1. Portfolio Definitions and diagrams from Section 4

2. Factor endowments Factors of production that a country has available to produce goods and services Real world example: Japan has people, China has land

3. specialization Country specializes in the production of goods and services where they have a comparative advantage in production.

4. Absolute and comparative advantage Absolute: The ability to produce a particular good with fewer resources than another country. Comparative: The ability to produce a particular good at a lower opportunity cost than another country. Real world example: Japan makes technology and Thailand rice

5. Shoes (pairs) 3 2 China India 0 5 12 Cloth (meter) Figure 1: Production PossibilitiesCurves (PPCs) for India and China

6. Protectionism & free trade Free trade: Absence of intrusions (subsidies) or barriers (tariff and quota) in the flow of goods and services between countries. Protectionism: Presence of intrusions (subsidies) or barriers (tariffs and quotas) in the flow of goods and services between countries

7. Tariff Tariffs: taxes on goods imported into a country in order to protect local industries. They are a form of protectionism and are often used by governments to try to reduce the level of imports into a country. Real world example: Brazil on US agricultural products

8. Price of agricultural goods SBrazil Government Revenue Deadweight loss P1 P3 SUS+TARIFF P2 SUS D Q3 Q5 Q1 Q2 Q4 0 Quantity of agricultural goods Before tariff domestic imports After tariff domestic imports Tariff

9. Quota Quota: limit on the quantity of goods that can be imported into a countryin order to protect local industries. Real world example: Japan

10. Price of agricultural goods SBrazil Government Revenue Deadweight loss P1 P3 SUS+TARIFF P2 SUS D Q3 Q5 Q1 Q2 Q4 0 Quantity of agricultural goods Before tariff domestic imports After tariff domestic imports Quota

11. Subsidy Subsidy: payment made to firms or consumers designed to encourage an increase in output in order to protect local industries. Real world example: US to agricultural farmers

12. Price of agricultural goods SUS SUS+SUBSIDIES Cost to Government Size of subsidy P1 SWORLD P2 D Q3 Q1 Q2 0 Q4 Quantity of agricultural goods Before subsidy domestic imports After subsidy domestic imports Subsidy

13. Voluntary exports restraint Voluntary agreement between an exporting country and an importing country that limits the volume of trade in a particular product Real world example: Japan and cars (reduced their exports to US)

14. Dumping & anti-dumping Dumping: selling of a good in another country at a price below its unit cost of production Anti-dumping: legislation to protect an economy against the import of a good at a price below its unit cost of production Real world example: Dumping US chicken in China (anti-dumping China on US chicken)

15. World trade organization (wto) 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.

16. Economic integration & globalization Economic integration: A process whereby countries coordinate, link and harmonize their economic policies. Globalization: The spread of economic, social & cultural ideas across the world, the result of increased economic integration through trade, investment and improving technology

17. Trading blocks Countries agree to increase trade and cooperate. Real world example: EU and ACP

18. Free trade area Countries remove trade barriers between themselves but trade in anyway with counties outside the group Real world example: NAFTA

19. Customs union & common market Countries adopt common trading policies. Countries adopt common regulations policies and the free movement of goods and service, capital and labor to form a common market. Real world example: EU

20. Economic and Monetary Union Countries adopt a common market and currency. Real world example: Euro zone

21. Trade creation Entry of country into a customs union leads to the transfer of production from a high cost producer to a low cost producer Real world example: Spain joined the EU

22. Trading Bloc A B Low Cost Producer C High cost Producer Tariffs B Before trade creation

23. C High cost Producer A B Low cost Producer B After trade creation

24. Trade diversion Entry of country into a customs union leads to the transfer of production from a low cost producer to a high cost producer

25. D Low cost producer A C High cost Producer B Before trade diversion

26. Trade Barriers D Low cost producer C High cost Producer A B After trade diversion

27. Balance of payments 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 Current account + capital account

28. Current account Visible Trade + Invisible Trade + Net Transfers

29. Visible trade Exports of goods minus imports of goods over a given time period

30. Invisible trade Exports of services minus imports of services over a given time period

31. Net transfers Net payments of interest, profits and dividends from investments and transfers of money

32. Capital account Net Transfers of Capital + Net Investment and loans + Changes in National Reserves

33. Expenditure-switching policies Policies implemented by the government that attempt to switch the expenditure of domestic consumers away from imports towards domestically produced goods and services

34. Exchange rate system Exchange Rates express the value of one currency in terms of another currency.

35. Floating exchange rate system Supply and Demand determine the exchange rate Real world example: US

36. Price of US dollars in terms of Yuan D P Ep S 0 Q Quantity of US dollars Supply and demand for US dollars

37. Managed exchange rate Exchange rate generally allowed to float but governments intervene to avoid sudden fluctuations Real world example: China now, Japan

38. Fixed exchange rate system Government intervention to maintain a fixed exchange rate Real world example: China before

39. Price of Yuan in terms of Dollars D P Ep Fixed exchange rate P* Shortage S 0 Q Quantity of Yuan Q1 Q2 Fixed exchange rate (devaluated: shortage)

40. Price of Yuan in terms of Dollars Surplus D Fixed exchange rate P* P Ep S 0 Q Quantity of Yuan Q1 Q2 Fixed exchange rate (surplus)

41. appreciation Increase in the value of one currency un terms of another currency in a floating exchange rate system Real world example: Chinese Yuan

42. Price of currency A in terms of currency B S1 EP2 P2 P1 EP1 D2 D1 0 Q1 Q2 Quantity of currency A Increase in demand

43. S2 Price of currency A in terms of currency B S1 EP2 P2 P1 EP1 D 0 Q2 Q1 Quantity of currency A Decrease in supply

44. depreciation A fall in the value of one currency in terms of another currency in a floating exchange rate system Real world example: US Dollars

45. Price of currency A in terms of currency B S1 P2 P1 EP1 EP2 D1 D2 0 Q2 Q1 Quantity of currency A Decrease in demand

46. S1 Price of currency A in terms of currency B S2 EP2 P1 P2 EP1 D 0 Q1 Q2 Quantity of currency A Increase in supply

47. devaluation Decrease in the value of a currency in a fixed exchange rate system

48. Price of Yuan in terms of Dollars D P Ep Rate #1 P1 P2 Rate #2 Shortage S 0 Q Quantity of Yuan Q1 Q2 Devaluation

49. revaluation Increase in the value of a currency in a fixed exchange rate system Real world example: US want Chinese Yuan to be revaluated

50. Price of Yuan in terms of Dollars Surplus D P2 Rate #2 P1 Rate #1 P Ep S 0 Q Quantity of Yuan Q1 Q2 Revaluation

51. Marshall-Lerner Condition PED of Exports + PED of imports > 1 Reducing the currency exchange rate will only reduce the Current Account deficit when the PED of Exports together with the PED of imports is greater than one i.e. elastic.

52. J-Curve Though policy makers may hope that a currency depreciation will improve the Current Account deficit in the short-run the Current Account Deficit will worsen even when the Marshall-Lerner Condition is meet.

53. Current account balance + 0 Time - J-curve

54. Terms of trade Relationship between the price received for exports and the amount of imports a country is able to buy with that money.