Posts tagged 4

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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Data Response Section 4 Reflection

I have got the score of 20 out of 20. I have answered to every question asked and I think that this was the reason why I have got the perfect score. However, there were some improvements to be made. Firstly, my hand writing was not that neat. It would frustrate the examiner who might be grading 100-200 papers a day if the writing illegible. Also, I finished 15 minutes before the test ended. I think that I should be used this time to examine and correct on some of the mistakes I have made.

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Kim Jong-Ill’s Furtive $4bn ‘Emergency Fund’

Kim, Jong-Ill with his gang

The Daily Telegraph: Click Here

According to Telegraph, Kim Jong-il, the Supreme Leader of North Korea, has a $4 billion (£2.6 billion) “emergency fund” hidden in secret accounts in European banks that he will use to continue his lavish way of life if he is forced to flee the country.

South Korean intelligences announced that the most of the money was held in Swiss banks, however, Kim Jong-Ill started to transfer them to banks in Luxembourg.

Most of the money is gained from the selling its nuclear and missile technology, making narcotics, insurance swindle, the use of forced labour in its vast gulag system, and the counterfeiting of foreign currency.

I used to live in Kuwait located across the gulf of Middle East, and I remember lots of North Korean laborers working outside under 45~50° Celsius of heat building roads. At the time I thought that they were rightfully paid. However, I realized now that they were actually being exploited to satisfy the pocket of North Korean dictator Kim Jong-Ill.

Let’s get the question of why these banks are ‘hiding’ this unlawful money for Kim Jong-Ill. Ken Kato, the director of Human Rights in Asia answers this well.

“Somewhere in the world, there are bankers who are earning a large sum of money by concealing and managing Kim Jong-il’s secret funds, and at the same time, almost nine million people in North Korea are suffering from food shortages,” he said. “I believe the secret bank accounts are now in Luxembourg, or have recently been transferred from Luxembourg to other tax havens.”

So what Ken Kato basically say is that these banks are making profit from hiding Kim Jong-Ill’s secret fund. They can invest, speculate, and profit by using this illicit money. This was the case for banks in Swiss also until they strengthened the regulations related to it. The so-called ‘black money’ from dictators around the world has made these banks’ pocket full of money.

Kim Jong-I’ll is surely the cruel traitor of the Korean people. He could have used 4 billion dollars to recover the economy and most importantly he could have used it for feeding 9 million North Koreans who are starving. It really doesn’t take that much of money (looking at Kim Jong-Ill’s pocket full of money) to buy the rice to feed the people.

Let’s look at the international rice price.

Rice Export Prices

(US $/tonne)

Thailand

Vietnam

California

Pakistan

Egypt

332

407

1102

380

760

<The FAO Rice Price Update – January 2010: Click Here>

As you see in the chart above, the cheapest rice you can get is for $332 per one ton of Thailand rice. Okay, lets calculate how much money is needed to feed the poor undernourished North Korean people. According to South Korean standard, people in average eat less than 10 kg of rice per month.  So we are going to assume that the normal nourishment required for North Korean people will be 10 kg per person. $332/1000kg = $3.32/10kg. So it requires 3.32 dollars to feed a person for a month. Multiply 3.32 by the North Korean population. 3.32 x 23,110,000 = 76,725,200.

So you only need about 77 million dollars to feed the starving people. Compare 77 million to 4 billion. It only costs 0.02% of the furtive emergency fund that Kim Jong-I’ll is hiding in those banks in Europe.

Using 0.02% of this ’emergency fund’ to buy food supply will not only save the people from starvation, but also helps them to recover economy significantly. How could this help the North Korea economy to recover? Simply by feeding the people, the factories could operate properly by having nourished labor force. It’ll will also be a great incentive for the laborers to work hard as their standard of living is obviously extremely low. They’d be smiling not with one of those ‘forced, unnatural smiles’ but with genuine smiles of happiness even with meager amounts of rice. (it is sad, however).

Or, he could just sell one of those cruises and he’ll be able to feed millions. He will be forever remembered as a traitor of his people if he keeps billions of dollars rotting in European banks. Also, the banks that are ‘hiding’ Kim Jong-Ill’s money will be difficult for them avoid criticism for letting 9 million people die from starvation. These banks should freeze his unrighteous money and should follow the UN’s economic sanctions on North Korea.

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