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 Chapter 4 – THE THEORY OF INTERNATIONAL TRADE: 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. 134 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 imports. 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. 166 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. 168 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 204. 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. 267 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 abroad.