International_Economics_Tenth_Edition (1)

and trade will be beneficial when one nation has an absolute cost advantage in one good and the other nation has an absolute cost advantage in the other good

producer surplus the revenue producers receive over and above the minimum amount required to induce them to supply the good

product life cycle theory many manufactured goods undergo a predictable trade cycle; during this cycle, the home country initially is an exporter, then loses its competitive advantage vis-a-vis its trading partners, and eventually may become an importer of the commodity

production controls artificial curtailments in the production of a commodity

production gains increases in production resulting from specialization in the product of comparative advantage

production possibilities schedule a schedule that shows various alternative combinations of two goods that a nation can produce when all of its factor inputs are used in their most efficient manner

production sharing when certain aspects of a product's manufacture are performed in more than one country

protection-biased sector generally consists of import-competing companies, the labor unions representing workers in that industry, and the suppliers to the companies in the industry

protective effect a tariff's loss to the domestic economy resulting from wasted resources when less efficient domestic production is substituted for more efficient foreign production

protective tariff a tariff designed to insulate importcompeting producers from foreign competition

policy agreement when changes in economic policies move an economy toward internal balance and external balance

policy conflict when changes in economic policy improve one economic objective but detract from another objective

purchasing-power-parity theory a method of determining the equilibrium exchange rate by means of the price levels and their variations in different nations

put option gives the holder the right to sell foreign currency at a specified price

Glossary 519

Q

quantity theory of money states that increases in the money supply lead directly to an increase in overall prices, and a shrinking money supply causes overall prices to fall

R

real exchange rate the nominal exchange rate adjusted for changes in relative price levels

real exchange-rate index the average value of a currency based on real exchange rates

real interest rate the nominal interest rate minus the inflation rate

redistributive effect with a tariff, the transfer of consumer surplus, in monetary terms, to the domestic producers of the import-competing product

region of mutually beneficial trade the area that is bounded by the cost ratios of the two trading countries

regional trading arrangement where member nations agree to impose lower barriers to trade within the group than to trade with nonmember nations

relative purchasing power parity a method of determining exchange rates that states that changes in relative national price levels determine changes in exchange rates over the long run

revaluation an official change in a currency's par value, which causes the currency's exchange value to appreciate

revenue effect represents the government's collections of tariff revenue; found by multiplying the number of imports times the tariff

revenue tariff a tariff imposed for the purpose of generating tax revenues and may be placed on either exports or imports

rules of the game an agreement among gold standard nations to reinforce and speed up interest-rate adjustment, requiring central bankers in a surplus nation to expand credit, leading to lower interest rates; central bankers in deficit nations would tighten credit, bidding interest rates upward

5

scientific tariff a tariff that eliminates foreign cost advantages over domestic firms

520Glossary

secunnes private-sector purchases of shortand long-term debt securities such as Treasury bills, Treasury notes, Treasury bonds, and securities of private enterprises

seigniorage profit from issuing money

selective quota an import quota allocated to specific countries

short position the position speculators take when they borrow or sell forward a foreign currency with the anticipation of purchasing it at a future lower price to repay the foreign-exchange loan or fulfill the forward sale contract

small nation a nation whose imports constitute a very small portion of the world market supply

social regulation governmental attempts to correct a variety of undesirable side effects in an economy that relate to health, safety, and the environment

special drawing right (SDR) an artificial currency unit based on a basket of four currencies established by the IMF

specific tariff a tariff expressed in terms of a fixed amount of money per unit of the imported product

specific-factors theory considers the incomedistribution effects of trade when when factor inputs are immobile among industries in the short run

speculation the attempt to profit by trading on expectations about prices in the future

speculative attack see currency crisis

sporadic dumping (distress dumping) when a firm disposes of excess inventories on foreign markets by selling abroad at lower prices than at home

spot market where foreign exchange can be traded for immediate delivery

spot transaction an outright purchase and sale of foreign currency for cash settlement not more than two business days after the date the transaction

spread the difference between the bid rate and the offer rate

stabilizing speculation occurs when speculators expect a current trend in an exchange rate's movement to change and their purchase or sale of the currency moderates movements of the exchange rate

static effects of economic integration include the trade-creation effect and the trade-diversion effect

statistical discrepancy a correcting entry inserted into the balance-of-payments statement to make the sum of the credits and debits equal

strategic trade policy the policy that government can assist domestic companies in capturing economic profits from foreign competitors

strike price the price at which an option can be exercised

subsidies granted by governments to domestic producers to improve their trade competitiveness; include outright cash disbursements, tax concessions, insurance arrangements, and loans at below-market interest rates

supply of international reserves includes owned reserves, such as key currencies and special drawing rights, and borrowed reserves, which can come from the IMF and other official arrangements or can be obtained from major commercial banks

swap arrangements bilateral agreements between central banks where each government provides for an exchange, or swap, of currencies to help finance temporary payments disequilibrium

T

target exchange rates desired exchange rates for a currency set by the host country and supported by intervention

tariff a tax levied on a product when it crosses national boundaries

tariff escalation occurs when tariff structures of industrialized nations are characterized by rising rates that give greater protection to intermediate and finished products than to primary commodities

tariff-rate quota a device that allows a specified number of goods to be imported at one tariff rate (the within-quota rate), and any imports above that specified number to be imported at a higher tariff rate (the over-quota rate)

technical analysis a method of exchange-rate forecasting that involves the use of historical exchange-rate data to estimate future values

technology transfer the transfer to other nations of knowledge and skills applied to how goods are produced

terms of trade the relative prices at which two products are traded in the marketplace

terms-of-trade effect the tariff revenue extracted from foreign producers in the form of a lower supply price

theory of overlapping demands nations with similar per capita incomes will have overlapping demand

structures and will likely consume similar types of manufactured goods; wealthy nations will likely trade with other wealthy nations, and poor nations will likely trade with other poor nations

theory of reciprocal demand relative demand conditions determine what the actual terms of trade will be within the outer limits of the terms of trade

three-point arbitrage a more intricate form of arbitrage, involving three currencies and three financial centers; also called triangular arbitrage

trade adjustment assistance government assistance granted to domestic workers displaced by increased imports

trade balance derived by computing the net exports (imports) in the merchandise accounts; also called merchandise trade balance

trade promotion authority (also known as fast-track authority) devised in 1974, this provision commits U.S. Congress to consider trade agreements without amendment; in return, the president must adhere to a specified timetable and several other procedures

trade remedy laws laws designed to produce a fair trading environment for all parties engaging in international business; these laws include the escape clause, countervailing duties, antidumping duties, and unfair trading practices

trade triangle an area in a production possibilities diagram showing a country's exports, imports, and equilibrium terms of trade

trade-creation effect a welfare gain resulting from increasing trade caused by the formation of a regional trade bloc

trade-diversion effect a welfare loss resulting from the formation of a regional trade bloc; it occurs when imports from a low-cost supplier outside the trade bloc are replaced by purchases from a higher-cost supplier within the trade bloc

trade-weighted dollar a weighted average of the exchange rates between a domestic currency and the currencies of the nation's most important trading partners, with weights given by relative importance of the nation's trade with each trade partner

trading possibilities line a line in a production possibilities diagram representing the equilibrium terms-of-trade ratio

transfer pricing a technique where an MNE reports most of its profits in a low-tax country, even though the profits are earned in a high-tax country

Glossary 521

transinon economies national economies making the transition from a centrally planned economy to a market economy

transplants the assembly plants of Japanese companies that produce automobiles in the United States

transportation costs the costs of moving goods from one nation to another

two-point arbitrage the simultaneous purchase and sale of a currency in two foreign-exchange markets in order to profit from exchange-rate differentials in different locations

u

uncovered interest arbitrage when an investor does not obtain exchange-market cover to protect investment proceeds from foreign-currency fluctuations

unilateral transfers include transfers of goods and services (gifts in kind) or financial assets (money gifts) between the United States and the rest of the world

v

variable levies an import tariff that increases or decreases as domestic or world prices change to guarantee that the price of the imported product after payment of duty will equal a predetermined pnce

vertical integration in the case of an MNE, occurs when the parent MNE decides to establish foreign subsidiaries to produce intermediate goods or inputs that go into the production of the finished good

voluntary export restraints (VER) voluntary quotas applied to exports; sometimes supplemented by backup import controls to ensure that the restraints are effective

w

wage insurance after finding new jobs, a temporary government subsidy of wages granted to domestic workers displaced by foreign trade and increased imports

wage and price controls intervention by the government to set price and wage levels

Index

A

Absolute advantage, 29-30

Absorption approach, 434-435

Acquired advantage, 29

Adjustable pegged exchange rates, 448

Adjustment mechanism, 400

Ad valorem tariff, 103-104

Advanced nations, 218

Agglomeration economies, 6

Airbus, 84-85

Antidumping law, 159-160, 163-164, 193-195

Appreciation, 345, 352-353

Arbitrage, 356

Asia-Pacific Economic Cooperation (APEC), 280

Asset-market approach, 381-385

Autarky, 34

Automatic adjustment, 400, 405-406

Automobile industry, 14

B

Babe Ruth and comparative advantage, 31

Balance of international indebtedness, 335-336

Balance of payments, 320

Balance-of-payments adjustment, 400

Banana dispute, 197-198

Bank for International Settlements (BIS), 484

Basis for trade, 34

Basket valuation, 495

Beggar-thy-neighbor policy, 118

Benelux, 255

Bid rate, 344

Big Mac index, 378

Boeing, 7, 84-85

Bonded warehouse, 110

Brain drain, 314

Bretton Woods system, 448-49

Buffer stock, 234-235

Business services, 87-88

Buy-national policies, 164-165

c

Call option, 349

Capital controls, 462-464

Capital and financial account, 324-325 Capital-labor ratio, 64

Cartel,235

Changing comparative advantage, 41-42 Cheap foreign labor, 128

Chile-U.S. Free Trade Agreement, 279

China, 246-250

Cigarettes and free trade, 16-17

Clean float, 453

Commodity Credit Corporation, 203 Commodity terms of trade, 39 Common agricultural policy, 263-264 Common market, 255

Community indifference curve, 60 Comparative advantage, 13, 30-33, 58-59 Complete specialization, 36

Compound tariff, 104

Conditionality, 502

Conglomerate integration, 291

Constant opportunity costs, 33

Consumer surplus, 111

Consumption effect, 115

Consumption gains from trade, 35

Convergence criteria, 281

Corporate average fuel economy (CAFE) standards,

165

Cost-based definition of dumping, 160

Cost-insurance-freight (CIF) valuation, 104

Countertrade, 281

Countervailing duty, 191-192

Country risk, 500

Covered interest arbitrage, 363-364

Crawling peg, 457-458

Credit risk, 499

Credit transaction, 320-321

Cross exchange rate, 346-347

Currency board, 464-466

Currency crisis, 458-462

Currency pass-through, 428-429, 439-440

Currency risk, 500

Currency swap, 342

Current account, 321-322, 328-335

Customs union, 254-255

Customs valuation, 104

D

Deadweight loss, 115

Debit transaction, 321

Debt forgiveness, 503

Debt reduction, 503

Debt service/export ratio, 501

Debt/equity swap, 503

Demand for international reserves, 491-503

Demand-pull inflation, 483

Demonetization of gold, 497

Depreciation, 345, 352-353

Destabilizing speculation, 366

Devaluation, 447-448, 471-473

Developing nations, 218

Index 525

Direct controls, 475-476

Direct exporting, 294-295

Direction of trade, 34

Dirty float, 453

Discount, 357

Distribution of income and trade, 66-68

Doha Round of trade negotiations, 188-190

Dollarization, 466-468

Domestic content requirement, 152-154

Domestic revenue effect, 118

Domestic subsidy, 155-156

Double-entry accounting, 320-321

Dumping, 157-164

Dynamic comparative advantage, 82-83

Dynamic effects of economic integration, 259

Dynamic gains from trade, 40-41

E

East Asian economies, 245

Economic growth strategies, 240-242

Economic integration, 254-255

Economic interdependence, 2

Economic sanctions, 208-211

Economic union, 255

Economies of scale, 74

Effective exchange rate, 354-356

Effective tariff rate, 105

Elasticity approach, 422-423

Equilibrium terms of trade, 38

Errors and omissions, 325-326

Escape clause, 190-191

Euro, 267

Eurocurrency market, 504-505

European Monetary Union (EMU), 261, 266-270

European Union (EU), 258, 260

Exchange arbitrage, 356

Exchange controls, 462-464

Exchange rate, 345

526Index

Exchange rate index, 354-356 Exchange rate stabilization, 446-447 Exchange rate systems, 442-444 Exchange-stabilization fund, 446-447 Exit barriers, 47 Expenditure-changing policies, 475 Expenditure-switching policies, 475 Export controls, 232-233

Export quota, 148-151

Export subsidies, 156-157,264 Export tariff, 102 Export-Import Bank, 203 Export-led growth, 242 Export-revenue effect, 157 External balance, 475

F

Factor-endowment theory, 63-68

Factor-price equalization, 64-65

Fair-trade movement, 224

Fallacies of international trade, 15-16

Fast-track authority, 190

Financial assets and exchange rates, 381

Financial flows and the balance of payments, 403-405

Fiscal policy, 475

Fixed exchange rates, 442, 445-447

Floating exchange rates, 449-451

Flying-geese pattern of economic growth, 246 Forecasting exchange rates, 390-394

Foreign direct investment, 291-293, 295-296 Foreign repercussion effect, 405

Foreign trade multiplier, 413

Foreign trade zone (FTZ), 110-111

Foreign-currency options, 349-350

Foreign-exchange market, 340

Forward market, 342, 347, 357-358

Free trade area, 254

Free Trade Area of the Americas (FTAA), 277-278 Free trade argument, 29, 101, 126

Free-on-board (FOB) valuation, 104

Free-trade-biased sector, 133

Fundamental analysis, 393-394

Fundamental disequilibrium, 447

Futures market, 347-349

G

Gains from international trade, 35

General Agreement on Tariffs and Trade (GATT), 178-179

General Arrangements to Borrow, 499 Generalized system of preferences (GSP), 231 Global quota, 141

Globalization, 3-8, 12-15,22-23

Gold exchange standard, 496-497

Gold standard, 401, 495-496

Golub, S., 48

Goods and services balance, 323

Government procurement policies, 164-165,265-266 Government regulatory policies and trade, 85-87 Group of Five (G-5), 484

Group of Seven (G-7), 486

Guest workers, 314

H

Harley-Davidson Motor Co., 123

Heckscher-Ohlin theory, 63-68

Hedging, 358, 360-361

Home-market effect, 75

Horizontal integration, 290-291

Hormones in beef production, 166

IMF drawings, 498-499

Immigration, 310-315

Import quota, 140

Import substitution, 240-242

Import tariff, 102

Importance of being unimportant, 39

Income adjustments, 405, 411-415

Income determination, 413

Increasing opportunity costs, 42

Increasing returns to scale and trade, 73-76

Indifference curves and trade, 60-62

Industrial policy, 82, 84-85, 202-206

Infant-industry argument, 131-132

Inflation differentials, 376

Institutional constraints, 476

Intellectual property rights (IPRs), 198-200

Interbank market, 343-344

Interest arbitrage, 362-364

Interest rate adjustments, 402-403

Interindustry specialization, 77

Interindustry trade, 77

Internal balance, 474

International commodity agreements (leAs), 232

International competitiveness, 17-18

International debt problem, 500-504

International economic policy, 475

International economic policy coordination, 484

International factor movements, 290-291

International joint ventures, 298-302

International lending risk, 499-500

International Monetary Fund (lMF), 230

International Monetary Market (IMM), 347

International payment process, 322

International price discrimination, 158-159

International reserves, 490-491

International trade and workers, 20-22

Intraindustry specialization, 76-77

Intraindustry trade, 76-77

Iraqi sanctions, 210-211

Index 527

J

J-curve effect, 425-427

Japanese auto restraint, 151-152

Job protection, 127

Judgmental forecasts, 391

K

Kennedy Round (of trade negotiations), 179

Key currency, 442

Keynes, J., 411

Kyoto Protocol, 186

L

Labor mobility, 310

Labor theory of value, 29

Ladder of economic development, 220

Lamb tariff, 123

Large nation, 115

Law of comparative advantage, 30

Law of one price, 376-377

Leaning against the wind, 453

Leontief paradox, 71-73

Level playing field, 130

License on demand allocation, 147

Licensing, 295-296

Liquidity problem, 495

Long position, 371

Lumber quotas, 192-193

M

Maastricht Treaty, 261

MacDougall, D., 48

Managed floating system, 452-457

Maquiladoras, 309

Margin of dumping, 160

Marginal rate of transformation (MRT), 33

528 Index

Market economy, 280

Market expectations, 385-386

Market fundamentals, 372-373

Marshall-Lerner condition, 423

Mercantilists, 28-29

Merchandise trade balance, 322-323

Migration, 310-315

Mill, J., 38

Ministry of International Trade and Industry

(MITI),204

Monetary adjustments, 406-407, 411-413

Monetary approach, 435-436

Monetary policy, 475

Monetary union, 255

Most-favored-nation (MFN) clause, 177

Motorcycle tariff, 123

Multilateral contract, 235

Multilateral trade negotiations, 179

Multilateralism, 253-254

Multinational enterprise (MNE), 290-291, 296-297, 303-308

Multiplier process, 412-413

N

Natural advantage, 29

Net creditor, 335

Net debtor, 335

Net foreign investment, 328-329

Nominal exchange rate, 354

Nominal exchange rate index, 354

Nominal tariff rate, 105

Noneconomic arguments for protectionism, 132-133 Nonmarket economy, 280

Nonrestrained suppliers, 150

Nontariff trade barriers (NTBs), 140

Normal trade relations, 177

North American Free Trade Agreement (NAFTA),

271-277

No-trade boundary, 38

o

Offer rate, 344

Official exchange rate, 445

Official reserve assets, 325

Official settlements transactions, 324 Offshore-assembly provision (OAP), 109-110 Open economy, 9-12

Opportunity cost, 33

Optimum currency area, 268

Optimum tariff, 118

Option market, 349

Orderly marketing agreement (OMA), 148

Organization of Petroleum Exporting Countries

(OPEC),235-240

Outer limits for the equilibrium terms of trade, 37 Outsourcing, 48-52, 108-110

Overall balance, 475

Overlapping demand theory, 76

Overshooting, 388-389

p

Par value, 445

Partial specialization, 45

Persistent dumping, 158

Petition of the Candle Makers, 134

Policy agreement, 482

Policy conflict, 482

Political economy of protectionism, 133-135 Postponing import duties, 110

Predatory dumping, 157

Premium, 357

Price adjustments, 401

Price taker, 112

Price-based definition of dumping, 160 Price-specie-flow doctrine, 29

Primary products, 218

Producer surplus, 111

Product life cycle theory, 80-81