Jake Hirsch-Allen – March 17, 2004 – ECO230 2004 Test 2                      1

                 Chapter 2 – THE THEORY OF INTERNATIONAL TRADE:
                    The Basic Theory Using Demand and Supply

Elasticity The percentage change in one variable resulting in a 1 percent change in another
variable. 20 [elastic 1 > e > 0 inelastic]

       Price Elasticity of Demand The percentage change in quantity demanded
       resulting from a 1 percent increase in price. 20

       Price Elasticity of Supply The percentage increase in quantity supplied resulting
       from a 1 percent increase in market price. 23

       Income Elasticity of Demand The percentage change in the demand for a good
       resulting from a one percent change in the income of consumers of the good.

Consumer Surplus The difference between what a person would be willing to pay and
what she actually has to pay to buy a certain amount of a good. It is the area below the
demand curve and above the price level. 20

Producer Surplus The increase in the economic well-being of producers who are able to
sell the product at a market price higher than the lowest price that would have drawn out
their supply. 24

Opportunity Cost The value of other goods and services that are not produced because
resources are instead used to produce this product. 23

Arbitrage Buying something at a low price in one market and reselling it at a higher price
in another market. 25, 41

International/ World Price The price that results in two countries at the free trade
equilibrium [when the international supply and demand curves meet] assuming no
transport costs or other frictions. 25

Demand for Imports (Dm) The excess demand (quantity demanded minus quantity
supplied) for a good with a national market. 26

Supply of Exports The excess supply (quantity supplied minus quantity demanded) of a
good in the rest-of-the-world market). 27

One-dollar, One-vote Metric Every dollar of gain or loss is just as important as every
other dollar of gain or loss, regardless of who the gainers or losers are. 29, 140

Net National Gains from Trade The difference between what one group gains and what
another group loses (assuming the one-dollar, one-vote metric). 30
               Jake Hirsch-Allen – March 17, 2004 – ECO230 2004 Test 2                      2

                 Chapter 3 – THE THEORY OF INTERNATIONAL TRADE:
                              Why Everybody Trades

Labour Productivity The number of units of output that a worker can produce in one
hour. 38

Absolute Advantage A nation has an absolute advantage in a commodity it produces
more efficiently (with higher productivity) than the rest of the world. 38

Opportunity Cost The amount of production of one product that is given up to produce
more of another. 39

Comparative Advantage A nation has a comparative advantage in the production of
those goods which (compared to other goods and countries in the world) it produces less
inefficiently than other commodities. A country will have a comparative advantage in one
or more commodities, whether or not it has absolute advantages. Thus a nation will export
those goods and services that it can produce at a low opportunity cost and import those
goods and services that it can produce at a high opportunity cost. 39

Relative Price The ration of one product price to another product price [bartering]. 40

Production-Possibility Curve (ppc) Shows all combinations of amounts of different
products than an economy can produce with employment of its resources and maximum
feasible productivity of these resources. 43

Increasing Marginal Costs As one industry expands at the expense of others, increasing
amounts of the other products must be given up to get each extra unit of the expanding
industry’s product. 48

Indifference Curve Shows the various combinations of consumption quantities [of two
goods] that lead to the same level of well-being. 52

Community Indifference Curves Purport to show how the economic well-being of a
whole group depends on the whole group’s consumption of products. 53

Heckscher-Ohlin (H-O) Theory A country will export that good which intensively uses
the country's abundant (cheap) factor, and import the good which intensively uses its
scarce (expensive) factor. 62, 69

Labour-Abundant Quality of a country if it has a higher ratio of labour to other factors
than does the rest of the world. 62

Labour-Intensive Quality of a product if labour costs are a greater share of its value than
they are of other products. 62
        Jake Hirsch-Allen – March 17, 2004 – ECO230 2004 Test 2                      3

                  Who Gains and Looses from Trade

Factor Specialization The degree of concentration of a factor in the production of
a commodity or group of commodities.

Factor Intensity A product is intensive in some factor if the cost of that factor is a
greater share of the product's value than it is of the value of other products.

Stolper-Samuelson Theorem Under certain assumptions, moving from no trade
to free trade unambiguously raises the returns to the factor used intensively in the
rising-price industry and lowers the returns to the factor used intensively in the
falling-price industry, regardless of which goods the owners of the factors prefer to
consume. 74

Specialized-Factor Pattern The more a factor is specialised, or concentrated, in
the production of a product whose relative price is rising, the more this factor
stands to gain from change in the product price. And visa versa. 75

Factor Price Equalization Theorem Under certain assumptions free trade will
equalize not only commodity prices but also the prices of individual factors
between two countries. 76
                Jake Hirsch-Allen – March 17, 2004 – ECO230 2004 Test 2                       4

                                Chapter 7 – TRADE POLICY:
                                   Analysis of a Tariff

Tariff A tax on importing a good or service usually collected by customs officials at the
place of entry. 134

       Specific Tariff A tariff stipulated as a money amount per physical unit of import.

       Ad Valorem Tariff A tariff is set as a percentage of the value of the goods when
       they reach the importing country. 134

Consumption Effect The welfare loss to consumers in the importing nation that
corresponds to their being forced to cut their total consumption as a result of the tariff. 140

Production Effect The cost of shifting to more expensive home production in the import-
competing sector, which is protected by the tariff on foreign goods. 142

Monopsony Power The ability of a nation to affect the world price unilaterally based on
its share of the world market [A monopsony is a monopoly from the consumers
perspective: in the extreme case there is one buyer (monopsony) instead of one seller
(monopoly) 144.

Terms of Trade Effect The situation in which a “large” country can effect the world price
of a good it imports, just by imposing a tariff. 144

       Terms of Trade The ratio of the price of a country's exports to the price of its

Nationally Optimal Tariff A tariff set at the rate which maximizes the gains for a large
country (at the expense of foreign countries). Technically, the optimal rate, as a fraction of
the price paid to foreigners, equals the reciprocal of the elasticity of supply of a country's
imports. 147

Effective Rate of Protection The percentage by which the entire set of a nation's trade
barriers raises the industry's value added per unit of output. (e.r.p.) 142

       Value Added The amount that is available to make payments to the primary
       production factors in the industry. That is, the sum of the value of wages paid to
       labour, the rents paid to landowners, and the profits and other returns to the owners
       and providers of capital. 142.
               Jake Hirsch-Allen – March 17, 2004 – ECO230 2004 Test 2                         5

                              Chapter 8 – TRADE POLICY:
                              Nontariff Barriers to Imports

Nontariff Barier (NTB) = * to imports is any policy used by the government to reduce
imports, ither than a simple tariff on imports. 154

Import Quota* A limit on total quantity of imports allowed into a country each year. It is
the most prevalent nontariff trade barrier. 154

       Import License A legal right to import goods subject to quotas or other nontariff
       barriers. Import licenses can be allocated by governments on a competitive auctions
       basis, fixed favoritism, or resource-using application procedures.

       Import License Auction The selling of import licences on a competitive basis to
       the highest bidders. 160

       Fixed Favoritism A way of allocating import licenses in which the government
       simply assigns fixed shares to firms, often based on the shares of imports the firms
       had before the quota was imposed. 160

       Resource-using Application Procedures The situation in which some of the
       money which would have been gained by the importing country through a quota is
       wasted making this type of quota worse than a tariff for net national well being.
       These include allocating licences on a first-come first-served basis; on the basis of
       demonstrating need or worthiness; or on the basis of negotiations. 161

VERS* Voluntary export restraints. Nontariff barriers to trade, equivalent to quotas.
Exporting countries are coerced by the importing country into allocating a limited quota of
exports. VERs are not legislated and can be imposed with or without formal international
negotiations. 163

Product Standards* The panoply of laws and regulations pertaining to product quality,
including those enforced in the names of health, sanitation, safety and the environment.

Domestic Content Requirement* mandates that a product produced and sold in a
country must have a specified minimum amount of domestic production value, in the form
of wages paid to local workers or materials and components produced within the country.

Mixing Requirement* stipulates that an importer or import distributor must buy a certain
percentage of their products locally. 169

See also Government Procurement*
               Jake Hirsch-Allen – March 17, 2004 – ECO230 2004 Test 2                         6

World Trade Organization (WTO) An international organization of most of the world's
countries which oversee governmental policies regarding international trade. The chief
purposes are to liberalize trade, promote the MFN principle, and limit unfair export
policies. 175

       General Agreement on Tariffs and Trade (GATT) a “provisional agreement”
       signed by 23 countries in 1947. 175

       MFN Most favoured nation status. An agreement between two nations to levy
       tariffs on each other at rates as low as those levied on any other country. If one of
       these nations reduces tariffs on a third country, all of that nation's MFN partners
       also receive that lower tariff rate. 175, 250
        Jake Hirsch-Allen – March 17, 2004 – ECO230 2004 Test 2                          7

                      Chapter 9 – TRADE POLICY:
                  Arguments For and Against Protection

Distortion Restrictions that prevent the market from equating social benefits and
costs of an economic activity. For example, the market price of cigarettes does not
reflect the indirect effect (externally) on third parties (other than the producer and
the smoker), resulting in too many cigarettes being produced and consumed. The
total social cost of smoking is higher than the private cost. 188

Second-best World A world that contains market distortion. 188

Incentive Distortions Gaps between the private and social benefits or costs of an
activity. 188

Externalities/ Spillover Effects Net effects on parties other than those agreeing to
buy or sell in a marketplace [i.e. pollution or external benefits: when social
marginal benefits (SMB) of working in a sector are higher than the wage rate). 188

Specificity Rule This guideline states that it is more efficient to use those policy
tools that are closest to the sources of the distortions separating private and social
benefits or costs. 190

Infant Industry Argument The argument that a new industry (especially in less
developed countries) needs protection until it attains a competitive level of cost
(and output) in world markets. 195

[Trade] Adjustment assistance Government financial assistance to relocate and
retrain workers (and firms) for re-employment in expanding sectors and away from
sectors that are declining as a result of import competition. 202

Developing Government Argument In a poor disadvantaged nation the import
tariff becomes a crucial source, not of industrial protection but of government
revenue. 203

National Defense Argument Import barriers would help a nation to have or to be
ready to produce products that would be important in a future military emergency

Tariff Escalation Refers to the tendency of tariffs and other import barriers to be
higher on finished goods sold to consumers than on intermediate manufactured
goods sold to industry (inputs). 211
        Jake Hirsch-Allen – March 17, 2004 – ECO230 2004 Test 2                         8

                       Chapter 11 – TRADE POLICY:
                       Trade Blocs and Trade Blocks

Trade Blocs Forms of economic integration whereby members remove explicit
trade barriers among themselves, but keep national barriers to the flow of labor and
capital and their fiscal and monetary autonomy. Trade blocs are exemplified mainly
by free-trade areas and custom unions. 247

        Free Trade Area An area in which members remove trade barriers among
        themselves but keep their separate national barriers against trade with the
        outside world. 248

        Customs Union One in which members remove all barriers to trade
        among themselves and adopt a common set of external barriers, thereby
        eliminating the need for customs inspection at internal borders (e.g.,
        MERCOSUR today, and the EEC from 1957-1992). 248

        Common Market An international union going beyond a customs union
        by also allowing for the free movement of labour and capital (factor flows)
        among member nations. 248

        Economic Union One which extends a common market by harmonizing
        the monetary and fiscal policies of the member nations as well. 248

Trade Creation The increase in trade volume caused by union with a lower cost
(more efficient) supplier within the trade bloc. 252

Trade Diversion The volume of trade shifted from a lower-cost (more efficient)
supplier outside the trade bloc to a higher-cost (less efficient) supplier within the
union. 252

European Monetary Union Outlined by the Maastricht Treaty in 1991 and
ratified by the EU countries in 1993. One of its goals is to create a single Europe-
wide currency. To join EU countries had to meet macro criteria regarding exchange
rate stability, inflation and interest rates, and government finances. In 1998 11 EU
countries joined the EMU. Britain, Denmark, and Sweden chose not to join, while
Greece did not qualify. 258

Rules of Origin Determine which products have been produced within the free-
trade area, so that they are traded freely within the area and which products have
not produced within the area to guard against firms claiming that the product is
locally produced based on minimal processing within the area. 262

[Trade] Embargoes (boycotts) Complete bans on economic exchange. 247, 267
        Jake Hirsch-Allen – March 17, 2004 – ECO230 2004 Test 2                       9

       Political Failure of Embargo When the target country’s national
       decisions-makers have so much stake in the policy that provoked the
       embargoes that they will stick with that policy even if the economic cost to
       their nation becomes extreme. 267

       Economic Failure of Embargo The embargo inflicts little damage on the
       target country but possible even greater damage on the imposing country.

Economic Sanction Discriminatory restrictions or complete bans on economics
exchange, designed to punish the target country or countries. 267

Trade Concession In international trade negotiations it is customary to define cuts
in one's own import barriers *(thereby letting in more inputs) as trade concessions,
for which the liberalizing country ought to be compensated with reciprocal cuts

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