Absolute advantage
may have over another in the production of a commodity. This was the basis for trade for Adam Smith.
Aggregate demand (AD) curve
The graphical relationship between the total quantity demanded of goods and services at various prices.
The graphical relationship between the nation’s output and the price level over a given time period.
The loose organization that blames globalization for many human and
Anti-globalization movement
environmental problems throughout the world and for sacrificing human and environmental well-being to the corporate profits of multinationals (Sect. 9.7B).
B
The forces that give rise to trade
Basis for trade
between two nations. This was absolute advantage according to Adam Smith and
Aggregate supply (AS) curve
comparative advantage according to David Ricardo.
Bilateral agreements Agreements between two nations regarding quantities and terms of specific trade transactions.
Bilateral trade
Trade between any two nations. The migration of highly skilled and
Brain drain
trained people from developing to developed nations and from other industrial nations to the United States.
C
Economies in which factors of production
Centrally planned economies
are owned by the government and prices are determined by government directives.
An economy in autarky or not engaging in international transactions.
Closed economy
Cobb-Douglas production function The production function exhibiting a unitary elasticity of substitution between labor and capital.
Removes all barriers on trade among members, harmonizes trade policies toward the rest of the world, and also
Common market
allows the free movement of labor and capital among member nations. An example is the European Union (EU) since January 1, 1993.
The curve that shows the various combinations of two commodities
Community indifference curve
yielding equal satisfaction to community or nation. Community indifference curves are negatively sloped, convex from the origin, and should not cross. The utilization of all of a nation’s
Complete specialization
resources in the production of only one commodity with trade. This usually occurs under constant cosrs.
Constant opportunity costs
The constant amount of a commodity that must be given up to produce each additional unit of another commodity.
Constant returns to The condition under which output grows
scale in the proportion as factor inputs. The difference between what consumers
Consumer surplus
are willing to pay for a specific amount of a commodity and what they actually pay for it .
Consumption effect of a tariff
The reduction in domestic consumption of a commodity resulting from the increase in its price due to a tariff. Removes all barriers on reade among
Customs union
members and harmonizes trade policies toward the rest of the world. The best example is the European Union (EU).
D
The demand for factors of production
Derived demand
that arises from the denand For final commodities that are produced using the particular factors.
Real investments in factories, capital
Direct investments
goods ,land, and inventories where both capital and management are involved and the investor retains control over t5he
use of the invested capital. The multilateral trade negotiations launched in November 2001in Daha (Qatar ) and scheduled to be completed
Doha Round
in 2004, that will address, among other things greater trade access by developing countries in developed countries’s markets.
The export of a commodity at below cost or at a lower price than sold domestically.
Dumping
Dynamic external economies The decline in the average cost of production as cumulative industry output increases and firms accumulate knowledge over time.
E Economic integration Economic union
The commercial policy of discriminatively reducing or eliminating trade barriers only among the nations joining together. Renoves all barriers on rtade among
members, harmonizes trade policies toard the rest of the world, allows the free movement of labor and capital among member nations, and alst harmonizes the monetary, fiscal, and tax policies of its members.
The customs union formed by West Germany, France, Italy, Belgium, the Netherlands, Luxembourg that came into
European Union
existence in 1958,and expanded to 15 nations with the joining of the United Kingdom, Denmark, and Ireland in 1973 , Greece in 1981, Spain and Portugal in 1986,and Austria, and Sweden in 1995.
F
he factor of production available in
Factor abundance
greater proportion and at a lower relative price in one nation than in another nation.
Factor-intensity reversal
The situation where a commodity is L intensive when the relative price of labor
is low and K intensive when the relative price of capital is low. If prevalent, this would lead to rejection of the H-O trade model.
G Gains from specialization
The increase in consumption resulting from specialization in production. The increase in consumption in each
Gains from trade
nation resolution from specialization in production and trading.
Game theory H
The education, job training, and health
Hunan capital
embodied in workers, which increase increase their productivity.
I
Incomplete specialization
The continued production of both commodities in both nations with increasing costs, even in a small nation Amethod of choosing the optimal strategy in conflict situations.
with trade.
the production situation where output
Increasing returns to scale
grows proportionately more than the increase in inputs or factors of
production. For example all inputs more than doubles output.
An organization of suppliers of a commodity located in different nations (or a group of governments ) that agrees to restrict output and exports of the
International cartel
commodity with the aim of maximizing or increasing the total profits of the organization. An international cartel that behaves as a monopolist is called a centralized cartel.
International trade policy
International trade theory
Intra-industry trade
Examines the reasons for and effects of trade restrictions.
Analyzes the basis and the gains from trade.
International in the differentiated products of the same industry or broad
product group.
Intra-industry trade index
L
Law of comparative advantage
It is given by 1 minus the ratio of the absolute value of exports minus imports
over exports plus imports.
Laissez-faire The policy of minimum government interference in or regulation of economic activity ,advocated by Adam Smith and other classical economists.
Explains how mutually beneficial trade can take place even when one nation is less efficient than ,or has an absolute disadvantage with respect to, another nation in the production of all
commodities. The less efficient nation should specialize in and export the commodity in which its absolute disadvantage is smaller (this is the commodity of its comparative
advantage ),and should import the other commodity.
M
The amount of one commodity that a mation could give up in exchange for one extra unit of a second commodity and
Marginal rate of substitution (MRS)
still remain on the same indifference curve. It is given by the slope of the community indifference curve at the point of consumption and declines as the nation consumes more of the second commodity.
Most-favord –nation principle N
Technical progress that increases the
Neutral technical progress
productivity of labor and capital in the same proportion and leaves K/L constant at constant relative factor prices. A tariff (such as an ad valorem one)
Nominal tariff
calculated on the price of a final commodity.
The extension to all trade partners of any recirocal tariff reduction negotiated by the United States with any other nation.
O
A curve that shows how much of its import commodity a nation demands to
Offer curve
be willing to supply various amounts of its export commodity, or the willingness of the nation to import and export at various relative commodity prices. The rate of tariff that maximizes the benefit resulting from improvement in the
Optimum tariff
nation’s terms of trade against the negative effect resulting from reduction in the volume of trade.
P
The market condition where (1) there are many buyers and sellers of a given commodity of factor, each too small to
Perfect competition
affect the price of the commodity of factor; (2) all units of the same commodity or factor are homogeneous, or of the same quality; (3) there is perfect knowledge and information on all
markets; and (4) there is perfect internal mobility of factors of production. The loosest form of economic integration; provides lower barriers to
Preferential trade arrangements
trade among participating nations than on trade with nonparticipating nations. An example is the British
Commonwealth Preference Scheme. The increase in domestic production of a commodity resulting from the increase in
Production effect of its price due to a tariff. a tariff
Prohibitive tariff A tariff sufficiently high to stop all international trade so that the nation returns to autarky.
R
Revenue effect of a The revenue collected by the tariff
government from the tariff.
Postulates that at constant commodity
Rybczynski theorem
prices, an increase in the endowment of one factor will increase by a greater proportion the output of the commodity
intensive in that factor and will reduce the output of the other commodity.
S
The model to analyze the effect of a
Specific-factors model
change in commodity price on the returns of factors in a nation when at least one factor is not mobile between industries.
Postulates that an increase in the relative price of a commodity (for
Stolper-Samuelson example, as a result of a tariff) raise the theorem
return or earnings of the factor used intensively in the production of the commodity.
The argument that an activist trade
Strategic trade policy
policy in oligopolistic markets subject to extensive external economies can increase a nation’s welfare.
T
Trade creation Occurs
when some domestic production in a member of the customs union is
replaced by lower-cost imports from another member nation. This increases welfare.
The entry of imports from the rest of the
Trade deflection
world into the low-tariff member of a free trade area to avoid the higher tariffs of other members.
U
The multilateral trade negotiations started in 1986 and completed at the end of 1993 aimed at reversing the trend of rising no tariff trade barriers. It replaced
Uruguay Round
the GATT with the World Trade Organization (WTO), brought services and agriculture into the WTO, and improved the dispute settlement mechanism.
V
The expansion of a firm backward to
Vertical integration
supply its own raw materials and intermediate products and/or for ward to
W
Wealth effect
provide its own sales or distribution networks.
The change in the output per worker or
per person as a result of growth in the nation.
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