Chapter 1: Trade in the Global Economy

Trade balance

The difference between its total value of exports and its total value of imports (usually including both and services)

Trade surplus

Countries that export more than they import

Ex. China

Trade deficit

Countries that import more than they export

Ex. US

Bilateral trade balance

The difference between exports and imports between two countries

Value-added

The difference between the value of a product when it leaves the country its made in and the costs of parts and materials purchased in said country and imported from other countries

Value-added example

To make an iPhone in China all the parts can come from different countries and are just assembled there, but the whole export value will be labeled as coming from China

Offshoring

Strategy where companies relocate to another country to reduce costs

Trade embargo

A complete elimination of imports

Gross domestic Product (GDP)

Value of all final goods produced in a year

Why are big countries the smallest trading nations when trade is measured as a percent of a country’s GDP?

Very large countries tend to have a lot of trade among states or provinces within their borders, but that trade is not counted as part of international trade

Trade barriers

All factors that influence the amount of goods and services shipped across international borders

Trade barrier examples

• Country size

• Import tariffs

• Transportation costs of shipping from one country to another

• Events, such as wars and natural disasters, that lead to reduced trade

First golden age of trade

• Period from 1890 to WW1 (1914-1918) is sometimes considered a “golden age” of international trade

• These years saw dramatic improvements in transportation, such as the steamship and the railroad, which allowed for a great increase in the amount of international trade

Political economy

Explanations for tariffs and other policy actions that combine both economic and political reasoning

Import quotas

A limit on the quantity of an imported good allowed into a country

Trade war

Tariff increases as countries retaliate against the actions of one another

Second golden age of trade

• In addition to the end of WWII and tariff reductions under the General Agreement on Tariffs and Trade, lower transportation costs contributed to the growth in trade

• The shipping container, invented in 1956, allowed goods to be moved by ship, rail, and truck more cheaply than before

International trade can act as a substitute for movements of labor or capital across borders, true or false?

True, in the sense that trade can raise the living standard of workers in the same way moving to a higher-wage country can

Foreing direct investment occurs when

A firm in one country owns a fraction (10%) of a firm located in another country

What does 10% ownership of a firm mean

Meants the owner of the 10% has a large amount of control over the firm

Horizontal FDI

• When a firm produces and sells the same product in 2 countries

• EX. coke products in a ton of other countries

Vertical FDI

• When a firm produces a component of a product in another country

• EX. Phones getting made in China and then bringing it to America to get sold

Trade balance equation

Y (GDP [income]) = C (aggregate consumption) + I (investment) + G (government spending) + Ex (exports) - Im (imports)

Outsourcing

Getting a different componay to produce your product but you are both still in the same country