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Trade glossary


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  • 1. International Economics Definitions of Terms in ‘New’ 2005 Syllabus Factor endowments The land, labor, human capital, physical capital and entrepreneurship an economy has at its disposal Specialization When a factor of production is employed in the production of only one good or even a part of a good; results in increased levels of output (Adam Smith and the pin factory) Absolute advantage A country is said to have an absolute advantage in the production of X if it can produce more of it with the same resources (or, if it can produce a certain amount with fewer resources) compared to another country. Comparative advantage A country is said to have an absolute advantage in the production of good X if it can produce it at a lower opportunity cost i.e. by sacrificing fewer units of good Y (in the 2 country, 2 good case) compared to another country. Free trade Refers to international trade (exporting and importing of goods and services) that is not subject to any form of protectionism (to any type of trade barriers). Thus, for a homogeneous good, the domestic and the world price are equal. In terms of volume, trade has become more free as a result of the success of the GATT and its successor the WTO. World trade volume has increased by about 17 times since the early in the past 50 years. Also, world exports as a proportion of world output (GDP) had more than doubled since 1950. (data from Protectionism Refers to the set of government policies that aim at restricting, or even eliminating, the flow of imports into a country and/or creating an artificial advantage to exporting firms. Tariff A tax on imports (goods and services produced abroad) as a result of which the domestic price of the product rises, the level of domestic production rises, the level of domestic consumption drops and the volume of imports decreases. In the ‘small’ country case the world price is unaffected. The effect of a tariff on the volume of imports is not certain as it depends on the price elasticity of demand for the good / service. Quota A quantitative restriction of imports. For example, the government of Egypt may impose a limit (say, 12000 cars annually) on the number of Korean cars permitted to enter the country. As a result of the restriction on supply, the price of the product will rise in the domestic market. Export subsidy A payment granted by a government to domestic firms to strengthen their competitiveness against foreign producers. c.h.ziogas economics @ the moraitis school, athens, greece
  • 2. VER Same as quota but the exporting firms ‘agrees’ to limit the volume of exports of a good (to avoid possible worse restrictions by the importing country). Administrative obstacles (regulatory barriers) Government or administrative regulations / requirements that result in lower levels of imports; a most famous example is the case of French video imports from Japan that were required to pass inspection at the city of Poitiers. Often they purportedly aim to protect public health or the environment or workers’ welfare while the true aim is to protect domestic businesses from foreign competition. Infant industry argument The argument that the only way a developing country can create a competitive domestic industrial sector is if it blocks all competing imports with prohibitive tariffs until it becomes sufficiently efficient for trade barriers to be eliminated. This argument is best viewed within the Harrod – Domar model and the Lewis model, i.e. within the structuralist approach to development. Diversification (of exports) A policy initiative to move away from commodity concentration of exports; instead of relying on only one or two exports to broaden the range of exported goods and services so that various risks are reduced. Anti-dumping duties These refer to duties (taxes) that purportedly aim to create a ‘level playing field’ by equating the price of the good that is being allegedly being dumped in the domestic market with the domestic price of the good until it is decided whether the lower priced import is or is not being truly dumped. Most often used to buy time for domestic firms to reorganize and become more efficient so that they have a better chance to compete with the more efficient foreign firms. (Regional) Economic integration When countries become members of regional trading blocks; more generally, the dismantling of trade and investment barriers coupled with the advances in communications, the internet and the lower cost of transport have accelerated the process of economic integration Globalization Globalization can be thought of as the widening, intensifying, speeding up, and growing impact of world-wide interconnectedness encompassing trade, finance and investments, production, ideas and culture etc. Trading blocs A form of economic integration whereby a group of countries decreases trade barriers amongst them while maintaining barriers with non-members. My take the form of a free trade agreement, a customs union, a common market or an economic union FTA An FTA is formed when two or more countries abolish tariff (and other barriers) between them while maintaining existing barriers to non-members c.h.ziogas economics @ the moraitis school, athens, greece
  • 3. Customs unions A Customs Union is formed when two or more countries abolish tariff (and other barriers) between them and establish a common external barrier to non-members Common market When members of a customs union move forward to establish not only free trade in goods and services but also free movement of factors of production Economic union When members of a customs union decide to integrate further by harmonizing taxation even establishing a common currency. Trade creation & Trade Diversion Jacob Viner in his book "The Customs Union Issue" (1950) made it clear that it is not a priori possible to judge whether a preferential trading agreement, such as a customs union, will increase or decrease efficiency. Trade creation is a result of the elimination of the internal trade barriers that leads members to import from one another goods and services that were previously not imported because of their tariffs. Trade creation is thus efficient since it means that production has shifted from a higher cost domestic producer to a lower cost foreign producer. The remaining though external tariff for non-members may lead one member (say A) to now import from another member (say B) what used to be imported from a non-member (say C) who had supplied the good at the lowest cost including the tariffs then levied to both (B and C) countries. Trade diversion is thus inefficient as it implies that production has been diverted to a higher country only because it is a member of the PTA. WTO (see my trade and development package of notes) BOP A record of all transactions of a country with the rest of the world over a period of time. Item that lead to an inflow of currency are entered with a plus sign and are labeled ‘credit’ items whereas if they lead to an outflow of currency they are known as ‘debit’ items. Current account The current account includes trade (i.e. exports and imports) of ‘visibles’ i.e. of goods (of physical merchandise) as well as of ‘invisibles’. Invisibles include exports and imports of services (tourism, shipping, financial etc) as well as net investment income flows (pid’s = profits, interest payments and receipts and dividends) and net transfers (private (remittances) and state). Trade balance The difference between the value of exports and imports of goods (and services). If value of exports exceeds value of imports then a trade surplus is recorded (always over a period of time); conversely, a trade deficit is the case Invisible balance Includes trade in services, net investment income (investment income from abroad minus investment income paid abroad) and net transfers. c.h.ziogas economics @ the moraitis school, athens, greece
  • 4. Capital account The Capital Account (transactions in external assets and liabilities) includes changes in short term and long term (external) assets and liabilities of a country. In the short run category movements of short term financial capital (say, bonds, with maturities of less than a year) is recorded. The long term section records changes in the holdings of longer term assets and includes FDI (foreign direct investment). In addition official financing is included (changes in official reserves as well as official borrowing and lending) and, lastly, the ‘balancing item’ (which is there only because of ‘errors and omissions’). Note that this is based on ‘old’ classifications that are not anymore used (see ) but, for the time being is good enough for us) Exchange rate The price of a currency expressed in terms of another currency; the number of units of a foreign currency required to purchase a unit of the domestic currency. (On a diagram, decide which currency’s price you will have on the vertical axis, say the won; write ‘price of won’; then write on the horizontal axis, ‘won traded per day’; then write next to the Demand curve ‘for Won) and next to the supply curve ‘of won’; go then back to the vertical and write in a parenthesis ‘expressed in terms of –say- yuan’ and below it ‘yuan per won’ with “yuan/won” below it) Fixed er system (or, regime) If the authorities (usually the Central Bank) maintain through intervention the exchange rate at a pre-announced level or within a preannounced range. Floating If the exchange rate is determined solely through the interaction of demand and supply for the currency Managed Usually refers to a floating system where authorities monitor the time path and if considered undesirable intervene without though a preannounced value or range existing (forex markets sometimes need a ‘slap in the face’ as Krugman wrote…) Appreciation An increase in the exchange rate (in the value, in the foreign price of a currency) within a flexible exchange rate regime Revaluation An increase in the exchange rate (in the value, in the foreign price of a currency) within a fixed exchange rate regime Depreciation A decrease in the exchange rate (in the value, in the foreign price of a currency) within a flexible exchange rate regime Devaluation A decrease in the exchange rate (in the value, in the foreign price of a currency) within a fixed exchange rate regime Trade flows Exports and imports of goods and services c.h.ziogas economics @ the moraitis school, athens, greece
  • 5. Capital flows Investment flows; portfolio and FDI Speculation Within a forex framework the buying and selling of foreign exchange in order to profit from differences in its price. A speculator does not buy won to buy Korean products or to buy Korean bonds or a Korean firm; she buys the currency hoping to sell it in the future (perhaps within minutes) at a higher price. Foreign exchange reserves The value of foreign exchange holdings held at the Central Bank of a country. Necessary to hold some amount so that flow of imports is not disrupted. Within a fixed er system authorities are forced to hold greater reserves in order to intervene if necessary. {An interesting story is evolving with the huge dollar reserves that China has (May 2005). If it starts selling these dollars then their value will shrink (i.e. the US will have enjoyed Chinese imports at a bargain price). If it does not sell then it is sitting on ‘useless’ paper} PPP theory A theory of long run equilibrium exchange rate determination. Simplifying, if there were no trade barriers and no transportation costs, if all goods were tradable (but, I can’t import cheaper housing services from Turkey nor can I import a haircut) and if there were no cross-border investments then arbitrage would guarantee that the exchange rate (between, say the Neo Psychico dollar and the Palio Psychico dollar) would be such that the cost of buying a hamburger in either country would be the same. (See Big Mac (and Latte) index articles in Economist – Google search the terms) Expenditure changing / switching policies Within a fixed er system a trade deficit can be corrected by adopting expenditure reducing policies i.e. contractionary demand management policies that will lower AD and thus NY reducing M and thus the trade deficit. Or, an expenditure switching policy that will try to switch expenditures away from imports and towards domestic products by making imports relatively more expensive and thus undesirable. For example, through a devaluation or through the imposition of tariffs. Marshall - Lerner condition A devaluation will improve a trade deficit if the sum of the price elasticities of demand for exports and imports exceed unity J-curve effect Following a devaluation a trade deficit will worsen before it starts improving (thus tracing the letter ‘J’ through time) as the M-L condition is not satisfied in the short run (a result of info, habits and contracts) TOT The ratio of the average price of exports over the average price of imports expressed in index number form times 100. Shows the volume of imports attainable with a unit of exports. For example if country exports only coffee and the price per ton is USD2,000 while it imports only ‘machines’ with a price of USD500.00 each then the TOT are 4/1 meaning that if it exports a ton of coffee it could import 4 ‘machines’. c.h.ziogas economics @ the moraitis school, athens, greece
  • 6. Improving TOT If the ratio rises (which will be the case if the relative price of exports rises) then there is an improvement in the sense that with a ton of coffee it will be able to import more than 4 machines; more generally, with the same volume of exports it can attain a greater volume of imports or to attain the same volume of imports it must now import a smaller volume of exports. Worsening /deterioration The other way around… DEVELOPMENT SYLLABUS 2005 TERMS / TOPICS (coming soon at a theatre near you) Institutional factors (contributing to development) Infrastructure Sustainability (sustainable development) Poverty (cycle) Commodity concentration of exports Indebtness Non-convertible currencies Capital flight Harrod Domar model Dual sector / structural / Lewis model Barriers to growth to development Informal markets Aid Bilateral multilateral Grant aid Soft loans Official aid Tied aid Export led outward oriented growth Import substitution / inward oriented growth Fair trade organizations Micro credit schemes FDI IMF World Band NGO’s MNC’s /TNC’s Commodity agreements c.h.ziogas economics @ the moraitis school, athens, greece