1. ECONOMICS PORTFOLIO
Section 4
Deepak Parwani

2. FREE TRADE
is
International Trade that takes place without any barriers, such as
tariffs, quotas or subsidies
PROTECTIONISM
is
The presence of intrusions (subsidies) or barriers (tariffs and
quotas)in the flow of goods and services between countries

3. FREE TRADE OF ONION
Price of Onion
S (Domestic)
Pe
Pw S (world)
D
Q1 Qe Q2
Quantity of onion

4. FREE TRADE OF ONION
Prior to the country opening to trade, onions were sold locally
at the price of Pe. Once the country opened its self to
international trade, the price of onion drops as a result of the
imported supply of corn.

5. TARIFF ON ONION IMPORTS
S (Domestic)
Price of Onion
Pe
Pw + tariff S (world) + tariff
Pw S (world)
Deadweight loss
D
Government Revenue
Q1 Q3 Qe Q4 Q2
Quantity of onion

6. TARIFF ON ONION IMPORTS
After a tariff has been implemented on imports, the price of
international onions increase to Pw+tariff. The domestic
market increases from Q1 to Q3 while imports shrink from
Q1Q2 to Q3Q2. The result of the import barrier is to
protect domestic industries and to generate government
revenue, which is delineated as the gray rectangle in diagram.

7. QUOTAS
Quotas are an import barrier that set upper limits on the
quantity or value of imports that may be imported into a
country. Eg. India

8. QUOTAS ON ONION IMPORTS
S (Domestic)
Price of Onion
Pe
Pw + tariff S (world) + tariff
Pw S (world)
Deadweight loss
D
Government Revenue
Q1 Q3 Qe Q4 Q2
Quantity of onions

9. DOMESTIC SUBSIDY ON RICE
S (Domestic)
Price of Onion
S (Domestic) +
Subsidy
Pe
Pw S (world)
D
Government
Cost
Q1 Q3 Q2
Quantity of onion

10. DOMESTIC SUBSIDY ON RICE
A subsidy is an amount of money paid by the government to
a firm, per unit of output to encourage output, and to provide
an advantage over foreign competitors. Though prices to
consumer remain the same, the domestic market increases
from Q1 to Q3 whereas imports shrink from Q1Q2 to
Q3Q2.

11. FACTOR ENDOWMENTS
Factors of production that a country has available to produce
goods and services
Eg. Japan has highly skilled workers
China has land
SPECIALIZATION
Country specializes in the production of goods and services
where they have a comparative advantage in production

12. ABSOLUTE ADVANTAGE
The capability to produce a particular good with fewer resources
than other competing countries
COMPARATIVE ADVANTAGE
The capability to produce a good at a lower opportunity cost
than other countries

13. PRODUCTION POSSIBILITY CURVE
FOR INDIA AND CHINA
Pairs of Shoes
12
5
2 3 Meter of Cloth

14. VOLUNTARY EXPORTS
RESTRAINTS
Voluntary agreement between an exporting country and an
importing country that limits the volume of trade in a product
Eg. Japan exports limited quantity of cars to the US
DUMPING & ANTI-DUMPING
Dumping is the selling of a good in another country at a price
below its cost of production
Anti-Dumping is a legislation to protect an economy against the
import of a good at a price below its cost of production

15. 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

16. CUSTOMS UNION
Is an agreement made between countries to trade freely among
themselves, but adopt common external barriers against other
countries who attempt to import into the customs union
Eg. Switzerland - Liechtenstein customs union
COMMON MARKET
Is a custom unions with common polices on product regulation,
and the free movement of goods, services, capital, and labor
Eg. The European Union

17. ECONOMIC INTEGRATION
The capability to produce a particular good with fewer resources
than other competing countries
GLOBALIZATION
The capability to produce a good at a lower opportunity cost
than other countries

18. FREE TRADE AREA
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
Eg. North American Free Trade Agreement between the U.S.
Canada and Mexico
TRADING BLOCKS
Countries agree to trade and cooperate
Eg. EU and ACP

19. 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

20. CURRENT ACCOUNT
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.

21. MARSHALL-LERNER
CONDITION
PED of Exports + PED of imports > 1
This 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.

22. J-CURVE
This 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

23. J-CURVE
Current Account
Balance
+
0
Time
-

24. EXCHANGE RATES
An exchange rate is the value of one currency expressed in
terms of another
Eg. $1 = ¥82.875

25. FLOATING EXCHANGE RATE
SYSTEM
Market forces, supply and demand, determine the exchange
rate
Eg. US

26. FLOATING EXCHANGE RATE
SYSTEM
Price of Yen S
expressed in
terms of
Dollars
P EP
D
Q Quantity of Yen

27. MANAGED EXCHANGE RATES
Is an exchange rate regime where the value of a currency is
generally allowed to float but governments intervene to avoid
sudden fluctuations
Eg. China

28. FIXED EXCHANGE RATE
Governments intervention to maintain a fixed exchange rate
Eg. Prior China

29. FIXED EXCHANGE RATE
DEVALUATED
S
Price of Yen expressed
in terms of Dollars
Pe EP
Fixed Exchange Rate
P1
D
Shortage
Q1 Qe Q2
Quantity of Yen

30. FIXED EXCHANGE RATES
SURPLUS
Surplus S
Price of Yen expressed
in terms of Dollars
P1 Fixed Exchange Rate
Pe EP
D
Q1 Qe Q2
Quantity of Yen

31. APPRECIATION
Increase in the value of one currency in terms of another
currency in a floating exchange rate system
Eg. Yuan

32. INCREASE IN DEMAND
S
Price of Yen expressed
in terms of Dollars
P2 EP2
EP1
P1
D2
D1
Q1 Q2
Quantity of Yen

33. DECREASE IN SUPPLY
S2
S1
Price of Yen expressed
in terms of Dollars
EP2
P2
EP1
P1
D
Q2 Q1
Quantity of Yen

34. DEPRECIATION
Decrease in the value of one currency in terms of another
currency in a floating exchange rate system
Eg. U.S. Dollars

35. DECREASE IN DEMAND
S
Price of Yen expressed
in terms of Dollars
P2 EP1
P1
EP2
D1
D2
Q2 Q1
Quantity of Yen

36. INCREASE IN SUPPLY
S1
Price of Yen expressed
in terms of Dollars S2
P2 EP1
P1 EP2
D
Q1 Q2
Quantity of Yen

37. DEVALUATION
Decrease in the value of a currency in a fixed exchange rate
system

38. DEVALUATION
S
Price of Yen expressed
in terms of Dollars
EP
Pe
P1 Rate #1
P2 Rate #2
D
Shortage
Q1 Qe Q2
Quantity of Yen

39. REVALUATION
Increase in the value of a currency in a fixed exchange rate
system
Eg. The U.S. accuses the Chinese of consistently controlling the
Yuan to possess a low value, therefore it should be
reevaluated

40. REVALUATION
Surplus S
Price of Yen expressed
in terms of Dollars
P1 Rate #2
Rate #1
Pe EP
D
Q1 Qe Q2
Quantity of Yen