|Factor of Endowments
||Factors of production that a country has available to produce goods and services.
||Japan has a strong labor force.
||Exists where a country specializes in the production of goods and services where they have a comparative advantage in production. They will then trade to get the goods and services in which they do not specialize.
||Japan specializes in the production of electronic goods.
||Exists where a country is able to produce more output than other countries using the same inputs of factors of production.
||China has an absolute advantage over Sri Lanka in its production of rice.
||Exists where a country is able to produce a good at a lower opportunity cost of resources than other country.
||Hawaii has a comparative advantage in producing pineapples over France.
||International trade that takes place without any barriers such as tariffs, quotas, or subsidies.
||In the EU there are no barriers to imports.
||A duty tax that is placed upon imports to protect domestic industries from foreign competition and to raise revenue for the government.
||U.S. put a tariff on France’s Roquefort Cheese.
||An import barrier that set upper limits on the quantity or value of imports that may be imported into a country.
||EU has a quota for fish.
||An amount of money paid by the government to a firm, per unit of output, to encourage output and to give the firm and advantage over foreign competitors.
||Japanese government subsidizes rice farmers.
|Voluntary Export Restraint
||A voluntary agreement between an exporting country and an importing country that limits the volume of trade in a particular product.
||In the 1980s Japan imposed a VER on their automobile imports to the U.S..
|Infant Industry argument
||Proposes that new industries should be protected from foreign competition until they are large enough to compete in international markets.
||Brazil uses the Infant Industry argument to protect its automobile industries.
||Is selling of a good in another country at a price below its unit cost of production.
||The U.S. claimed that Canada was dumping its wheat in the U.S.
||Is a legislation to protect an economy against the import of a good at a price below its unit cost of production.
||The EU put an anti-dumping legislation on shrimp.
|Free Trade Area
||Exists when an agreement is made between countries, where the countries agree to trade freely among the member of the group, but are able to trade with countries outside the FTA in whatever ways they wish.
||ASEAN is a free trade area. Asian nations.
||An agreement made between countries, where the countries agree to trade freely among themselves, and they also agree to adopt common external barriers against any country attempting to import into the union.
||The EU is a customs union.
||A customs union with common policies on product regulation, and the free movement of goods, services, capital and labor.
||Southern Cone Common Market (MERCOSUR) of Argentina, Brazil, Paraguay and Uruguay is an example of a common market. So is EU.
||Occurs when the entry of a country into a trading bloc leads to the production of a good moving from a high-cost producer to a low-cost producer.
||When a country would join the EU.
||Occurs when the entry of a country into a customs union leads to the production of a good moving from a low-cost producer to a high-cost producer.
||When a country would leave the EU.
|World Trade Organization
||An international body that sets the rules for global trading and resolves disputes between its member countries. It also hosts negotiations concerning the reduction of trade barriers between its member nations.
||Deals with the rules of trade for 153 countries.
|Balance of Payments
||A record of the value of all the transactions between the residents of a country with the residents of all other countries over a given period of time.
||All countries have balance of payments.
|Balance of Trade
||Measure of the revenue received from the exports of tangible goods minus the expenditure on the imports of tangible goods over a given period of time.
||The U.S. has a negative balance of trade with China.
||Measure of the revenue received from the exports of services minus the expenditure on the imports of services over a given period of time.
||The U.S. outsources to India.
||Measure of the flow of funds from trade in goods and services, plus net investment income flows (profit, interest, and dividends) and net transfers of money (foreign aid, grants and remittances.)
||Every country has a current account.
||Measure of the buying and selling of assets between countries. The assets are often separated to show assets that represent ownership and assets that represent lending.
||Every country has a capital account.
|Current account surplus
||This exists when the revenues from the exports of goods and services and income flows is greater than the expenditure on the import of goods and services and income flows over a given period of time.
||China is in a current account surplus with the U.S.
|Current account deficit
||This exists when revenues from the export of goods and services and income flows is less than the expenditure on the import of goods and services and income flows over a given period of time.
||U.S. is in a current account deficit with China
||Policies implemented by the government that attempt to switch the expenditure of domestic consumers away from imports towards domestically produced goods and services.
||The U.S. put tariffs on cheese from France.
||Policies implemented by the government that attempt to reduce overall expenditure in an economy, including expenditure on imports.
||Tariffs or such that would reduce the expenditure on imports. U.S. imposed a quota on cloth from China.
||States that a deprecation, or devaluation of a currency will only lead to an improvement in the current account balance if the elasticity of demand for exports and imports is greater than one.
||Raw materials do not have an elasticity of higher than 1 and therefore they would not affect the current account much.
||The theory suggests that in the short term, even if the Marshall-Lerner condition is fulfilled, a fall in the value of the currency will lead to a worsening of the current account deficit, before thins improve in the long run.
||The value of one currency expressed in terms of another.
|Fixed exchange rate
||An exchange rate regime where the value of a currency is fixed, or pegged to the value of another currency or to the average value of a selection of currencies or another commodity like gold.
||Hong Kong to the $ U.S.
|Floating exchange rate
||An exchange rate regime where the value of a currency is allowed to be determined solely by the demand for and supply of the currency on the foreign exchange market.
||The U.S. $ is a floating exchange rate.
||A fall in the value of one currency in terms of another in a floating exchange rate system.
||If the yen depreciates to the $ then 1 yen is now wroth less in terms of $.
||An increase in the value of a currency in a floating exchange rate system.
||If the yen appreciates to the $ then 1 yen is now wroth less in terms of $.
||A decrease in the value of a currency in a fixed exchange rate system.
||If the Hong Kong $ decreases in value against the U.S. $.
||An increase in the value of a currency in a fixed exchange rate system.
||If the Hong Kong $ increases in value against the U.S. $.
|Purchasing power parity theory
||Theory states that under a floating exchange rate system, exchange rates adjust to offset differential rates of inflation between countries that are trading partners in order to restore balance of payments equilibrium.
||The big mac in different countries costs different.
|Terms of trade
||An index that shows the value of a country’s average export prices relative to their average import prices.
||Developing countries were considered to be at a disadvantage regarding terms of trade. This is because exports are more often raw goods or commodities with lower prices than the manufactured goods imported from more developed counties.
|Deteriorating terms of trade/adverse terms of trade
||Exists when the average price of exports fall relative to the average price of imports.
||Since 2004 the US has annually spent over $600 billion MORE on imports than it earned from the sale of its exports.
|Elasticity of demand for exports
||It is a measure of the responsiveness of the quantity demanded of exports when there is a change in the relative price of exports.
||Luxury goods have a higher elasticity for exports.
|Elasticity of demand for imports
||It is a measure of the responsiveness of the quantity demanded of imports when there is a change in the relative price of imports.
||Capital goods/raw goods that are needed in production of other goods will have a lower price elasticity.