Unit 4: The Global Economy

Question 1

Absolute advantage

Answer 1

A country has an absolute advantage in the production of a good if it can produce more of it with the same resources or, equivalently, if it can produce the same amount using fewer resources compared to another country.

Question 2

Administrative barriers

Answer 2

Trade barriers in the form of regulations that aim to limit imports into a country. These barriers may take the form of product safety standards, sanitary standards or pollution standards but may also include more stringent than necessary application of customs procedures.

Question 3

Anti-dumping

Answer 3

Typically refers to tariffs that aim at raising the artificially low price of a dumped imported good to the level of the higher domestic price. A dumped good is one that is exported at a price below the cost of producing it.

Question 4

Appreciation

Answer 4

When the price of a currency increases in a floating exchange rate system.

Question 5

Appropriate technology

Answer 5

Technology that relies mostly on the relatively abundant factor an economy is endowed with.

Question 6

Balance of payments

Answer 6

A record of the value of all transactions of a country with the rest of the world over a period of time.

Question 7

Balance of trade in goods

Answer 7

Part of the balance of payments, it is the value of exports of goods of a country minus the value of imports of goods over a given period of time.

Question 8

Balance of trade in services

Answer 8

Part of the balance of payments, it is the value of exports of services of a country minus the value of imports of services over a given period of time.

Question 9

Bilateral trade agreement

Answer 9

An agreement between two countries to phase-out or eliminate trade related barriers.

Question 10

Capital account

Answer 10

A subaccount of the balance of payments that includes credit and debit entries for non-produced, non-financial assets as well as capital transfers between residents and non-residents.

Question 11

Capital flight

Answer 11

Occurs when money and other assets flow out of a country to seek a “safe haven” in another country.

Question 12

Capital transfers

Answer 12

Include financial or non-financial assets for items including debt forgiveness, investment, non-life insurance claims. They are part of the capital account of the balance of payments.

Question 13

Common market

Answer 13

When a group of countries agree not only to free trade of goods and services but also to free movement of capital and labour.

Question 14

Comparative advantage

Answer 14

When a country can produce a good at a lower opportunity cost compared to another country.

Question 15

Composite indicator

Answer 15

An indicator that is comprised as an average of more than one economic variable, for example, the HDI.

Question 16

Credit items

Answer 16

Refers to transactions within the balance of payments of a country that lead to an inflow of currency (for example, the export of goods); these transactions enter the account with a plus sign.

Question 17

Current account

Answer 17

A subaccount of the balance of payments that records the value of net exports in goods and services, net income and net current transfers of a country over a period of time.

Question 18

Current account deficit

Answer 18

Exists when the sum of net exports of goods and services plus net income plus net current transfers is negative (or simply when debits or outflows are greater than credits or inflows).

Question 19

Current account surplus

Answer 19

Exists when the sum of net exports of goods and services plus net income plus net current transfers is positive (or simply when credits or inflows are greater than debits or inflows).

Question 20

Current transfers

Answer 20

An entry in the current account that records payments between residents and non-residents of a country without something of economic value being received in return and that affect directly the level of disposable income (for example, workers remittances, pensions, aid and grants, and so on).

Question 21

Customs union

Answer 21

An agreement between countries to phase out or eliminate tariffs and other trade barriers and establish a common external barrier toward non-members.

Question 22

Debit items

Answer 22

Refers to transactions within the balance of payments of a country that lead to an outflow of currency (for example, the import of services); these transactions enter the account with a minus sign.

Question 23

Debt relief (cancellation)

Answer 23

A reduction of the debt burden of developing countries organized by the World Bank and the IMF.

Question 24

Debt servicing

Answer 24

Refers to the repayment of principal and interest on the debt of a person, a firm or a country.

Question 25

Depreciation

Answer 25

A decrease in the value of a currency in terms of another currency in a floating or managed exchange rate system.

Question 26

Devaluation

Answer 26

A decrease in the value of a currency in a fixed exchange rate system.

Question 27

Development aid

Answer 27

Aid aimed at assisting developing countries in their development efforts. Includes project aid, program aid and debt relief. It is concessional meaning there are low interest rates and long repayment periods.

Question 28

Dumping

Answer 28

When a firm sells abroad at a price below average cost or below the domestic price.

Question 29

Economically least developed countries (ELDCs)

Answer 29

According to the UN these are low-income countries facing severe structural constraints to sustainable development, with low levels of human assets, highly vulnerable to economic and environmental shocks.

Question 30

Economic development

Answer 30

A multidimensional concept involving a sustained increase in living standards that implies higher levels of income and thus greater access to goods and services, better education and health, a better environment to live in as well as individual empowerment.

Question 31

Economic integration

Answer 31

Economic interdependence between countries usually involving agreements between two or more countries to phase-out or eliminate trade and other barriers between them.

Question 32

Exchange rate

Answer 32

The value of one currency expressed in term of another currency; for example, €1 = US$1.5.

Question 33

Expenditure reducing

Answer 33

Contractionary demand side policies aiming at decreasing national income and thus expenditures on imports so that a current account deficit narrows.

Question 34

Expenditure switching

Answer 34

Policies aimed at switching expenditures away from imports towards domestically produced goods and services by making imports more expensive in order to narrow a current account deficit. It includes lowering the exchange rate as well as adopting trade protection.

Question 35

Exports

Answer 35

Goods and services produced in one country and purchased by consumers in another country.

Question 36

Export promotion

Answer 36

Growth policies aiming at expansion of export revenues as the vehicle of economic growth; often contrasted to import substitution.

Question 37

Export revenue

Answer 37

The revenues collected by exporting firms.

Question 38

Export subsidy

Answer 38

Payments made by the government to exporting firms on the basis of the number of units exported.

Question 39

External balance

Answer 39

A situation where the value of a country’s exports is balanced by the value of its imports over a period of time, such that a current account surplus or deficit does not persist over long periods.

Question 40

Financial account

Answer 40

In the balance of payments this records inflows and outflows of portfolio and FDI funds over a period of time, official borrowing and changes in reserve assets.

Question 41

Fixed exchange rate

Answer 41

An exchange rate system where the exchange rate is fixed, or pegged, to the value of another currency (or to the average value of a selection of currencies) and maintained there with appropriate central bank intervention.

Question 42

Floating exchange rate

Answer 42

An exchange rate system where the exchange rate is determined solely by the market demand and market supply of the currency in the foreign exchange market without any central bank intervention.

Question 43

Foreign aid

Answer 43

Refers to flows of grants or loans from developed to developing countries that are non-commercial from the point of view of the donor and for which the terms are concessional (that is, the interest rate is lower than the market rate and the repayment period longer).

Question 44

Foreign direct investment (FDI)

Answer 44

When a firm establishes a productive facility in a foreign country or acquires controlling interest (at least 10% of the ordinary shares) in an existing foreign firm.

Question 45

Foreign sector

Answer 45

In an open economy the term refers to exports and imports.

Question 46

Free trade

Answer 46

International trade that is not subject any kind of trade barriers, such as tariffs or quotas.

Question 47

Free trade area/agreement

Answer 47

An agreement between two or more countries to phase-out or eliminate trade barriers between them, members of the agreement are free to maintain their own trade policy towards non-members.

Question 48

Gender inequality index (GII)

Answer 48

A composite indicator that measures gender inequalities in three dimensions of human development, namely reproductive health, empowerment and economic status.

Question 49

Human Development Index (HDI)

Answer 49

A composite index of development that reflects the three basic goals of development, which are a long and healthy life, improved education, and a decent standard of living. The variables measured are life expectancy at birth, mean years of schooling and expected years of schooling, and GNI per capita (PPP US$).

Question 50

Humanitarian aid

Answer 50

Aid given to alleviate short-term suffering, consisting of food aid, medical aid, and emergency relief aid usually as a result of a natural catastrophe or war.

Question 51

Import expenditure

Answer 51

The value of imports of goods and services.

Question 52

Imports

Answer 52

The value of goods and services purchased domestically that are produced abroad.

Question 53

Import substitution

Answer 53

A growth strategy where domestic production is substituted for imports in an attempt to shift production away from the primary sector and industrialize. This strategy requires that the domestic industry is protected from import competition.

Question 54

Inequality adjusted Human Development Index (IHDI)

Answer 54

A composite indicator consisting of an average of a country’s achievements in health, education and income all adjusted for the degree of inequality characterizing each.

Question 55

Infant industry

Answer 55

Refers to a new industry that should be protected from foreign competition until it is large enough to achieve economies of scale that will allow it to be internationally competitive. It is used as an argument in favour of trade protection in developing countries.

Question 56

International Monetary Fund (IMF)

Answer 56

An international financial institution of 189 countries whose objectives include to improve global monetary cooperation and secure financial stability by monitoring the economic and financial policies of its members and providing them with advice and with loans, if they face balance of payments difficulties.

Question 57

International trade

Answer 57

Trade that involves the exports and imports of goods or services between countries.

Question 58

Managed exchange rate

Answer 58

An exchange rate that floats in the foreign exchange markets but is subject to intervention from time to time by domestic monetary authorities, in order to prevent undesirable movements in the exchange rate.

Question 59

Microfinance

Answer 59

The provision of small loans to poor entrepreneurs who lack access to traditional banking services.

Question 60

Monetary union

Answer 60

Where two or more countries share the same currency and have a common central bank.

Question 61

Multidimensional Poverty Index (MPI)

Answer 61

An international measure of poverty covering over 100 of the economically least developed countries. It complements traditional income-based poverty measures by capturing the deprivations that each person faces at the same time with respect to education, health and living standards.

Question 62

Multilateral development assistance

Answer 62

Assistance provided by multilateral organizations such as the World Bank when they lend to developing countries for the purpose of helping them in their development objectives.

Question 63

Multilateral trade agreement

Answer 63

An agreement between many countries to lower tariffs or other protectionist measures, currently carried out within the framework of the WTO.

Question 64

Non-governmental organization (NGO)

Answer 64

Organizations that are not part of the government that promote economic development and/or humanitarian ideals and/or sustainable development.

Question 65

Non-produced, non-financial assets

Answer 65

A measure of the net international sales and purchases of non-produced assets (such as land) and intangible assets (such as patents and copyrights).

Question 66

Official Development Assistance (ODA)

Answer 66

Aid that is provided to a country by another government or multilateral agency. It is the most important part of foreign aid.

Question 67

Overvalued currency

Answer 67

A currency whose value or exchange rate is greater than its equilibrium exchange rate, usually achieved through central bank intervention; may occur in a pegged or managed exchange rate system.

Question 68

Portfolio investment

Answer 68

The purchase of financial assets such as shares and bonds in order to gain a financial return in the form of interest or dividends. Appears in the financial account of the balance of payments.

Question 69

Poverty trap/cycle

Answer 69

Any circular chain of events starting and ending in poverty—for example, low income leads to low savings, leads to low investment, leads to low growth, leads to low income.

Question 70

Preferential trade agreement

Answer 70

Where a country agrees to give preferential access (for example, reduced tariffs) for certain products to one or more trading partners.

Question 71

Property rights

Answer 71

The exclusive, legal, authority to own property and determine how that property is used, whether it is owned by the government or by private individuals.

Question 72

Purchasing power parity (PPP)

Answer 72

A method used to make the buying power of different currencies equal to the buying power of US$1. PPP exchange rates are used to make comparisons of income or output variables across countries while eliminating the influence of price level differences.

Question 73

Quota

Answer 73

An import barrier that set limits on the quantity or value of imports that may be imported into a country.

Question 74

Regional trade agreement

Answer 74

An agreement between a group of countries usually within a geographical region to lower or eliminate trade barriers.

Question 75

Remittances

Answer 75

The transfer of money by foreign workers to individuals, often family members, in their home country.

Question 76

Reserve assets

Answer 76

Foreign currencies and precious metals held by central banks as a result of international trade. Reserves may be used to maintain or influence the exchange rate for the country’s currency. Reserves appear as an item in the financial account of the balance of payments.

Question 77

Revaluation

Answer 77

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

Question 78

Specialization

Answer 78

Refers to when a firm or country focuses on the production of one or a few goods or services. This forms the basis of theory of comparative advantage in international trade.

Question 79

Speculation

Answer 79

Refers to a process where something is bought or sold with a view to making a short term profit, for example, currency speculation where currencies are bought or sold so that a profit can be made when the exchange rate changes.

Question 80

Subsidy (international)

Answer 80

An amount of money paid by the government to a firm, per unit of output, to encourage production and provide the firm an advantage over foreign competition.

Question 81

Sustainable development

Answer 81

Refers to the degree to which the current generation is able to meet its needs today but still conserve resources for the sake of future generations.

Question 82

Tariff

Answer 82

A tax that is placed on imports to protect domestic industries from foreign competition and to raise revenue for the government.

Question 83

Trade creation

Answer 83

In international trade it occurs when higher cost imports are replaced by lower cost imports due to the formation of a trading bloc or a trade agreement.

Question 84

Trade diversion

Answer 84

In international trade it occurs when lower cost imports are replaced by higher cost imports due to the formation of a trading bloc or a trade agreement.

Question 85

Trade liberalization

Answer 85

The process of reducing barriers to international trade.

Question 86

Trade protection

Answer 86

Government intervention aiming to limit imports and/or encourage exports by setting up trade barriers that protect from foreign competition.

Question 87

Trading bloc

Answer 87

A group of countries that have agreed to reduce protectionist measures like tariffs and quotas between them.

Question 88

Undervalued currency

Answer 88

A currency whose value or exchange rate is lower than its equilibrium exchange rate, usually achieved through central bank intervention; may occur in a pegged or managed exchange rate system.

Question 89

Unfair competition

Answer 89

In international trade this refers to practices of countries trying to gain an unfair advantage through such methods as undervalued exchange rates.

Question 90

Sustainable development goals (SDGs)

Answer 90

The UN set out 17 global goals including those that aim to end all forms of poverty, fight inequalities and tackle climate change.

Question 91

World Bank

Answer 91

An international organization that provides loans and advice to economically less developed countries for the purpose of promoting economic development and reducing poverty.

Question 92

World Trade Organization (WTO)

Answer 92

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.