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Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
Diagrams & Definitions
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Diagrams & Definitions

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  • 1. Portfolio
    Definitions and diagrams from Section 4
  • 2. Factor endowments
    Factors of production that a country has available to produce goods and services
    Real world example: Japan has people, China has land
  • 3. specialization
    Country specializes in the production of goods and services where they have a comparative advantage in production.
  • 4. Absolute and comparative advantage
    Absolute: The ability to produce a particular good with fewer resources than another country.
    Comparative: The ability to produce a particular good at a lower opportunity cost than another country.
    Real world example: Japan makes technology and Thailand rice
  • 5. Shoes (pairs)
    3
    2
    China
    India
    0
    5
    12
    Cloth (meter)
    Figure 1: Production PossibilitiesCurves (PPCs) for India and China
  • 6. Protectionism & free trade
    Free trade: Absence of intrusions (subsidies) or barriers (tariff and quota) in the flow of goods and services between countries.
    Protectionism: Presence of intrusions (subsidies) or barriers (tariffs and quotas) in the flow of goods and services between countries
  • 7. Tariff
    Tariffs: taxes on goods imported into a country in order to protect local industries. They are a form of protectionism and are often used by governments to try to reduce the level of imports into a country.
    Real world example: Brazil on US agricultural products
  • 8. Price of agricultural goods
    SBrazil
    Government Revenue
    Deadweight loss
    P1
    P3
    SUS+TARIFF
    P2
    SUS
    D
    Q3
    Q5
    Q1
    Q2
    Q4
    0
    Quantity of agricultural goods
    Before tariff
    domestic
    imports
    After tariff
    domestic
    imports
    Tariff
  • 9. Quota
    Quota: limit on the quantity of goods that can be imported into a countryin order to protect local industries.
    Real world example: Japan
  • 10. Price of agricultural goods
    SBrazil
    Government Revenue
    Deadweight loss
    P1
    P3
    SUS+TARIFF
    P2
    SUS
    D
    Q3
    Q5
    Q1
    Q2
    Q4
    0
    Quantity of agricultural goods
    Before tariff
    domestic
    imports
    After tariff
    domestic
    imports
    Quota
  • 11. Subsidy
    Subsidy: payment made to firms or consumers designed to encourage an increase in output in order to protect local industries.
    Real world example: US to agricultural farmers
  • 12. Price of agricultural goods
    SUS
    SUS+SUBSIDIES
    Cost to Government
    Size of subsidy
    P1
    SWORLD
    P2
    D
    Q3
    Q1
    Q2
    0
    Q4
    Quantity of agricultural goods
    Before subsidy
    domestic
    imports
    After subsidy
    domestic
    imports
    Subsidy
  • 13. Voluntary exports restraint
    Voluntary agreement between an exporting country and an importing country that limits the volume of trade in a particular product
    Real world example: Japan and cars (reduced their exports to US)
  • 14. Dumping & anti-dumping
    Dumping: selling of a good in another country at a price below its unit cost of production
    Anti-dumping: legislation to protect an economy against the import of a good at a price below its unit cost of production
    Real world example: Dumping US chicken in China (anti-dumping China on US chicken)
  • 15. World trade organization (wto)
    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.
  • 16. Economic integration & globalization
    Economic integration: A process whereby countries coordinate, link and harmonize their economic policies.
    Globalization: The spread of economic, social & cultural ideas across the world, the result of increased economic integration through trade, investment and improving technology
  • 17. Trading blocks
    Countries agree to increase trade and cooperate.
    Real world example: EU and ACP
  • 18. Free trade area
    Countries remove trade barriers between themselves but trade in anyway with counties outside the group
    Real world example: NAFTA
  • 19. Customs union & common market
    Countries adopt common trading policies.
    Countries adopt common regulations policies and the free movement of goods and service, capital and labor to form a common market.
    Real world example: EU
  • 20. Economic and Monetary Union
    Countries adopt a common market and currency.
    Real world example: Euro zone
  • 21. Trade creation
    Entry of country into a customs union leads to the transfer of production from a high cost producer to a low cost producer
    Real world example: Spain joined the EU
  • 22. Trading Bloc
    A
    B
    Low Cost Producer
    C
    High cost Producer
    Tariffs
    B
    Before trade creation
  • 23. C
    High cost Producer
    A
    B
    Low cost Producer
    B
    After trade creation
  • 24. Trade diversion
    Entry of country into a customs union leads to the transfer of production from a low cost producer to a high cost producer
  • 25. D
    Low cost producer
    A
    C
    High cost Producer
    B
    Before trade diversion
  • 26. Trade Barriers
    D
    Low cost producer
    C
    High cost Producer
    A
    B
    After trade diversion
  • 27. Balance of payments
    Record of the value of all the transactions between the residents of a country with the residents of all other countries over a given time period
    Current account + capital account
  • 28. Current account
    Visible Trade
    + Invisible Trade
    + Net Transfers
  • 29. Visible trade
    Exports of goods minus imports of goods over a given time period
  • 30. Invisible trade
    Exports of services minus imports of services over a given time period
  • 31. Net transfers
    Net payments of interest, profits and dividends from investments and transfers of money
  • 32. Capital account
    Net Transfers of Capital
    + Net Investment and loans
    + Changes in National Reserves
  • 33. Expenditure-switching policies
    Policies implemented by the government that attempt to switch the expenditure of domestic consumers away from imports towards domestically produced goods and services
  • 34. Exchange rate system
    Exchange Rates express the value of one currency in terms of another currency.
  • 35. Floating exchange rate system
    Supply and Demand determine the exchange rate
    Real world example: US
  • 36. Price of US dollars in terms of Yuan
    D
    P
    Ep
    S
    0
    Q
    Quantity of US dollars
    Supply and demand for US dollars
  • 37. Managed exchange rate
    Exchange rate generally allowed to float but governments intervene to avoid sudden fluctuations
    Real world example: China now, Japan
  • 38. Fixed exchange rate system
    Government intervention to maintain a fixed exchange rate
    Real world example: China before
  • 39. Price of Yuan in terms of Dollars
    D
    P
    Ep
    Fixed exchange rate
    P*
    Shortage
    S
    0
    Q
    Quantity of Yuan
    Q1
    Q2
    Fixed exchange rate (devaluated: shortage)
  • 40. Price of Yuan in terms of Dollars
    Surplus
    D
    Fixed exchange rate
    P*
    P
    Ep
    S
    0
    Q
    Quantity of Yuan
    Q1
    Q2
    Fixed exchange rate (surplus)
  • 41. appreciation
    Increase in the value of one currency un terms of another currency in a floating exchange rate system
    Real world example: Chinese Yuan
  • 42. Price of currency A in terms of currency B
    S1
    EP2
    P2
    P1
    EP1
    D2
    D1
    0
    Q1 Q2
    Quantity of currency A
    Increase in demand
  • 43. S2
    Price of currency A in terms of currency B
    S1
    EP2
    P2
    P1
    EP1
    D
    0
    Q2 Q1
    Quantity of currency A
    Decrease in supply
  • 44. depreciation
    A fall in the value of one currency in terms of another currency in a floating exchange rate system
    Real world example: US Dollars
  • 45. Price of currency A in terms of currency B
    S1
    P2
    P1
    EP1
    EP2
    D1
    D2
    0
    Q2 Q1
    Quantity of currency A
    Decrease in demand
  • 46. S1
    Price of currency A in terms of currency B
    S2
    EP2
    P1
    P2
    EP1
    D
    0
    Q1 Q2
    Quantity of currency A
    Increase in supply
  • 47. devaluation
    Decrease in the value of a currency in a fixed exchange rate system
  • 48. Price of Yuan in terms of Dollars
    D
    P
    Ep
    Rate #1
    P1
    P2
    Rate #2
    Shortage
    S
    0
    Q
    Quantity of Yuan
    Q1
    Q2
    Devaluation
  • 49. revaluation
    Increase in the value of a currency in a fixed exchange rate system
    Real world example: US want Chinese Yuan to be revaluated
  • 50. Price of Yuan in terms of Dollars
    Surplus
    D
    P2
    Rate #2
    P1
    Rate #1
    P
    Ep
    S
    0
    Q
    Quantity of Yuan
    Q1
    Q2
    Revaluation
  • 51. Marshall-Lerner Condition
    PED of Exports + PED of imports > 1
    Reducing the currency exchange rate will only reduce the Current Account deficit when the PED of Exports together with the PED of imports is greater than one i.e. elastic.
  • 52. J-Curve
    Though policy makers may hope that a currency depreciation will improve the Current Account deficit in the short-run the Current Account Deficit will worsen even when the Marshall-Lerner Condition is meet.
  • 53. Current account balance
    +
    0
    Time
    -
    J-curve
  • 54. Terms of trade
    Relationship between the price received for exports and the amount of imports a country is able to buy with that money.

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