FREE TRADE isInternational Trade that takes place without any barriers, such as tariffs, quotas or subsidies PROTECTIONISM is The presence of intrusions (subsidies) or barriers (tariffs and quotas)in the ﬂow of goods and services between countries
FREE TRADE OF ONIONPrice of Onion S (Domestic) Pe Pw S (world) D Q1 Qe Q2 Quantity of onion
FREE TRADE OF ONIONPrior to the country opening to trade, onions were sold locallyat the price of Pe. Once the country opened its self tointernational trade, the price of onion drops as a result of theimported supply of corn.
TARIFF ON ONION IMPORTS S (Domestic)Price of Onion Pe Pw + tariff S (world) + tariff Pw S (world) Deadweight loss D Government Revenue Q1 Q3 Qe Q4 Q2 Quantity of onion
TARIFF ON ONION IMPORTSAfter a tariff has been implemented on imports, the price ofinternational onions increase to Pw+tariff. The domesticmarket increases from Q1 to Q3 while imports shrink fromQ1Q2 to Q3Q2. The result of the import barrier is toprotect domestic industries and to generate governmentrevenue, which is delineated as the gray rectangle in diagram.
QUOTASQuotas are an import barrier that set upper limits on thequantity or value of imports that may be imported into acountry. Eg. India
QUOTAS ON ONION IMPORTS S (Domestic) Price of Onion Pe Pw + tariff S (world) + tariff Pw S (world) Deadweight loss DGovernment Revenue Q1 Q3 Qe Q4 Q2 Quantity of onions
DOMESTIC SUBSIDY ON RICE S (Domestic) Price of Onion S (Domestic) + Subsidy Pe Pw S (world) DGovernment Cost Q1 Q3 Q2 Quantity of onion
DOMESTIC SUBSIDY ON RICEA subsidy is an amount of money paid by the government toa ﬁrm, per unit of output to encourage output, and to providean advantage over foreign competitors. Though prices toconsumer remain the same, the domestic market increasesfrom Q1 to Q3 whereas imports shrink from Q1Q2 toQ3Q2.
FACTOR ENDOWMENTSFactors of production that a country has available to producegoods and servicesEg. Japan has highly skilled workersChina has land SPECIALIZATIONCountry specializes in the production of goods and serviceswhere they have a comparative advantage in production
ABSOLUTE ADVANTAGEThe capability to produce a particular good with fewer resourcesthan other competing countriesCOMPARATIVE ADVANTAGEThe capability to produce a good at a lower opportunity costthan other countries
PRODUCTION POSSIBILITY CURVE FOR INDIA AND CHINAPairs of Shoes 12 5 2 3 Meter of Cloth
VOLUNTARY EXPORTS RESTRAINTS Voluntary agreement between an exporting country and an importing country that limits the volume of trade in a product Eg. Japan exports limited quantity of cars to the USDUMPING & ANTI-DUMPING Dumping is the selling of a good in another country at a price below its cost of production Anti-Dumping is a legislation to protect an economy against the import of a good at a price below its cost of production
WORLD TRADE ORGANIZATIONAlso known as the WTO, is an international body that sets therules for global trading and resolves disputes between itsmember countries. It also hosts negotiations concerning thereduction of trade barriers between its member nations
CUSTOMS UNIONIs an agreement made between countries to trade freely amongthemselves, but adopt common external barriers against othercountries who attempt to import into the customs unionEg. Switzerland - Liechtenstein customs union COMMON MARKETIs a custom unions with common polices on product regulation,and the free movement of goods, services, capital, and laborEg. The European Union
ECONOMIC INTEGRATIONThe capability to produce a particular good with fewer resourcesthan other competing countries GLOBALIZATIONThe capability to produce a good at a lower opportunity costthan other countries
FREE TRADE AREAExists when an agreement is made between countries, where thecountries agree to trade freely among the members of the group,but are able to trade with countries outside the free trade area inwhatever ways they wishEg. North American Free Trade Agreement between the U.S.Canada and Mexico TRADING BLOCKSCountries agree to trade and cooperateEg. EU and ACP
BALANCE OF PAYMENTSRecord of the value of all the transactions between theresidents of a country with the residents of all other countriesover a given time periodCurrent account + capital account
CURRENT ACCOUNT The current account surplus exists where the revenue from the export of goods and services and income ﬂows is greater than expenditure on the import of goods and services and income ﬂows over a given time period.The current account deﬁcit exists where revenue from theexport of goods and services and income ﬂows is less than theexpenditure on the import of goods and services and incomeﬂows over a given time period.
MARSHALL-LERNER CONDITIONPED of Exports + PED of imports > 1This condition states that a depreciation, or devaluation, of acurrency will only lead to an improvement in the currentaccount balance if the elasticity of demand for exports plusthe elasticity of demand for imports is greater than one.
J-CURVEThis theory suggests that in the short term, even if theMarshall-Lerner condition is fulﬁlled, a fall in the value of thecurrency will lead to a worsening of the current accountdeﬁcit, before things improve in the long term
EXCHANGE RATESAn exchange rate is the value of one currency expressed interms of anotherEg. $1 = ¥82.875
FLOATING EXCHANGE RATE SYSTEMMarket forces, supply and demand, determine the exchangerateEg. US
FLOATING EXCHANGE RATE SYSTEMPrice of Yen Sexpressed in terms of Dollars P EP D Q Quantity of Yen
MANAGED EXCHANGE RATESIs an exchange rate regime where the value of a currency isgenerally allowed to ﬂoat but governments intervene to avoidsudden ﬂuctuationsEg. China
FIXED EXCHANGE RATEGovernments intervention to maintain a ﬁxed exchange rateEg. Prior China
FIXED EXCHANGE RATE DEVALUATED SPrice of Yen expressed in terms of Dollars Pe EP Fixed Exchange Rate P1 D Shortage Q1 Qe Q2 Quantity of Yen
FIXED EXCHANGE RATES SURPLUS Surplus SPrice of Yen expressed in terms of Dollars P1 Fixed Exchange Rate Pe EP D Q1 Qe Q2 Quantity of Yen
APPRECIATIONIncrease in the value of one currency in terms of anothercurrency in a ﬂoating exchange rate systemEg. Yuan
INCREASE IN DEMAND SPrice of Yen expressed in terms of Dollars P2 EP2 EP1 P1 D2 D1 Q1 Q2 Quantity of Yen
DECREASE IN SUPPLY S2 S1Price of Yen expressed in terms of Dollars EP2 P2 EP1 P1 D Q2 Q1 Quantity of Yen
DEPRECIATIONDecrease in the value of one currency in terms of anothercurrency in a ﬂoating exchange rate systemEg. U.S. Dollars
DECREASE IN DEMAND SPrice of Yen expressed in terms of Dollars P2 EP1 P1 EP2 D1 D2 Q2 Q1 Quantity of Yen
INCREASE IN SUPPLY S1Price of Yen expressed in terms of Dollars S2 P2 EP1 P1 EP2 D Q1 Q2 Quantity of Yen
DEVALUATIONDecrease in the value of a currency in a ﬁxed exchange ratesystem
DEVALUATION SPrice of Yen expressed in terms of Dollars EP Pe P1 Rate #1 P2 Rate #2 D Shortage Q1 Qe Q2 Quantity of Yen
REVALUATIONIncrease in the value of a currency in a ﬁxed exchange ratesystemEg. The U.S. accuses the Chinese of consistently controlling theYuan to possess a low value, therefore it should bereevaluated
REVALUATION Surplus SPrice of Yen expressed in terms of Dollars P1 Rate #2 Rate #1 Pe EP D Q1 Qe Q2 Quantity of Yen