INTERNATIONAL ECONOMICS GLOSSARY TERMS

1. Deep integration-economic integration beyond the removal of obvious trade barriers (tariffs) more closed; health and safety regulations
2. Shallow integration-more integrated; have a lower set of tariffs/quotas
3. Foreign direct investment-flows of capital representing physical assets such as real estate, factories, and business
4. Bretton Woods conference-created International Monetary Fund
5. Doha round-consider trade issues of importance to developing countries highly discussed farm subsidies in developing countries
6. Foreign exchange reserves-dollars, yen, pounds, euros, or another currency (or gold) that is accepted internationally
7. GATT-Agreement, not an institution.  Was signed in 1947 by 23 nations.  It was very successful in lowering trade barriers.  Initially, it mentioned all ignored agriculture, textiles, and approached services.  Replaced by WTO in 1986
8. The IMF-multilateral institution serves as the lender of last resort; funded by collecting fees/quotas from members
9. IMF conditionality-If simple economic reforms such as a cut in the value of the currency, or limits on the central bank’s creation of credit, are insufficient to solve the problem permanently, then the IMF usually requires a borrower to make fundamental changes in the relationship between government and markets in order to qualify for IMF funds. Refers to the changes in economic policy that borrowing nations are required to make in order to receive IMF loans.
10. Lender of the last resort to prevent the spread of some types of financial crises.  A source of loanable funds after all commercial sources of lending have disappeared.
11. MFN status-Most-favored nation status is allowed by the WTO under some circumstances because it gives no nation more preferable trading conditions than all other nations.  Says that you treat all your trading partners as well (same tariffs, etc.) as treat your best partners.  No discrimination among trading partners.  All quotes, tariffs, etc. must be the same.  The WTO does occasionally allow violations of MFN status in regional trade agreements if the overall gains in the regional agreement outweigh the losses from the preferential treatment
12. Sovereignty-Multilateral organizations help resolve disputes but they may also reduce national sovereignty.  Covers the rights of nations to be free from unwanted foreign interference in their affairs.
13. Regional trade agreement-free trade, includes partial trade, free-trade area, customs union, common market, and economic union
14. World Bank-international institution that formed at the end of World War II with the initial focus of reconstruction of war-torn areas and today lends to developing nations to aid in economic development
15. WTO-result of Uruguay Round.  The purpose is to help trade flow freely.  Deals with rules of trade between nations at a global near-global level.  A negotiating forum.  A set of rules.  A place to settle disputes.  WTO Principles: Trade without discrimination, Most favored nation-give you have to equal treatment to everyone, National Treatment-once something is in the country, you may have to treat it just like your own stuff, Freer trade gradually through negotiation, Predictability through binding and transparently, Lowers risks, Confident that barriers aren’t going to change, Promoting fair competition, Encourage development and economic reform, and Extending transition time to developing
16. Autarky-complete absence of trade
17. An absolute advantage-A nation does not need to have an absolute advantage in order to have a comparative advantage in producing a good or service.  A country may not have an absolute advantage and still, benefit from trade.  Gains from trade are based on comparative advantage-which country, relatively speaking, produces a good cheaper.  They should specialize and trade in that good.  In two-country trade, each country will have one comparative advantage.
18. Comparative advantage-opportunity cost, who can do it cheaper opportunity cost, who can do it cheaper.  Nations get significant advantages if they have a single, valuable, natural resource, but with significant downside risk.  Not always.  Some countries suffer from the “resource curse.”  The endowment of single resources does not guarantee prosperity.  Labor and capital can become concentrated in that activity alone.  National income can fluctuate quickly if commodity price changes abruptly.  Can be a significant source of political instability and corruption.  David Ricardo introduced the simple trade model and the concept of trade based on comparative advantage
19. Gains from trade (GRAPH)-improvement of national welfare.  In the presence of international trade, we expect the foreign and domestic prices of a good to converge.  The increase in consumption made possible by specialization and trade.
20. Mercantilism-stresses exports over imports, primarily as a way to obtain revenues for building armies and national construction projects
21. Price or trade line (GRAPH)-the trading possibilities for a given country
22. Resource curse-The economic and/or political problems caused by an abundance of one valuable natural resource such as petroleum
23. Zero-sum game-one nation’s gain is the loss of another nation.  The costs and benefits of an activity cancel each other out.
24. Factor abundance-relative cost is less than in countries where it is relatively scarcer
25. Heckscher-Ohlin theory-it is assumed for opportunity costs are increasing; the source of comparative advantage in this is differences in factor endowments.  Nations will not completely specialize in the product in which they have a comparative advantage.  Because of the differences in factor endowments, factors are not perfectly mobile between goods which leads to increasing opportunity costs and a bowed out production possibilities frontier.  To maximize the gains from trade, a country should produce at the point of tangency between the PPF and the trade line.  A firm will completely specialize.  Countries will export products that utilize their abundant and cheap factors of production and import products that utilize true countries factors.  Countries comparative advantage uses in the production of goods that intensively use relatively abundant factors.  Ex: the U.S. has a lot of lands, true produce corn, etc. they have a comparative advantage in canola oil because of their endowments (not their labor).  Once this is determined, it should be possible to predict which goods they’ll export and import.  The relative abundance of a factor implies that in autarky its relative cost is less than in countries where it is relatively scarcer.  Relatively scarce resources are more expensive
26. Offshoring-the relocation of service industry functions to another country
27. The outsourcing – another firm does part of the other company’s business
28. External economies of a scale – a firm experiencing falling average production costs as its industry expands are experiencing this
29. Internal economies of scale – The idea that an individual firm experiences a decline in its average cost of production as it increases the number of units produced.  Both of the previous models assumed constant returns to scale: When inputs doubled, outputs also doubled.  In practice, many industries are characterized by economies of scale: Production is more efficient the larger the scale at which it takes place, Doubling inputs more than doubles output, Decreasing costs over a relatively large range of output.  Economies of scale can be a source of comparative advantage
30. Interindustry trade-United States and Canada trade hydro-powered electricity for Hollywood firms.  Workers in one industry benefit while other workers lose, this kind of trade raises a more political objection.  Interindustry trade is comparative advantage-based trade, and with such trade, a country’s relatively scarce resources endure job losses and reduced incomes.  This type of trade describes U.S.- Mexican trade.  Additionally, such trade yields smaller benefits to consumers.  On the other hand, intraindustry trade is based on economies of scale, and this type of trade, which typifies the U.S.- Canadian trade, tends to yield smaller job threats and greater benefits than interindustry trade
31. Intraindustry trade-if countries have similar factor endowments and productivities; characterized by economies of scale and differentiated products.  Is more politically acceptable because it results in fewer distribution effects than interindustry effects.  Results in fewer income distribution effects between firms and workers in a country.  Thus, there are fewer objections to this kind of trade because workers do not feel hurt.  The majority of U.S. and European trade is intra-industry trade
32. Maquiladora-a form of intraindustry trade between the United States and Mexico to generate employment along Mexico’s northern border
33. Rent seeking-Use lobbying to keep protection in place.  Use resources for nonproductive activities.  Ex: If you are an industry that wants tariffs because other countries are undercover you have to go to Congress, trying to get tariff: very expensive; inefficient
34. Product Differentiation-Each firm produces a slightly different product due to competition in monopolistic structure
35. Monopolistic competition market structure (GRAPH)-can explain why dumping is beneficial to a firm.  A firm may have some power domestically and face a downward sloping D and MR curve, but little power internationally, so they face a horizontal demand curve in foreign markets.  Thus it makes sense for a firm to produce another unit and sell it for less abroad whenever MrABROAD>MRDOM.  Dumping is a form of price discrimination.  It will occur if foreign prices are more elastic than domestic prices.
36. Consumer Surplus (GRAPH)-the value received by consumers over and above what they are required to pay. Everyone values each good differently.  Occurs because firms can’t charge each consumer a different price-car dealership.  What you’re willing to pay-what-you end up paying.  Always above price and below the demand curve
37. Deadweight Loss (GRAPH)-The destruction of value that is not compensated by a gain somewhere else in the economy
38. Producer Surplus (GRAPH)-the difference between the minimum price a producer would accept and the price is actually received.  Receive benefit that didn’t cost anything to them.  Below price, above the supply curve
39. Efficiency loss (GRAPH)-A form of deadweight loss that refers to the loss of income or output that occurs when a nation produces a good at a cost higher than the world price.  Occurs on the production side
40. Tariff (GRAPH)-is increased, the price changed domestically increases, as does the area of producer surplus. Leads to a decrease in the world price of the imported good and an increase in the domestic price of the imported goods when a country is large.  If a country is large, the imposition of a tariff will change the world price.  The domestic p will increase due to the tariff.  Because the country is large, this will shift back international demand and the world price will fall.
41. Non-tariff measures – reduce the number of imports and exports.  Examples: complicated bureaucracies, environmental/health/labor precautions, and technical standards, procurement rules, quotas, and subsidies
42. Quota (GRAPH)-Quantity restriction on imports.  Similar impact.  Import Quota: generates rents that might go to foreigners.  No gain in government revenue.  If eventually consumer demand of a quota good increases, the price increases and producer surplus increases (with tariff price would stay).  Domestic firms prefer quotas to tariffs.
43. Quota Rent-the greater profits for foreign firms as a result of quantitative restrictions on imports rather than tariffs.
44. Voluntary Export restraint – Not always entirely voluntary.  An agreement between nations in which the exporting nation voluntarily agrees to limit its exports in order to reduce competition in the importing country.  Loosely limited by Uruguay Round.  Economic Effects: No Government revenue from the quota.  Instead, foreign producers earn greater profits: quota rents because they artificially limit supply which increases the price
45. Antidumping duty-a tariff levied on an import that is selling at a price below the product’s fair value in retaliation.  Problems: Defining fair value is subjective.  Source of tension between countries.  Approximately 21 duties imposed per year
46. Countervailing Duty-Tariff granted to U.S. industry hurt by a foreign country’s subsidizing its firms; if the industry can prove.  Subsidies allow foreign firms to sell products at lower prices.  Countervailing duty seeks to counter the effect of the benefits of a subsidy.  Problem: defining a subsidy is subjective, Infrequent: 4-5 times a year
47. Dumping (GRAPH)-A consequence of imperfect competition.  Beneficial to firms because of monopolistic competition.  Why would you sell to foreign more?:  Because they can differentiate the price.  The incentive is higher marginal revenue.  Because higher domestic market than foreign (typically) because international markets are imperfectly integrated due to both transportation costs and protectionist trade barriers.  Means foreign sales are more affected by their pricing than domestic sales.  Firms have less monetary power in foreign markets.  Economies of scale lead to the increase of international trade, lead to imperfect competition.  Imperfect competition has consequences for international trade.  Most striking result: firms do not necessarily charge the same price for goods that are exported and those that are sold to domestic buyers.  Dumping: foreign country selling goods in another country for below cost.  Example of price discrimination-different customers, different prices.  A controversial issue in trade policy.  Widely regarded as “unfair”.  Subject to special rules and penalties
48. Infant industry-new industries in developing countries initially need protection to allow them to grow in the face of foreign competition.  Problems: Difficult to predict industries which will become competitive, difficult to determine industries with falling costs, Industries may never grow up the Manufacturing sector
49. Harmonization of standards-Share common standards, For example, Electric sockets (shape), flash drives
50. Mutual recognition of standards-We will honor your law and you will honor ours.  Keep domestic standards.  Recognize foreign standards.  Ex: minimum wage in different countries
51. Pollution Haven- a place that attracts a degrading economic activity by offering less strict environmental regulation.  Evidence on their significance to international pollution is weak
52. Race to the bottom-When countries with high labor/environmental standards face pressure to lower their standards in order to prevent a loss of domestic jobs or competitiveness
53. Transboundary environmental impact-low standards in one country can degrade the environment in another country or other countries
54. Non-transboundary environmental impact-
55. Capital Account-record of some specialized types of relatively small capital flows
56. Financial Account-record of the flow of financial capital
57. Current Account-tracks the flow of goods and services into and out of the country; equal but opposite in sign to the current account.  A Current Account deficit is positive for a nation allows more domestic investment than would have been possible with only domestic savings.  Implicit vote of confidence in domestic financial markets by foreigners.
58. Statistical discrepancy-=-1 x (Current account + Capital account)
59. GDP – the value of goods and services produced in an economy in one year.  GNP – The market value of all final goods and services produced by the residents of a nation, regardless of where the production takes place.  GNP equals GDP minus income paid to foreigners plus income received from abroad.

INTERNATIONAL ECONOMICS GLOSSARY TERMS: