Deep integration-economic integration beyond the removal of obvious trade barriers (tariffs) more closed; health and safety regulations
Shallow integration-more integrated; have a lower set of tariffs/quotas
Foreign direct investment-flows of capital representing physical assets such as real estate, factories, and business
Bretton Woods conference-created International Monetary Fund
Doha round-consider trade issues of importance to developing countries, highly discussed farm subsidies in developing countries
Foreign exchange reserves-dollars, yen, pounds, euros, or another currency (or gold) that is accepted internationally
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
IMF-multilateral institution serves as the lender of last resort; funded by collecting fees/quotas from members
IMF conditionality-If simple economic reforms such as a cut in the value of 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.
Lender of 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.
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 quotas, 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
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.
Regional trade agreement-free trade, includes partial trade, free-trade area, customs union, common market, and economic union
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
WTO-result of Uruguay Round. Purpose is to help trade flow freely. Deals with rules of trade between nations at 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
Autarky-complete absence of trade
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 any 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.
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.” 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
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.
Mercantilism-stresses exports over imports, primarily as a way to obtain revenues for building armies and national construction projects
Price or trade line (GRAPH)-the trading possibilities for a given country
Resource curse-The economic and/or political problems caused by an abundance of one valuable natural resource such as petroleum
Zero sum game-one nation’s gain is another nations loss. The costs and benefits of an activity cancel each other out.
Factor abundance-relative cost is less than in countries where it is relatively scarcer
Hechscher-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. A countries comparative advantage uses in the production of goods that intensively use relatively abundant factors. Ex: U.S. has a lot of land, 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. 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
Offshoring-the relocation of service industry functions to another country
Outsourcing-another firm does part of the other company’s business
External economies of scale-a firm experiencing falling average production costs as its industry expands is experiencing this
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
Interindustry trade-United States and Canada trade hyrdo-powered electricity for Hollywood firms. Workers in one industry benefit while other workers lose, this kind of trade raises 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
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 as hurt. The majority of U.S. and European trade is intra-industry trade
Maquiladora-a form of intraindustry trade between the United States and Mexico to generate employment along Mexico’s northern border
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
Product Differentiation-Each firm produces a slightly different product due to competition in monopolistic structure
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.
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 demand curve
Deadweight Loss (GRAPH)-The destruction of value that is not compensated by a gain somewhere else in the economy
Producer Surplus (GRAPH)-the difference between the minimum price a producer would accept and the price is actually receives. Receive benefit that didn’t cost anything to them. Below price, above supply curve
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
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 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.
Non-tariff measures-reduce the quantity of imports and exports. Examples: complicated bureaucracies, environmental/health/labor precautions, and technical standards, procurement rules, quotas, and subsidies
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.
Quota Rent-the greater profits for foreign firms as a result of quantitative restrictions on imports rather than tariffs.
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 quota. Instead, foreign producers earn greater profits: quota rents because they artificially limits supply which increases price
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
Countervailing Duty-Tariff granted to U.S. industry hurt by a foreign country’s subsidizing its firms; if industry can prove. Subsidies allow foreign firms to sell products at lower prices. Countervailing duty seeks to counter the effect of the benefits from a subsidy. Problem: defining a subsidy is subjective, Infrequent: 4-5 times a yea
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. 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 increase of international trade, lead to imperfect competition. Imperfect competition has consequences for international trade. Most striking result: firms do not necessarily charge 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. Controversial issue in trade policy. Widely regarded as “unfair”. Subject to special rules and penalties
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 Manufacturing sector
Harmonization of standards-Share common standardsm For example Electric sockets (shape), flash drives
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
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
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
Transboundary environmental impact-low standards in one country can degrade the environment in another country or other countries
Non-transboundary environmental impact-
Capital Account-record of some specialized types of relatively small capital flows
Financial Account-record of the flow of financial capital
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.
Statistical discrepancy-=-1 x (Current account + Capital account)
GDP=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.
Official reserve assets-Credit, Financial Account. Mainly the currencies of the largest and most stable economies in the world. Also include gold and special drawing rights. Also used to settle international debts and central banks and treasury ministries use them as a store of value.
Capital flight-a sudden flow of investment capital out of a country
Sudden Stop-Shifts in expectations that can lead to sudden cessation of inflows followed by large and destabilizing outflows of financial capital
Trade balance– reported more frequently than the current account because the trade balance is a less comprehensive measure of trade than the current account. =Exports-imports of goods and services. It is reported more frequently, but: the current account is a more comprehensive measure because it includes investment income and unilateral transfers
Anti-globalization-justify trade barriers because rich countries are exploiting low income countries because the only way low-income countries can compete is with sub-standard labor or environmental regulations
Kuznet’s curve-growth in developing countries is result first in falling and then if world grows
Pollution spillover-actors, market characteristics, Business cycle impacts
FX appreciation-if the central bank of Japan sells yen and buys U.S. dollars, the U.S. dollar will appreciate due to the demand of the U.S. dollar increasing, imports tend to increase whenever a nation’s currency appreciates because foreign products become more expensive to domestic consumers. If the central bank of a country with fixed exchange rates sells part of its reserve of foreign currency, the domestic money supply will decrease. If the central bank sells some of its foreign assets, it is paid for with domestic currency, which thus comes out of circulation. So the domestic money supply decreases. Appreciation is a rise in the dollar price of the foreign currency. It makes the country’s goods more expensive to foreigners, and thus exports fall and imports rise
Floating exchange rate-the value of a nation’s money is allowed to “float” up and down in response to the market forces
Fixed rates-the value of a nation’s money is defined in terms of a fixed amount of a commodity, such as gold in terms of a fixed amount of another currency, such as the U.S. dollar
Fx intervention and impact on money supply
Monetary and fiscal policy
FX depreciation-a decrease in a currency’s value under a floating exchange rate
Changing the peg (devaluation)-What is difference from fixed depreciation
Interest rate arbitrage-borrow rates are low, loan where rates are high, primary linkage between economies, keeps interest rates from diverging too much
Fixed exchange rate-type of exchange rate system that minimizes the effectiveness of domestic monetary policy to an economy
Pegged exchange rate-instead of gold, another currency is used to “anchor” the value of the home currency
Gold Standard-form of fixed exchange rates, nations keep gold as their international reserve
Dollarization-adoption of another’s currency
Forward exchange rate-the price of a currency that will be delivered in the future
Hedging-bondholders and other interest rate arbitrageurs often use forward markets to protect themselves against the foreign exchange rate risk incurred while holding foreign bonds and other financial assets. Accomplished by buying a forward contract to sell foreign currency at the same time that the bond or interest-earning asset matures.
Interest rate parity (GRAPH)-an increase in the foreign interest rate will cause the foreign currency to appreciate. Domestic interest rate=foreign interest rate + expected depreciation. If i* people increase demand for foreign currency, and it will appreciate. Interest parity condition-achieving parity and impact of changes in I, i*, R and F
Sterilization-the simultaneous sale of foreign bonds and purchase of domestic assets by a central bank to keep the domestic money supply constant; sterilized intervention
Purchasing power parity (GRAPH)-the concept that the equilibrium value of an exchange rate is at the level that allows a given amount of money to buy the same quantity of goods abroad as it will buy at home. Use an artificial exchange rate to make adjustments for differences in prices.
Spot market-Buying or selling in the present
Aggregate supply (GRAPH)-The total output of an economy
Aggregate demand (GRAPH)-The sum of household consumption, business investment, government spending on final goods and services, and net exports
Fiscal policy (GRAPH)-Policies related to government expenditures and taxation
Monetary policy (GRAPH)-National macroeconomic policies related to the money supply and interest
Multiplier effect-The macroeconomic concept that a change in spending has an impact on the national product, which is ultimately larger than the original spending change
Expenditure switching-Policies designed to shift the expenditures of domestic residents. If the problem is a trade deficit, they should shift toward domestically produced goods; if the problem is a trade surplus, they should shift toward foreign goods. Examples of these policies are changes in the exchange rate and changes in tariffs and quotas.
Expenditure reducing policy-Policies that reduce the overall level of domestic expenditure. These are appropriate for addressing the problem of a trade deficit, and they include cuts in government expenditures and/or increases in taxes.
Open market operations-The main tool of monetary policy, consisting of the buying and selling of government debt (bills, notes, and bonds) in order to influence bank reserves and interest rates
Banking crisis-Occurs when the banking system becomes unable to perform its normal lending functions, and some or all of a nation’s banks are threatened with insolvency.
Exchange rate crisis-caused by a sudden and unexpected collapse in the value of a nation’s currency
Basel Capital Accord-A set of recommended “best practices” designed to help countries avoid banking and financial crises. The accords emphasize capital requirements, supervisory review, and information disclosure.
Intermediation-banks and other financial institutions pool the savings of households and make them available to businesses that want to invest
Moral hazard-an incentive to withhold essential information or to act in a manner that creates personal benefits at the expense of the common goal
Senile industry-to provide a method for older, comparatively disadvantaged to move resources to new industries without hurting the economy; Ex: Landlines, CD’s, VCR’s. To help people with jobs in industry. Easier to pick these firms than the infant firms. Difficulty lies in the execution. More efficient to directly aid firms and workers. Four arguments in favor of trade protection: infant government, national defense, infant industries, senile industries, protect jobs, retaliation
Infant government-In developed countries; tax revenue is relatively easy to collect. In developing countries, tariffs are an attractive method of raising government revenue: Goods pass through customs. Administrative costs low. Can act like a corporate income tax or luxury tax: target it to certain goods. Used when getting started.
Retaliation-Loss of jobs in export industries. Can escalate rapidly for unfair trade practices. Problems: Can lead to escalating trade wars. Free trade benefits all. On the other hand: Since free trade benefits all, if a tariff now will induce others to lower theirs, all eventually benefit. Market size=important; gives them their entire domestic market to themselves, may drive us out
Production possibility curve (GRAPH)-shows the maximum amount of output possible, given the available supply of inputs. It also shows the trade-off that a country must make if it wishes to increase the output of one of its goods.
Uruguay round-Most ambitious round. Reformed tariffs and subsidies on agricultural textiles, sensitive areas. Birth to WTO. Extend trading system into intellectual property rights and services
HPAE-apparent source of most of the growth of the High Performance Asian Economies is capital accumulation through high savings and investment. To a lesser extent, high rate of education (human capital growth). Other factors such as macroeconomic stability, shared economic growth, export promotion, open trade policies, and rapid capital accumulation contributed to the success of these countries.
Vehicle currency-a currency widely used in contracts by other countries with other countries
Trade protection– the benefits of protection (higher profits and profits, etc.) go to a small group of producers and are very valuable to them. The costs of protection (the slightly higher prices) are felt by all consumers, but it is usually a small enough price increase that is not worth their time and energy to fight it.
Participants in foreign exchange markets-commercial banks, corporations, individuals, foreign exchange brokers, nonbank financial institutions, central banks
Specific tariff– a fixed charge per unit of an imported good. In the sample trade model, labor is assumed to be perfectly mobile between industries
Tariff-tax imposed by a government on goods entering at its borders; will generally increase inflationary pressures, weaken balance-of-payments positions, and restrict manufacturers’ supply sources.
Quota-a specific unit or dollar limit applied to a particular type of good.
Embargo-to refuse to sell to another country
Antidumping laws-prevent foreign producers from “predatory pricing” or when a foreign producer intentionally sells its products in the United States for less than the cost of production to undermine the competition and take control of the market.
Omnibus Trade Act and Competitiveness Act-assisting businesses to be more competitive in world markets as well as on correcting perceived injustice in trade practices; improves U.S. trade in market access, export expansion, and import relief.
Foreign Corrupt Practices Act (FCPA)-prohibits American executives and firms from bribing officials of foreign governments.
GATT-first effective worldwide tariff agreement and first multilateral, legally enforceable agreement covering trade and investment in the services sector.
Boycott-absolute restriction against the purchase and importation. Standards-major source of trade difficulties between the United States and Japan.
History is subjective.
Monroe Doctrine-No further European colonization in the New World, abstention of the United States from European political affairs, and nonintervention of European governments in the governments of the Western Hemisphere.
Manifest Destiny-chosen people ordained by God to create a model society “sea to shining sea”.
Reference groups-A society’s accepted basis for responding to external and internal events.
United States-the greatest percentage of total energy according to the World Energy Consumption charts. The Basel Convention banned the export of hazardous wastes by developed countries. Trade route by sea is the newest trade route to gain popularity. Fewer workers to support future retirees.
Sovereign-Independent and free from all external control.
Expropriation-government seizes an investment but makes some reimbursement for the assets.
Domestication-force foreign investors to share more of the ownership, management, and profits with nationals than was the case before domestication.
Local Content Laws-NAFTA requires 62 percent of parts and chassis of any cars coming from member countries be NAFTA-originated (in other words, there are limits on foreign cars and parts)