4.1 - International Economics

Question 1

Closed economy

4.1.1 - Globalisation

Answer 1

An economy operating without imports or exports, i.e. closed to global trade

Question 1

Containerisation

4.1.1 - Globalisation

Answer 1

A system of freight transport for use in sea shipping that has reduced the transport costs of shipping many thousands of different goods across the globe

Question 2

Deglobalisation

4.1.1 - Globalisation

Answer 2

The process of diminishing interdependence and integration between economies acround the globe

Question 3

Foreign direct investment

4.1.1 - Globalisation

Answer 3

FDI is the accquisition of a controlling interest in productive operations abroad by businesses resident in the home economy. May involve the creation of new productive capacity such as a new factory or building of infrastructure

Question 4

Globalisation

4.1.1 - Globalisation

Answer 4

The deepening of relationships between countries of the world reflected in an increasing level of cross-border trade and investment and migration

Question 5

Mercantilism

4.1.1 - Globalisation

Answer 5

The notion that the wealth of a nation was based on how much it couild export in excess of its imports, and thereby accumulate precious metals. Applied in the modern context to countries accumulating huge trade surpluses and focusing on export-let growth

Question 6

Multinational companies

4.1.1 - Globalisation

Answer 6

A MNC has facilities and other assets in at least one country other than its home country

Question 7

Open economy

4.1.1 - Globalisation

Answer 7

An economy with low tariff and non-tarriff barriers which is deeply integrated into the regional and global economy

Question 8

Transnational companies

4.1.1 - Globalisation

Answer 8

TNCs base their manufacturing, assembly, research and retail operations in a number of countries

Question 9

Absolute advantage

4.1.2 - Specialisation and trade

Answer 9

Occurs when a country can produce a product using fewer resources than another nation. If a country using the same factors of production can produde more of a product, then it has an absolute advantage

Question 10

Comparative advantage

4.1.2 - Specialisation and trade

Answer 10

Refers to the relative advantage that one country or producer has over another. A country can benefit from specializing in and exporting the product(s) for which it has the lowest opportunity cost of supply

Question 11

Dynamic gains from trade

4.1.2 - Specialisation and trade

Answer 11

Dynamic gains from trade make a domestic economy more productive. Examples of gains from trade liberalization that fall into this category are: Diffusion of knowledge and technology, economies of scale and increased competition and innovation

Question 12

Fairtrade

4.1.2 - Specialisation and trade

Answer 12

Trade between companies in developed countries and producers in developing countires in which fair prices are paid to producer

Question 13

Free trade

4.1.2 - Specialisation and trade

Answer 13

When trade in goods and services between nations is allowed to occur without any form to import restriction

Question 14

Relative export prices

4.1.2 - Specialisation and trade

Answer 14

A country’s export prices relative to those of a competing economy

Question 15

Specialisation

4.1.2 - Specialisation and trade

Answer 15

When individuals, regions or countries concentrate on making one product to create a surplus to trade

Question 16

Trade creation

4.1.2 - Specialisation and trade

Answer 16

Trade creation occurs when a country enters a free trade area/agreement or becomes involved in a customs union in which there is free trade between members but also a common external tariff. Trade creation is the movement from a high cost source of output to a lower cost source of supply as a result of joining a trade agreement

Question 17

Trade diversion

4.1.2 - Specialisation and trade

Answer 17

Trade diversion is a feature of a country deciding to join a customs union i.e. an area where there is free trade within a customs union but also a common external tariff. Trade diversion is a switch from lower-cost foreign source/supplier outside of a customs union towards a higher-cost supplier located inside the customs union

Question 18

Bilateral trade agreement

4.1.3 - Pattern of trade

Answer 18

An agreemnt to lower import tariffs and other trade barriers between two countries - for example between South Korea and Australia

Question 19

Competitiveness

4.1.3 - Pattern of trade

Answer 19

External competitiveness is the sustained ability to sell goods and servcices profitably at competitive prices in a foreign country. The core measure of competitiveness is a nation’s relative unit labour costs expressed in a common currency

Question 20

Exchange rate

4.1.3 - Pattern of trade

Answer 20

The external value of currency

Question 21

Intra-regional trade

4.1.3 - Pattern of trade

Answer 21

Intra-regional trade is the exchange of virtually identical products between countries within the same region

Question 22

Trading bloc

4.1.3 - Pattern of trade

Answer 22

A group of countries co-operating to liberalize trade between each other

Question 23

Prebisch-Singer Hypothesis

4.1.4 - Term of trade

Answer 23

This is an observaqtion (not a theory) that states that the terms of trade between primary goods and manufactured products deteriorate over time. The Prebisch-Singer Hypothesis (PSH) suggests that, over the long run, prices of primary goods such as coffee and cocoa decline in proportion to prices of manufactured goods such as cards and washing machines

Question 24

Relative export prices | 4.1.4 - Term of trade

Answer 24

A country's export prices relative to those of competing economy

Question 25

Terms of Trade | 4.1.4 - Term of trade

Answer 25

The terms of trade (also known as the real exchange rate) is the real value of countries exports in terms of their imports. Thus, it is a function of the price levels in the domestic and foreign country and the nominal exchange rate

Question 26

Anti-dumping tariffs | 4.1.5 - Trading blocs and the World Trade Organisation (WTO)

Answer 26

Anti-dumping import tariffs are allowed under World Trade Organisation rules when cases of dumping have been establised

Question 27

ASEAN | 4.1.5 - Trading blocs and the World Trade Organisation (WTO)

Answer 27

Association of Southeast Asian Nations - a regional trade bloc

Question 28

Bilateral trade agreement | 4.1.5 - Trading blocs and the World Trade Organisation (WTO)

Answer 28

An agreement to lower import tariffs and other trade barriers between two countries - for example between South Korea and Australia

Question 29

Common External Tariff (CET) | 4.1.5 - Trading blocs and the World Trade Organisation (WTO)

Answer 29

A CET is an import tarrif applied equally by each country participating in a customs union, e.g. the EU might impose a common tariff on imported whisky from Japan

Question 30

Common market | 4.1.5 - Trading blocs and the World Trade Organisation (WTO)

Answer 30

A single market providing for participating countries free trade in goods and services and free moment of labour and capital. The European Union is a single market

Question 31

Customs union | 4.1.5 - Trading blocs and the World Trade Organisation (WTO)

Answer 31

A group of countries that abolish tariffs and quotas between member nations to encourage free movement of goods and services. Adopt a common external tariff on imports from non-member countries. The European Union is a customs union

Question 32

European Free Trade Agreement (EFTA) | 4.1.5 - Trading blocs and the World Trade Organisation (WTO)

Answer 32

European Free Trade Association consists of Norway, Iceland, Switzerland and Leichtenstein

Question 33

European Union (EU) | 4.1.5 - Trading blocs and the World Trade Organisation (WTO)

Answer 33

As of January 2017, there are twenty-eight member nations of the EU - collectively known as EU28. The UK voted to leave the EU in June 2016

Question 34

Eurozone | 4.1.5 - Trading blocs and the World Trade Organisation (WTO)

Answer 34

This consists of those member states of the EU that use the Euro as their currency

Question 35

Free trade area | 4.1.5 - Trading blocs and the World Trade Organisation (WTO)

Answer 35

A free trade area (FTA) is one where there no tariffs or taxes or quotas on goods and/or services from one country entering another

Question 36

Monetary union | 4.1.5 - Trading blocs and the World Trade Organisation (WTO)

Answer 36

An intergovernmental agreement that involves two or more stats shareing the same currency

Question 37

NAFTA | 4.1.5 - Trading blocs and the World Trade Organisation (WTO)

Answer 37

North American Free Trade Agreement - a free trade area agreement signed by the US, Canada and Mexico. This has now been replaced by the USMCA agreement

Question 38

Non-tariff barrier | 4.1.5 - Trading blocs and the World Trade Organisation (WTO)

Answer 38

Trade barriers such as import quotas, embargoes and export subsidies

Question 39

Pacific Alliance | 4.1.5 - Trading blocs and the World Trade Organisation (WTO)

Answer 39

Trade agreement between Chile, Colombia, Mexico and Peru

Question 40

Regional trade agreement | 4.1.5 - Trading blocs and the World Trade Organisation (WTO)

Answer 40

An agreement to lower import tariffs and other trade barriers between countries in a certain region

Question 41

SAFTA | 4.1.5 - Trading blocs and the World Trade Organisation (WTO)

Answer 41

South Asian Free Trade Area comprising Afghanistan, Bangladesh, Bhutan, India, Maldivves, Nepal, Pakistan and Sri Lanka

Question 42

Schengen Area | 4.1.5 - Trading blocs and the World Trade Organisation (WTO)

Answer 42

26 country passport-free area inside Europe

Question 43

Single market | 4.1.5 - Trading blocs and the World Trade Organisation (WTO)

Answer 43

A single market represents a deeper form of economic integration than a customs union. It invovles the free movement of goods and services, capital and labour

Question 44

Trade liberalisation | 4.1.5 - Trading blocs and the World Trade Organisation (WTO)

Answer 44

Reductions in import tariffs and non-tariff barriers to enhance trade between one or more countries

Question 45

Trading bloc | 4.1.5 - Trading blocs and the World Trade Organisation (WTO)

Answer 45

A group of countries co-operating to liberalize trade between each other

Question 46

Transition economies | 4.1.5 - Trading blocs and the World Trade Organisation (WTO)

Answer 46

Former countries of the Eastern Bloc that have been engaged in a transition from being largely command economies to market systems with a greater role for private enterprise and resource allocation via the price mechanism

Question 47

World Trade Organisation (WTO) | 4.1.5 - Trading blocs and the World Trade Organisation (WTO)

Answer 47

The WTO polices free trade agreements and decide on trade disputes between countries. It arranges trade negotiations to liberalize trade for member countries by mutually agreed reductions in tariffs & quotas and opening domestic markets up to foreign competition

Question 48

Ad valorem tariff | 4.1.6 - Restrictions on free trade

Answer 48

An import tariff rate charged as percentage of the price

Question 49

Beggar my Neighbour | 4.1.6 - Restrictions on free trade

Answer 49

A policy that seeks to promote a country's economy at the expense of another country. An obvious example is the use of tariff barriers. A country may place a tariff on imports to help promote local domestic industry. This may help reduce local unemployment, but, be at the expense of the other country's export sectors

Question 50

Countervailing tariffs | 4.1.6 - Restrictions on free trade

Answer 50

An additional import tariff (tax) imposed on imported goods to offset subsidies providded to producers or exports by the government of the exporting country

Question 51

Creeping protectionism | 4.1.6 - Restrictions on free trade

Answer 51

A period of time where import tariff rates rise and where countries introduce quotas and barriers to the mobility of labour and capital

Question 52

Dumping | 4.1.6 - Restrictions on free trade

Answer 52

When a producer in one country exports a product to another country at a price which is below the price it charges in its home market or is below average costs of production

Question 53

Economic nationalism | 4.1.6 - Restrictions on free trade

Answer 53

The idea that a country's economy will perform best if its industries are protected from competition, for example by taxes on imported goods or barriers to foregin takovers

Question 54

Export quota | 4.1.6 - Restrictions on free trade

Answer 54

A restriction on the volume of exports that can be sold overseas - this acts as a supply constraints in international markets and can lead to higher prices in global markets

Question 55

Infant industry | 4.1.6 - Restrictions on free trade

Answer 55

New/fledging industry that may require government protectionj from overseas competition (for instance through the setting of import tariffs) in order to develop

Question 56

Market liberalization | 4.1.6 - Restrictions on free trade

Answer 56

Removing state controls that impede the normal functioning of a market economy - for example, lifting prices and wage controls and import quotas or lowering import tariffs

Question 57

Protectionism | 4.1.6 - Restrictions on free trade

Answer 57

Tariff and non-tariff restrictions on imports to protect domestric producers

Question 58

Quota | 4.1.6 - Restrictions on free trade

Answer 58

A quota is a trade barrier that imposes a physical limit on the quantity of a good that can be imported into a country in a given time period

Question 59

Subsidy | 4.1.6 - Restrictions on free trade

Answer 59

Payments by the government to domestic suppliers that reduce their costs and thus make domestic output cheaper than imported goods and services

Question 60

Tariff | 4.1.6 - Restrictions on free trade

Answer 60

A tax on the value of imported products - can be specific or ad valorem

Question 61

Trade barriers | 4.1.6 - Restrictions on free trade

Answer 61

Ways in which trade is controlled for example an import tariff, quota or embargo

Question 62

Trade liberalisation | 4.1.6 - Restrictions on free trade

Answer 62

Reductions in import tariffs and non-tariff barriers to enhance trade between one or more countries

Question 63

Capital account (BoP) | 4.1.7 - Balance of payments

Answer 63

Formerly known as financial account, now a small section of the account which includes effects of debt forgiveness, sale/transfer of patents, copyrights, franchises, leases and other transferable contracts across borders

Question 64

Capital flows | 4.1.7 - Balance of payments

Answer 64

Movements of capital between countries. Outward capital flows are movements of domestically owned capital abroad; inward capital flows are movement of foreign-owned capital to the domestic economy

Question 65

Creditor nations | 4.1.7 - Balance of payments

Answer 65

Those nations that have a balance of payments surplus on the current account

Question 66

Current account | 4.1.7 - Balance of payments

Answer 66

Measures the difference between money and credit going in and out of an economy (through exports, imports and income paid on assets both home and abroad)

Question 67

Current account deficit | 4.1.7 - Balance of payments

Answer 67

The amount by which money relating to trade and investment income going out a country is more than the amount coming in

Question 68

Current account surplus | 4.1.7 - Balance of payments

Answer 68

The amount by which money relating to trade and investment income going out of a country is less than the amount coming in

Question 69

Debtor nations | 4.1.7 - Balance of payments

Answer 69

Those nations that have a persistent balance of payments deficit on the current account

Question 70

Domestic remittances | 4.1.7 - Balance of payments

Answer 70

Money received from family members or friends living in a different city of their own country

Question 71

Expenditure-reducing policies | 4.1.7 - Balance of payments

Answer 71

Policies designed to lower real incomes and aggregate demand and thereby cut demand for imports e.g. higher direct taxes or increase interest rates

Question 72

Expenditure-switching policies | 4.1.7 - Balance of payments

Answer 72

These are policies designed to change the relative prices of exports and imports. For example - an exchange rate depreciation ough to improve the price competitiveness of exports and also make imports more expensive

Question 73

Export revenue | 4.1.7 - Balance of payments

Answer 73

Sales from selling goods and services overseas

Question 74

Export subsidies | 4.1.7 - Balance of payments

Answer 74

A financial benefit conferred on a firm by the government that is contingent on exports

Question 75

External debt | 4.1.7 - Balance of payments

Answer 75

External debt is owed by government, households and businesses in a country to external (overseas) creditors. Examples include government bonds sold to foreign investors and private sector credit from foreign banks. The scale of external debt is measured as a % of a country's GNI

Question 76

External demand | 4.1.7 - Balance of payments

Answer 76

External demand is the net change in demand for goods and services from international trade. Net trade = the value of exports (X) minus value of imports (M). Net trade is positive when a country runs a trade surplus and negative with a trade deficit

Question 77

Financial account (BoP) | 4.1.7 - Balance of payments

Answer 77

Transactions that result in a change of ownership of financial assets and liabilities betweeen residents of different countries - includes net flows of money into equities, bonds, property

Question 78

Foreign direct investment | 4.1.7 - Balance of payments

Answer 78

FDI is the acquisition of a controlling interest in productive operations abroad by businesses resident in the home economy. May involve the creation of new productive capacity such as a new factory or building of infrastructure

Question 79

Hot money | 4.1.7 - Balance of payments

Answer 79

Money that flows freely and quickly around the world looking to earn the best rate of return. It might be invested in any asset whose value is expected to rise or simply be placed in an ccount offering the best real rate of interest

Question 80

Portfolio investment | 4.1.7 - Balance of payments

Answer 80

Portfolio investment happens when people/businesses from one country buy shares or other securities such as bonds in other nations. For example: A UK investor might by some shares in Google (portfolio investment outflow for the UK) or a German investment bank might by some of the soverign debt issued by the UK government (a portfolio investment inflow for the UK)

Question 81

Primary income (BoP) | 4.1.7 - Balance of payments

Answer 81

The net flow of profits, interest and dividends from investments in other countries and net remittance flows from migrant workers

Question 82

Remittances | 4.1.7 - Balance of payments

Answer 82

When migrants send home parts of their earnings in the form of either cash or goods to support their families. A net inflow of remittances adds to a nation's GNI

Question 83

Secondary income (BoP) | 4.1.7 - Balance of payments

Answer 83

Net flow of overseas aid/debt relif, military grants and so on

Question 84

Structural trade deficit | 4.1.7 - Balance of payments

Answer 84

A trade deficit that arises due to supply-side weaknesses rather than a chaneg in GDP or currency - caused by poor competitiveness

Question 85

Appreciation of currency | 4.1.8 - Exchange rates

Answer 85

A rise in the external value of one currency agasint another or a basket of currencies. Relates to a floating exchange rate system

Question 86

Big Mac index | 4.1.8 - Exchange rates

Answer 86

The Big Mac index is a way of measuring Purchasing Power Parity (PPP) between different countries. By converting the average national Big Mac prices to US dollars the same goods can be informally compared. This can tell us something about whether a currency is under or overvalued in foreign exchange markets

Question 87

Clean float | 4.1.8 - Exchange rates

Answer 87

A currency that floats according to market forces, free from government intervention

Question 88

Devaluation | 4.1.8 - Exchange rates

Answer 88

When a country tries to devalue its currency to increase its price competitiveness in domestic and overseas markets. However, this often encourages other countries to also devalue leading to only temporary increases in the price competitiveness of exports

Question 89

Currency reserves | 4.1.8 - Exchange rates

Answer 89

Money or other assets held by a central bank or other monetary authority so that it can pay if need be its liabilities (debts)

Question 90

Currency union | 4.1.8 - Exchange rates

Answer 90

A group of countries (or regions) using a common currency - for example 19 countries that have entered the singel European currency (as of 2019)

Question 91

Depreciation of currency | 4.1.8 - Exchange rates

Answer 91

A fall in the external value of one currency against another

Question 92

Devaluation of currency | 4.1.8 - Exchange rates

Answer 92

A fall in the external value of a currency inside a fixed exchange rate system

Question 93

Fixed exchange rate | 4.1.8 - Exchange rates

Answer 93

An exchange rate that is fixed agasint other major currencies through action by governments or central banks, usually within small margins of fluctuations around the central rate. Likely to involve periodic intervention in the foreign exchange market by one or more central banks to buy or sell the currency in question if it moves below or above its margins

Question 94

Floating exchange rate | 4.1.8 - Exchange rates

Answer 94

A free-floating currency where the external value of a currency depends whollly on market forces of supply and demand. IMF classifies as free floating only those currencies where central bank interventions are limited to nore more than three instances in the preceding six months

Question 95

Foreign exchange reserves | 4.1.8 - Exchange rates

Answer 95

The reserves of gold or foreign currencies (e.g. US dollars or Euros) typically held by central banks on behalfof their national government

Question 96

J Curve Effect | 4.1.8 - Exchange rates

Answer 96

The effect of currency depreciation on the trade deficit depends on price elasticity of demand for exports & imports. The J Curve effect says a trade deficit can worsen after depreciation but improve in the medoum term if the Marshall-Lerner condition holds

Question 97

Managed floating currency | 4.1.8 - Exchange rates

Answer 97

A floating exchange rate but subject to intervention by the monetary authorities, in order to resist fluctuations mthat they consider to be undesirable

Question 98

Marshall-Lener Condition | 4.1.8 - Exchange rates

Answer 98

Marshall-Lerner condition predicts the circumstances in which a fall in the exchange rate improves the current account of the balance of payments. A devaluation of a currency improves the BoP only if the sum of price elasticities of demand for imports & exports are greater than one (Condition is that PedX + PedM > 1)

Question 99

Nominal exchange rate | 4.1.8 - Exchange rates

Answer 99

The nominal exchange rate is the price of the domestic currency (say the UK pound) in another foreign currency (say US dollars), currently about US $1.30 or so. Thus to buy 1 UK poind you must spend 1.30 US dollars

Question 100

PPP Exchange Rate | 4.1.8 - Exchange rates

Answer 100

The rate at which the currency of one country is converted into that of another to purchase the same amount of goods and services in each country

Question 101

Purchasing Power Parity (PPP) | 4.1.8 - Exchange rates

Answer 101

The current exchange rate is adjusted so that a basket of goods and services can be bough for the same amount of dollars

Question 103

Real exchange rate | 4.1.8 - Exchange rates

Answer 103

The product of the nominal exchange rate (the dollar cost of euro, for example) and the ratio prices between the two countries

Question 104

Reserve currency | 4.1.8 - Exchange rates

Answer 104

A foreign currency such as the US dollar ($) that is held in countries' offical reserves because of its global importance as a medium of exchange and its inherant stability

Question 105

Revaluation of currency | 4.1.8 - Exchange rates

Answer 105

An increase in the external value of a currency inside a fixed exchange rate system.

Question 106

Reverse J curve effect | 4.1.8 - Exchange rates

Answer 106

When an appreciation of the exchange rate initially causes the current account or trade balance to improve

Question 107

Speculation | 4.1.8 - Exchange rates

Answer 107

This is a risky action in which a person or organisation tries to predict what will happen to the price of an asset and buys/sells accordingly in order to try and make a profit. A speculator takes advantage of fluctuations in market prices

Question 108

Potential output | 4.1.9 - International competitiveness

Answer 108

The economy's maximum productive capacity in a phyisical sense. The larget output that could be produced, given the prevailing state of technology

Question 109

Potential productivity | 4.1.9 - International competitiveness

Answer 109

Estimates of the productivity of the labour force i.e. output per peroson employed or the output per person hour. Improvements in productivity have an important effect on long run aggregate supply and trend growth

Question 110

Protectionism | 4.1.9 - International competitiveness

Answer 110

Tariff and non-tariff restrictions on imports to protect domestic producers

Question 111

Relative export prices | 4.1.9 - International competitiveness

Answer 111

A country's export prices relative to those of a competing economy

Question 112

Relative unit labour costs | 4.1.9 - International competitiveness

Answer 112

Labour costs per unit of output relative to those in other countries. Relative unit labour costs will rise when 1. A country's exchange rate appreciates 2. Wage costs rise relatively faster than other nations 3. When labour productivity growth is relatively slower than in other economies