List of Definitions for Section 4

This is the list of economic definitions used in Section 4 (International Economics) with real world examples to have better understanding of the definitions. It would be faster if you use command-F (Mac) or control-F (PC) to find the definitions.

1. Trade – is an exchange involving goods, services, or currency.

2. Reasons for Trade – There are several reasons for why countries trade with each other.

  1. Different Factor Endowments – There are some economies that are rich in natural resources while others have comparatively little resources. Trade enables economies to specialize in the exports in resources and money to buy imports of other goods that they need but lack.
  2. Increased Welfare – specialization and trade allow countries to gain a higher level of consumption than they would do domestically and this leads to increased welfare and higher living standards.
  3. To gain Economies of Scale – with specialization and production on a larger scale than may be possible domestically, a country may be able to gain more economies of scale. This will lead to lower average costs and benefit consumers through lower prices.
  4. Diversity of Choice – trade enables people to access and approach diverse and variety of goods and services that may not be available only in the domestic market.
    • Real World Example: Korean consumers are able to buy Apple products from US and have wide variety of choice along their own electronics manufacturers Samsung and LG.
  5. Increased Competition – Increased competition helps domestic industries to have improvements in productivity and efficiency. In addition, it gives domestic firms better incentive and improve their products to compete against foreign firms.
    • Real World Example: As Apple introduced the iPhone, Korean phone manufacturers such as Samsung and LG began to make their own smart phones to counter the increasing Apple influence on Korean domestic market. Warc: iPhone threatens LG and Samsung in Korea
  6. Engine for Growth – increased trade helps domestic economies to grow and make improvements in living standards of the people.

3. Free trade – It is international trade free from any restrictions like tariffs, quotas or other protection.

  • Real World Example: Korea and EU signed the agreement to initiate FTA that will eliminate all the trade barriers imposed on the trade. ICTSD: EU-Korea FTA

4. Protectionism – it is a policy to protect domestic industries from fierce foreign competitions. It includes tariffs, quotas, embargo, and voluntary export restraints.

  • Real World Example: Japan has a heavy protectionism on their domestic rice industry. Japan imposes 341 yen per kilogram tariff on all imported rice. This raises the price of the imported rice to be way higher than the quota, effectively prohibiting the imported rice from hurting domestic rice industry. In addition, Japan subsidizes the rice industry and the taxpayers paid $2.8 billion in 1999 alone. Japan-101: Japanese Rice Trade Policy

5. Tariff – it is a tax on imports in order to protect domestic industries by increasing the price of the imports. This gives domestic industries equivalent comparative advantage to the foreign industries.

  • Real World Example: Japan imposes a tariff of 341 yen per kilogram on imported rice.

6. Quotas -it restricts the maximum amount of imports allowed into an economy. This reduces the amount of imports into the economy and increases the equilibrium price within the market.

7. Exchange Control – it limits the amount of foreign currency available for paying for imports. This reduces the amount of imports in the economy to protect domestic industries.

  • Real World Example: China has exchange control to regulate not only the value of their currency but also to regulate the amount of imported goods to be in Chinese domestic market. CABC: Chinese foreign exchange control system

8. Export Subsidies – it is a subsidy offered to domestic industries to allow exporters to export more products than the natural equilibrium point would allow. The benefits the foreign consumers with increased economic welfare and the decrease in the price of the imports. Tax payers would have to bear the burden, however, the domestic industries would enjoy more wages and job security. However, this could reduce the domestic exporters’ interest in domestic market and disregard the market. This could lead to an increase in domestic prices.

9. Voluntary Export Restraints (VER’s) – it is the voluntary quota set by the manufacturer.

10. Administrative Obstacles – governments could set trade barriers such as long, slow paperwork. This makes it hard for foreign firms to to compete with the domestic firms.

11. Health and Safety Standards – high health and safety standards for imported goods can make it difficult for foreign firms to compete in domestic market. This protects the domestic industries.

  • Real World Example: Japan only allows US beef that are aged below 20 months in fear of mad cow disease. Japan considers beef aged over 20 months as ‘highly dangerous’ of mad cow disease and prohibits them from the domestic beef market. Bloomberg: Japan-US Beef, Mad Cow Disease Concerns

12. Environmental Standards – high environmental standards also makes the foreign firms to compete in the domestic market. This protects the domestic industries.

13. Downward Multiplier Effects – protectionism could reduce the level could affect the country’s exports to be less competitiveness and decrease the exports due to decreased amount and the increased price of imports.

  • Real World Example: Korea has tariffs on imported chicken and this may have been the cause to the high price of domestic chicken in Korean market. The high price in chicken reduces the competitiveness of industries that rely on chicken as part of their production. For example, KFC’s would have great decrease in the competitiveness in the price of their chicken due to the high price caused by the protectionism.

14. Globalization -it is the integration of national economies into international economy trough trade, commerce, investments, and capital flows.

  • Real World Example: China is a communist country, but it has realized that it could benefit from the globalization and trade. So, China opened up its market and economy to the world and became an enormous part of the global economy.

15. Types of Trading Blocs

  1. Free Trade Area (FTA) – it is an area where there are no trade barriers. Sovereign countries must not implement trade barriers on the member countries of FTA.
  2. Customs Union – it is similar to FTA in that it is free from trade barriers. However, it is different in that countries are no longer fully sovereign over the trade policies. There is standardized trade policies that the countries must abide by to.
  3. Common Market -it allows free movement of factors of production such as labor and capital between the member countries without restriction.
  4. Economic Union – it is a developed trading bloc in the level of integration. The member states may have common economic policies, common currency, and common monetary policies.
    • Real World Example: EU is an economic and political union that has common economic policies and common currency as Euro.

16. World Trade Organisation (WTO) – it is an organization that intends to supervise and liberalize international trade. It penalizes countries implementing illegal trade barriers on the other country.

17. Balance of Payments – it measures the international trade performance of an economy and shows how well it is managing to match imports and exports of goods and services and the flows of investment in and out of the country.

18. Current Account – it records imports and exports of goods and services.

19. Capital Account – it records the flow of money into and out of a country for investment and other purposes.

20. Exchange Rate – it is the price of one currency expressed in terms of another.

  1. Fixed– the exchange rate of one currency is fixed in value to other currencies.
    • Real World Example: North Korea has a fixed exchange rate. However, the fixed exchange rate does not accurately reflect the market value of the currency as the market value for the currency is often 20 times lower than the fixed value for the currency.
  2. Floating – the exchange rate of one currency is completely dependent on the market mechanism of supply and demand of the currency.
    • Real World Example: Japan has a floating exchange rate. The government does not intervene with the exchange rate.
  3. Managed or Dirty Float – the exchange rate that is based on floating exchange rate, however, has maximum and minimum limits managed by the government.
    • Real World Example: China is implementing dirty float system for the exchange rate. It sets the maximum value to the exchange rate in order to artificially depreciate its currency and therefore export more to the world.

21. Dumping – It is to sell a product in another country at a price below its unit cost of production in order to decimate the domestic industry of that country.

  • Real World Example: Philippines once had a competitive agricultural industry. It was once famous for its efficiency to harvest crops 3 times a year whereas other agricultural industries could only harvest 1 time. However, as it opened up its market to the world, foreign agricultural industries started dumping their crops in Philippines domestic market. The domestic agricultural industries soon collapsed, and the foreign agricultural industries raised the price of the crops. Philippines’ economy significantly shrank and gave its title of Asia’s 2nd developed nation to other countries like South Korea, Taiwan, Hong Kong, etc.

22. Anti-Dumping – It is a legislation to protect an economy against imported goods that are sold at a price below its unit cost of production.

  • Real World Example: World Trade Organization (WTO) monitors firms dumping maliciously on foreign markets and penalize them as soon as they spot them on the action.

Resources:

  • Triple A Learning
  • Economics Glossary
  • Wikipedia
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