deep integration
economic integration beyond removal of barriers at each country's border
foreign direct investment (FDI)
the purchase of physical assets such as real estate or businesses by a foreign company or individual. It can be outward or inward.
gross domestic product (GDP)
the market value of all final goods and services produced in a year inside a nation
index of openness
a measure of the importance of trade to a national economy, consisting of exports plus imports divided by GDP
quota
a numerical limit on the volume of imports
regional trade agreement (RTA)
agreements between two or more countries, each offering the others preferential access to its markets. RTAs provide varying degrees of access and variable amounts of deep integration
shallow integration
the elimination or reduction of tariffs, quotas, and other border-related barriers (such as customs procedures) that restrict the flow of goods across borders
tariffs
taxes imposed on imports. Tariffs raise the price to the domestic consumer to reduce the quantity demanded.
transaction costs
the costs of gathering market information, arranging a market agreement, and enforcing the agreement. Transaction costs include legal, marketing, and insurance costs, as well as quality checks, advertising, distribution, and after-sales service costs.
Bretton Woods conference
a small town in NH that was, in July 1944, the site of talks establishing the international financial and economic order after WWII. The IMF and the World Bank emerged from the Bretton Woods conference.
common external tariff
the policy of customs unions in which the members adopt the same tariffs toward nonmembers
common market
a regional trade agreement whose member nations allow the free movement of inputs as well as outputs, and who share a common external tariff toward nonmembers
customs union
an agreement among two or more member countries to engage in free trade with each other and to share a common external tariff toward nonmembers
Doha Development Agenda
the name for the trade negotiations that began in 2000 under the auspices of the WTO
Doha Round
the current WTO round of trade negotiations
economic union
the most complete form of economic integration, these unions are common markets that also harmonize many standards while having the same substantially similar fiscal and monetary policies. Economic unions may include a common currency.
foreign exchange reserves
assets held by the national monetary authority that can be used to settle international payments. Dollars, euros, yen, and monetary gold are examples of reserves.
free riding
occurs when a person lets others pay for a good or service, or lets them do the work when he or she knows that he or she cannot be excluded from consumption of the good or from the benefits of the work
free-trade area
a preferential trade agreement in which countries permit the free movement of outputs across their borders as long as the outputs originate in one of the member countries
General Agreement on Tariffs and Trade (GATT)
the main international agreement covering the rules of trade in most, but not all, goods. The GATTs origins can be traced to negotiations that took place in 1946, after WWII.
IMF conditionality
the changes in economic policy that borrowing nations are required to make in order to receive IMF loans. The changes usually involve policies that reduce or eliminate a severe trade deficit and/or a central government budget deficit. In practical terms,
institution
a set of rules of behavior. Institutions set limits, or constraints, on social, political, and economic interaction. An institution may be informal or formal.
International Monetary Fund (IMF)
one of the original Bretton Woods institutions, IMF responsibilities include helping member countries that suffer from instability or problems with their balance of payments. It also provides technical expertise in international financial relations.
lender of last resort
in international economics, a place where nations can borrow after all sources of commercial lending have dried up. Today, the IMF fills this role.
most-favored nation (MFN) status
the idea that every member of the WTO is required to treat each of its trading partners as well as it treats its most favored trading partner. In effect, MFN prohibits one country from discriminating against another.
national treatment
the idea that foreign firms operating inside a nation should not be treated differently than domestic firms
non-diminishable
a good or service that is not reduced by consumption. For example, listening to a radio broadcast does not reduce its availability to others
nondiscrimination
the notion that national laws should not treat foreign firms differently than domestic firms
nonexcludable
when people wo do not pay for a good or service cannot be excluded form its consumptions. National defense is an example
nonrival
see Non-diminishable
partial trade agreement
an agreement that covers only some goods and/or services and is less than a free-trade agreement
public goods
goods that share two characteristics: nonexludability and nonrivalry or nondiminishability. If they are exludable but nondiminishable goods, they are sometimes called collective goods.
sovereignty
free from outside intervention, or self-determining
trade bloc
a preferential trade area; a group of nations that reduces or eliminates barriers between themselves while maintaining higher tariffs and other barriers to trade against nonmember, third party countries.
trade creation
the opposite of trade diversion. Trade creation occurs when trade policies cause a shift in production from a higher cost producer to a lower cost producer.
trade diversion
the oposite of trade creation. Trade diversion occurs when trade policies cause a shift in production and imports from a lower cost producer to a higher cost producer.
trade rounds
multilateral negotiating rounds under the auspices of the GATT or the WTO
Uruguay Round
the latest round of tariff negotiations within the GATT framework, the Uruguay Round began in 1986 in Punta del Este, Uruguay, concluded in 1993, and was ratified in 1994. Among other accomplishments, it created the WTO.
World Bank
a Bretton Woods institution, originally charged with the responsibility for providing financial and technical assistance to the war-torn economies of Europe. In the 1950s, the World Bank began to shift its focus to developing countries.
World Trade Organization (WTO)
an umbrella organization created by the Uruguay Round of the GATT talks, the WTO houses the GATT and many other agreements. It is the main international body through which multilateral trade talks take place
absolute productivity advantage
a country has an absolute productive advantage in a good if its labor productivity is higher; that is, it is able to produce more output with an hour of labor than its trading partner can
autarky
the complete absence of foreign trade; total self-sufficiency of a national economy
comparative productivity advantage
achieved in a good when a country has lower opportunity costs of producing the good than those of its trading partners
competitive advantage
the ability to sell a good at the lowest price. Competitive advantage may be the result of high productivity and a comparative advantage. Alternatively, it may be the result of government subsidies for inefficient industries.
economic restructuring
a movement from one point to another along a country's production possibility curve
gains from trade
the increase in consumption made possible by specialization and trade
labor productivity
the amount of output per unit of labor input
mercantilism
economic system that arose in western Europe in the 1500s; stressed the need for nations to run trade surpluses to obtain revenues for armies and national construction projects; favored monopolies; shunned competition
opportunity cost
the value of the best forgone alternative to the activity actually chosen
price line
the rate at which one good trades for another in a two-good model; the slope of the price line is the relative price. The same as a trade line.
production possibilities curve (PPC)
this curve shows the maximum amount of output possible, given the available supply of inputs. It also shows the trade-off that a country must make if it wishes to increase the output of one of its goods.
relative price
the price of one good interms of another good.
resource curse
the economic and/or political problems caused by an abundance of one valuable natural resources such as petroleum
trade adjustment assistance (TAA)
government programs that offer temporary assistance to workers who lose jobs because of foreign trade or their firms moving abroad
trade line
see Price Line
zero sum
the costs and benefits of an activity cancel each other (equal zero).
demand-pull factors
economic conditions in the receiving country that "pull" in migrants
derived demand
demand for a good or service that is derived from the demand for something else. For example, the demand for labor is derived from the demand for goods and services.
factor abundance, factor scarcity
these are relative terms because, strictly speaking, all factors are scarce. Relative factor abundance impolies that an economy has more of a particular factor in relation to some other factor and by comparison to another economy. Relative factor scarcity
foreign affiliate
a foreign-based operation that is owned by a firm in the home country
Heckscher-Ohlin (HO) trade theory
a trade theory that predicts the goods and services that countries export and import. The theorem states that countries will export goods that require the intensive use of relatively abundant factors to produce, and import goods that require relatively sc
intrafirm trade
international trade between two or more divisions of the same company that are located in different countries
magnification effect
the idea that a rise or decline in goods prices has a larger effect in the same direction on the income of the factor used intensively in its production
off-shoring
the movement of some or all of a firm's activities to a foreign country
OLI theory
a model of the determinants of foreign direct investment that is based on the key variables Ownership-Location-Internalization
outsourcing
outsourcing is the shifting of procurement from within a firm to outside a firm. It is often used to refer to services that are purchased abroad, such as the procurement of business services in India by a firm based in Europe or the United States
product cycle
the idea that manufactured goods go through a cycle of heavy research and development requiring experimentation in the product and manufacturing process, followed by stabilization of design and production, and in a final stage of complete standardization
social networks
members of a migrant's family or village that provide support in the migrant's new location
specific factors model
a trade model that allows for mobile and immobile factors of production
Stolper-Samuelson theorem
a corollary of the Heckscher-Ohlin Theory stating that changes in import or export prices lead to change in the same direction of the income factors used intensively in its production
supply-push factors
the factors that "push" migrants out of their home country
export processing zone (EPZ)
a geographical region in which firms are free from tariffs as long as they export the goods that are made from imports. Rules and regulations governing EPZs vary by country, but all of them are aimed at encouraging exports, often through encouragement giv
external economies of scale
scale economies that are external to a firm, but internal to an industry. Consequently, all the firms in an industry experience declining average costs as the size of the industry increases
externality
a divergence between social and private returns
Grubel-Lloyd index
a measure used to determine the importance of intraindustry trade
industrial policy
a policy designed to create new industries or to provide support for existing ones
interindustry trade
trade that involves exports and imports of goods that are produced in different industries, for example, when the United States exports cars and imports sugar cane.
internal economies of scale
the idea that an individual firm experiences a decline in its average cost of production as it increases the number of units produced
intraindustry trade
exports and imports of the same category of goods and/or services
maquiladora
Mexican manufacturing firms, mostly along the U.S.-Mexico border, that receive special tax breaks
market failure
a situation in which markets do not produce the most beneficial economic outcome. Market failure has numerous causes, including externalities and monopolistic or oligopolistic market structures.
monopolistic competition
competition between differentiated products, combining elements of perfect competition and monopoly
oligopoly
a market with so few producers that each firm can influence the market price
private returns
the value of all private benefits minus all private costs, properly adjusted to take into account that some costs and benefits are in the future and must be discounted to show their value in today's dollars
product differentiation
two products that serve similar purposes but that there are different in one or more dimensions. Most consumer goods are differentiated products.
rent seeking
any activity by firms, individuals, or special interests that is designed to alter the distribution of income to their favor. Political lobbying, legal challenges, and bribery are common forms of rent-seeking behaviors, which use resources (labor and capi
social returns
social returns include private returns, but they add costs and benefits to the elements of society that are not taken into consideration in the private returns. For example, a firm that generates pollution that it does not have to clean up imposes costs o
strategic trade policy
the use of trade barriers, subsidies, or other industrial support policies designed to capture the profits of foreign firms for domestic firms.
value added
the price of a good minus the value of intermediate inputs used to produce it. Value added measures the contribution of capital and labor at a given stage of production.
consumer surplus
the difference between the value of a good to consumers and the price they have to pay. Graphically it is the area under the demand curve and above the price line
deadweight loss
a pure economic loss with no corresponding gains elsewhere in the economy
effective rate of protection
effective rates of protection consider levels of protection on intermediate inputs as well as the nominal tariff levied on the protected good. Effective rates are measured as the percentage change in the domestic value add after tariffs on the intermediat
efficiency loss
a form of deadweight loss that refers to the loss of income or output that occurs when a nation produces a good at a cost higher than the world price
intellectual property rights
intellectual property is divided into copyrights and related rights for literacy and artistic work, and industrial property rights for trademarks, patents, industrial designs, geographical indications, and the layout of integrated circuits.
large country case
a country that purchases a significant share of the world's output of a particular good may improve its welfare by imposing a tariff that causes import prices to fall
nominal rate of protection
the amount of a tariff (or the tariff equivalent of a quota) expressed as a percentage of the good's price
nontariff barrier (NTB)
any trade barrier that is not a tariff. Most important are quotas, which are physical limits on the quantity of permitted imports. Nontariff barriers include red tape and regulations, rules requiring governments to purchase from domestic producers, and a
nontariff measure
nontariff measures are nontariff barriers that are not quotas. They include red tape or cumbersome and unevenly applied rules. In general, the term refers to any regulatory or policy rules other than tariffs and quotas that reduce the physical quantity of
nontransparent
not easily interpreted or understood. For example, some countries use red tape and bureaucratic rules rules to block imports
producer surplus
the difference between the minimum price a producer would accept to produce a given quantity and the price it actually receives. Graphically, it is the area under the price line and above the supply curve.
quota rents
the excess profits earned by foreign producers (and sometimes domestic distributors of foreign products) in an export market. Quota rents occur whenever a quota causes a price increase in the market receiving the exports.
Trade Related Aspects Intellectual Property Rights (TRIPS)
an agreement that emerged from the Uruguay Round of the GATT. It requires increased enforcement of intellectual property.
transparent
any trade barrier that is clearly defined as a barrier. Tariffs have the most transparency (are the most transparent) because they are usually clearly specified and published in each country's tariff code. Any disguised or hidden trade barriers cause a co
voluntary export restraint (VER)
an agreement between nations in which the exporting nation voluntarily agrees to limit its exports in order to reduce competition in the importing country.