International Economics Definitions

Factor endowments are the factors of production that a country has available to produce goods and services.

Specialization exists where a country specializes in the production of goods and services where they have comparative advantage in production. They will then trade to get the goods and services in which they do not specialize.

Absolute advantage for a good exists where a country is able to produce more output than other countries using the same inputs of factors of production.

Comparative advantage for a good exists where a country is able to produce a good at a lower opportunity cost of resources than another country.

Free trade is international trade that takes place without any barriers, such as tariffs, quotas, or subsidies.

tariff is a duty tax that is placed upon imports to protect domestic industries from foreign competition and to raise revenue for the government.

quota is an import barrier that set upper limits on the quantity or value of imports that may be imported into a country.

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

Voluntary Export Restraint (VER) is a voluntary agreement between an exporting country and an importing country that limits the volume of trade in a particular product/products.

The infant industry argument proposed that new industries should be protected from foreign competition until they are large enough to compete in international markets.

Dumping is the selling of a good in another country at a price below its unit cost of production.

Anti-dumping is legislation to protect an economy against the import of a good at a price below its unit cost of production.

free trade area (FTA) exists when an agreement is made between countries, where the countries agree to trade freely among the members of the group, but are able to trade with countries outside the free trade area in whatever ways they wish, for example, the North  American Free Trade Agreement between the US, Canada and Mexico.

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

Real World Example: The Switzerland-Liechtenstein customs union.

common market is a customs union with common policies on product regulation, and the free movement of goods, services, capital, and labor.

Real World Example: The European Union.

The World Trade Organization, also known as the WTO, is an international body that sets the rules for global trading and resolves disputes between its member countries. It also hosts negotiations concerning the reduction of trade barriers between its member nations.

The Balance of Payment is a record of the value of all the transactions between the residents of a country with the residents of all other countries over a given time period.

The balance of trade is a measure of the revenue received from the exports of goods minus the expenditure on the imports of goods over a given time period.

The currency account is a measure of the 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 remittance).

The capital account is a measure of the buying and selling from the export of goods and services and income flows is greater than the expenditure on the import of goods and services and income flows over a time period.

The current account surplus exists where the revenue from the export of goods and services and income flows is greater than expenditure on the import of goods and services and income flows over a given time period.

The current account deficit exists where revenue from the export of goods and services and income flows is less than the expenditure on the import of goods and services and income flows over a given time period.

The Marshall-Lerner condition states that a depreciation, or devaluation, of a currency will only lead to an improvement in the current account balance if the elasticity of demand for exports plus the elasticity of demand for imports is greater than one.

The J-Curve theory suggests that in the short term, even if the Marshall-Lerner condition is fulfilled, a fall in the value of the currency will lead to a worsening of the current account deficit, before things improve in the long term.

An exchange rate is the value of one currency expressed in terms of another, for example, $1 = 1.60 euros

fixed exchange rate is an exchange rate regime where the value of a currency is fixed to the value of another currency, or to the value of some other commodity like gold.

floating exchange rate is an exchange rate regime where the value of a currency is allowed to be determined fully by the demand and supply of that currency on the foreign market.

depreciation is when the value of a currency decreases in terms of another currency in a floating exchange rate system.

An appreciation is when the value of a currency increases in terms of another currency in a floating exchange rate system.

Purchasing power parity (PPP) theory suggests that under a floating exchange rate system, exchange rates adjust to offset differential rates of inflation between countries that are trading partners in order to restore balance of payments equilibrium.

The terms of trade is an index that illustrates the value of a country’s average export prices relative to their average import prices.

Deteriorating terms of trade, also known as adverse terms of trade, exist when the average price of exports falls relative to the average price of imports.

Elasticity of demand for exports is a measure of the responsiveness of the quantity demanded of exports when there is a change in the relative price of exports.

Elasticity of demand for imports is a measure of the responsiveness of the quantity demanded of imports when there is a change in the relative price of imports.


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