Reasons for Trade -

1)   Factor Endowments

1. Factors of production that a country has available to produce goods and services

i.         Australia has minerals

2)   Specialization

1. Exists where country specializes in production of goods and services where they have a comparative advantage in production. Trade to get goods and services in which they do not specialize.

3)   Absolute Advantage

1. Good exists where a country is able to produce more output than other countries using same inputs of factors of production.

Free Trade & Protectionism –

1)   Free Trade

1. International trade takes place without any barriers, such as tariffs, quotas, and subsidies.

2)   Tariff

1. Duty that is placed upon imports to protect domestic industries from foreign competition and to raise revenue for government

3)   Quota

1. Import barrier set upper limits on quantity or value of imports that may be imported into a country.

4)   Subsidy

1. An amount of money paid by the government to a firm, per unit of output, to encourage output and to give firm an advantage over foreign competitors.

5)   Voluntary export restraint

1. Voluntary agreement between an exporting country and an importing country that limits volume of trade in particular product.

6)   Infant Industry Argument

1. Propose new industries should be protected from foreign competition until they are large enough to compete in international markets.

7)   Dumping

1. Selling of a good in another country at a price below its unit cost of production.

8)   Anti-Dumping

1. Legislation to protect an economy against import of a good at a price below its unit cost of production.

 

Economic Integration & WTO

1)   Free Trade Area

1. Exists when agreement is made between countries agree to trade freely among members of the group, but are able to trade with countries outside free trade area in whatever ways they wish.

2)   Customs Union

1. Agreement made between countries, where countries agree trade freely among themselves, and they also agree to adopt common external barriers against any country attempting to import into the customs union.

3)   Common market

1. Customs union with common policies on product regulation, and free movement of goods, services, capital, and labor.

4)   Trade Creation

1. Slide Show

5)   Trade Diversion

1. Slide Show

6)   WTO

1. International body that sets rules for global trading and resolves disputes between its member countries. Also hosts negotiations concerning reduction of trade barriers between member nations.

 

Balance of Payments

1)   Balance of Payments

1. Record of value of all transactions between residents of a country with residents of all other countries over given time period.

2)   Balance of Trade

1. Measure of revenue received from exports of tangible goods minus expenditure on imports of tangible goods over a given time period.

3)   Invisible Balance

1. Measure of revenue received from exports of services minus expenditure on imports of services over given time period.

4)   Current Account

1. Measure of flow of funds from trade in goods and services, plus net investment income flows (profit, interest, and dividends) and net transfers of money (foreign aid, grants, and remittances)

5)   Capital Account

1. Measure of buying & selling assets between countries. Assets are often separated to show assets that represent ownership and assets that represent lending.

6)   Current Account Surplus

1. Where revenue from exports of goods and services and income flows is greater than expenditure on import of goods and services and income flows over given time period.

7)   Current Account Deficit

1. Where revenue from export of goods & services & income flows is less than expenditure on import of goods & services & income flows over given time period.

8)   Expenditure Switching

1. Slide show

9)   Expenditure Reducing

1. Slide show

10)                  Marshall-Lerner Condition

1. Depreciation, or devaluation, of a currency will only lead to improvement in current account balance if elasticity of demand for exports plus elasticity of demand for imports is <1.

11)                   J-Curve

1. Theory suggests in short term, even if marshall-lerner condition is fulfilled, fall in value of currency will lead to worsening of current account deficit, before things improve in long term.

Exchange Rates and ToT

1)   Exchange Rate

1. Value of one currency expressed in terms of another.

2)   Fixed Exchange Rate

1. Slide Show

3)   Floating Exchange Rate

1. Slide Show

4)   Depreciation

1. Fall in value of one currency in terms of another currency in floating exchange rate system

5)   Appreciation

1. Increase in value of one currency in terms of another currency in “  “ “

6)   Devaluation

1. Decrease in value of currency in a Fixed Exchange rate system

7)   Revaluation

1. Increase in value of currency in a “ “ “

8) Purchasing Power Parity theory

1. States that under floating exchange rate, exchange rates adjust to offset differential rates of inflation between countires that are trading partners in order to restore BoP equilibrium.

9)   Terms of Trade

1. Index that shows value of country’s average export prices relative to their average import prices.

10)                  Deteriorating/adverse ToT

1. Exists where average price of exports falls relative to average price of imports.

11)                  Elasticity of Demand of exports

1. Measure of responsiveness of quantity demanded of exports when there is a change in relative price of exports.

12)                  Elasticity of demand for imports

1. Measure of responsiveness of quantity demanded of imports when change in relative price of imports.