Notes

free trade: international trade that occurs without any trade barriers

protectionism: partial or complete protection of domestic industries from foreign competition in domestic markets, achieved through setting up trade barriers (tariffs, quota, subsidy)

why free trade good?
- allocative efficiency since each country produces according to comparative advantage, lower COP increases Ss, increase domestic consumption with trade
- imported inputs and capital goods facilitate PEG
- source of foreign exchange through export revenue
- wider export market for domestic Firms, achieve EOS
- increases competition, increasing Dynamic Efficiency and Productive Efficiency
- mutual interdependence of countries prevents hostility and war
- AEG and increases Material SOL for consumers with greater variety of goods

Absolute advantage: situation where one country can produce more units of a good with the same amount of resources, or can produce one unit of a good with fewer resources compared to another country

Comparative advantage: situation where one country can produce a good at a lower opportunity cost than another country (flatter PPC, country holds comparative advantage in production of good on horizontal axis, steeper PPC, country holds comparative advantage in production of good on vertical axis)

assumptions of absol and compar advantage:
- constant opportunity cost (straight line PPC)
- goods produced are homogenous
- no transportation costs, perfect factor mobility within each country
- perfect competition in all markets
- full utilization of resources
- no trade barriers

tariff: tax imposed on imports
Quota: restriction on maximum quantity of imports allowed
Subsidy: grant provided by the Government to Firms aiming to lower costs of production and increase supply
Administrative barriers: health and safety regulations, embargoes, Red tape, Import licenses
Reasons for protectionism: infant industry argument, national security, health and environmental standards, anti-dumping, protection of domestic jobs, overcome balance of payments deficit, source of government revenue, diversification of ELDCs

dumping: practice of selling goods in international markets at a price below cost of production
FDI: long-term fixed capital investment, made by MNCs or domestic Firms in another country
MNC: large firms that engage in FDI, or Firms with productive factors located in more than one country

2 functions of WTO:
reduce trade barriers relating to anti-dumping, subsidies, product standards
settle trade disputes between governments with trade negotiations, WTO as final judge

Managed float exchange rate: exchange rate system where currency's value in terms of another currency is determined by market forces of demand and supply within set boundaries, but the Central Bank intervenes periodically to prevent excess fluctuations outside those boundaries

devaluation: officially announced lowering of value of domestic currency relative to foreign currencies

revaluation: officially announced raising of value of domestic currency relative to foreign currencies

impact of currency appreciation/depreciation on...
- inflation rate (cost push/demand pull inflation)
- current account balance & trade balance (analyze marshall lerner condition for depreciation of currency)
- actual economic growth, potential economic growth
- employment

Marshall Lerner condition: depreciation WILL improve current account balance if sum of PED for imports and PED of exports is bigger than 1

Balance of Payments: summary statement of monetary value of all economic transactions that have occurred over a period of time, sum of current account, capital account, financial account

Current account: sum of balance of trade in goods and services, net current transfers, net income flows

Capital account: composed of inflows minus outflows of funds for capital transfers and transactions in non-produced, non-financial assets

Financial account: composed of inflows minus outflows of funds for capital transfers and transactions in financial assets

BOP=0

J curve analysis: why is Dd for exports and imports price inelastic in short-run?
- importers and exporters have fixed contracts
- consumer's habitual buying behavior
- Information lag regarding depreciation

TOT: index that shows VALUE of a country's average export prices relative to their average import prices

Economic integration: economic cooperation between countries and coordination of their economic policies

PTA: agreement that gives preferential access to certain products from certain countries by reducing or eliminating tariffs, or other agreements relating to trade

trading bloc: group of countries that join some form of agreement to increase trade between them and gain economic benefits

Free trade area: group of countries that agrees to gradually eliminate trade barriers between themselves

Customs Union: group of countries that agrees to gradually eliminate trade barriers between themselves AND adopt common external tariffs and quotas with non-member countries

Common Market: group of countries that agrees to gradually eliminate trade barriers between themselves AND adopt common external tariffs and quotas with non-member countries AND eliminate all restrictions on movement of FOP within Common Market

Monetary Union: common market with common currency and common central bank

Economic Development: sustainable improvements in material and non-material SOL that imply increases in per capita income, improvements in education, employment and healthcare opportunities, decreased income inequality and environmental protections

EDCs require technologically advanced capital intensive methods of production
ELDCs require labor-intensive methods of production that employ their ABUNDANT LABOR

HDI: composite indicator used to measure economic development, composed of mean and expected years of schooling, life expectancy at birth, GNI per capita

Infrastructure: large scale public systems essential for economic activity normally provided by government

Aims of the IMF: promote International monetary cooperation, facilitate expansion and balanced growth of World trade

NGO; organization that is not part of the government, not founded by states

Development aid: long-term aid focused on helping economic development of recipient country

Humanitarian aid: short-term aid focused on alleviating poverty and other suffering caused by humanitarian crisis