds (SWF):

A state-owned investment fund composed of financial assets such as stocks, bonds, real estate, and other financial instruments

Management control right

The right to appoint key managers and establish control mechanisms

Upstream vertical FDI

A type of vertical FDI in which a firm engages in an upstream stage of the value chain in a host country

Downstream vertical FDI

A type of vertical FDI in which a firm engages in a downstream stage of the value chain in a host country

FDI flow

The amount of FDI moving in a given period (usually a year) in a certain direction

FDI inflow

Inward FDI moving into a country in a year

FDI outflow

Outward FDI moving out of a country in a year

FDI stock

Total accumulation of inward FDI in a country or outward FDI from a country across a given period

Horizontal FDI

A type of FDI in which a firm duplicates its home country based activities at the same valuechain stage in a host country

Vertical FDI

A type of FDI in which a firm moves upstream or downstream at different value-chain stages in a host country

Licensing

Firm A’s agreement to give Firm B the rights to use A’s proprietary technology (such as a patent) or trademark (such as a corporate logo) for a royalty fee paid to A by B; this is typically done in manufacturing industries

Market imperfection (Market failure)

The imperfect rules governing international transactions

Agglomeration

Clustering of economic activities in certain locations

Knowledge spillovers

Knowledge diffused from one firm to others among closely located firms

oligopoly

an industry dominated by a small number of players.

Radical view

A political view that is hostile to FDI

Free market view

A political view that suggests that FDI unrestricted by government intervention is the best

Pragmatic nationalism:

A political view that only approves FDI when its benefits outweigh its costs

technology spillover

technology diffused from foreign firms to domestic firms.

Tax avoidance

Efforts to minimize taxes

Tax haven

Jurisdiction that offers low taxes as a primary way to attract investment

Bargaining power

Ability to extract favorable outcome from negotiations due to one party’s strengths

Obsolescing bargain

The deal struck by MNEs and host governments, which change their requirements after the initial FDI entry

Regional economic integration

Efforts to reduce trade and investment barriers within one region

Global economic integration

Efforts to reduce trade and investment barriers around the globe

General Agreement on Tariffs and Trade (GATT):

A multilateral agreement governing the international trade of goods (merchandise)

World Trade Organization (WTO)

The official title of the multilateral trading system and the organization underpinning this system since 1995

European Union (EU)

The official title of European economic integration since 1993

Multilateral trading system

The global system that governs international trade among countries—otherwise known as the GATT/WTO system

Nondiscrimination

A principle that a country cannot discriminate among its trading partners

Free trade area (FTA):

A group of countries that remove trade barriers among themselves

Eurasian Economic Union (EAEU):

A free trade area launched by Belarus, Kazakhstan, and Russia

Customs union

One step beyond a free trade area, a customs union imposes common external policies on nonparticipating countries

Common market

Combining everything a customs union has, a common market, in addition, permits the free movement of goods and people

Economic union

Having all the features of a common market, members also coordinate and harmonize economic policies to blend their economies into a single economic entity

Monetary union

A group of countries that use a common currency

Political union

The integration of political and economic affairs of a region

Schengen

A passport-free travel zone within the EU

Euro

The currency currently used in 19 EU countries

Euro zone

The 19 EU countries that currently use the euro as the official currency

Brexit

British exit from the EU

North American Free Trade Agreement (NAFTA)

A free trade agreement among Canada, Mexico, and the United States that was in force between 1994 and 2020

United States–Mexico–Canada Agreement (USMCA)

A free trade agreement that replaced NAFTA

Andean Community

A customs union in South America that was launched in 1969

Mercosur

A customs union in South America that was launched in 1991

Union of South American Nations (USAN/UNASUR)

A regional integration mechanism integrating two existing customs unions (Andean Community and Mercosur) in South America

United States–Dominican Republic–Central America Free Trade Agreement (CAFTA):

A free trade agreement between the United States and five Central American countries and the Dominican Republic

Australia–New Zealand Closer Economic Relations Trade Agreement (ANZCERTA or CER)

A free trade agreement between Australia and New Zealand

Association of Southeast Asian Nations (ASEAN):

The organization underpinning regional economic integration in Southeast Asia

Asia–Pacific Economic Cooperation (APEC):

The official title for regional economic integration involving 21 member economies around the Pacific

Trans–Pacific Partnership (TPP)

A multilateral free trade agreement being negotiated by 12 Asia Pacific countries

Comprehensive and Progressive Agreement for Trans– Pacific Partnership (CPTPP or TPP11):

A free trade agreement launched by the 11 remaining members of TPP after the US withdrew from TPP

Regional Comprehensive Economic Partnership (RCEP):

A free trade agreement launched by ASEAN 10, CER 2, and East Asia 3 (China, Japan, and Korea)

Belt and Road Initiative (BRI):

A global infrastructure investment and development strategy adopted by the Chinese government to invest in Africa, Asia, and Europe

African Continental Free Trade Area (AfCFTA):

A free trade area formed by 54 of the 55 African countries to promote Africa-wide economic integration

State aid

government assistance to help domestic firms

Institutional void

Institutional conditions of a country lacking market-supporting infrastructure

Location-specific advantage:

The benefits a firm reaps from the features specific to a place.

First-mover advantage

Benefits that accrue to firms that enter the market first and that late entrants do not enjoy

Late-mover advantage

Benefits that accrue to firms that enter the market later and that early entrants do not enjoy

Scale of entry

The amount of resources committed to entering a foreign market

Nonequity mode

A mode of entry (exports and contractual agreements) that reflects relatively smaller commitments to overseas markets