International Trade Glossary of terms

Transcription

1 International Trade Glossary of terms Luc Hens Vrije Universiteit Brussel These are the key concepts from Krugman et al. (2015), chapter by chapter. In question 1 of the exam, I ll ask you to briefly define some of the terms from the chapters we covered. Chapter 1 No terms. Chapter 2 gravity model (p. 42): a model in which trade between any two countries is, other things equal, proportional to the product of their GDPs and diminishes with distance. trade agreement (p. 44): an agreement between countries which ensures that most goods shipped between the countries are not subject to tariffs or other barriers to trade. service offshoring (or service outsourcing) (p. 49): when a service previously done within a country is shifted to a foreign location, by a foreign subsidiary or by another firm. Chapter 3 opportunity cost (p. 55): the opportunity costs of one good (say, roses) in terms of another good (say, computers) is the number of computers that could have been produced with the resources used to produce a given number of roses. Ricardian model (p. 56): a model in which international trade is solely due to international differences in the productivity of labor. unit labor requirement (p. 56): the number of hours of labor required to produce one unit of a good. The inverse of labor productivity. 1

2 absolute advantage (p. 59): a country has an absolute advantage in producing a good if it can produce a unit of a good with less labor than another country. comparative advantage (p. 56): a country has a comparative advantage in producing a good if the opportunity cost of producing that good in terms of other goods is lower in that country than it is in other countries. partial equilibrium analysis (p. 60): analysis of a single market, without taking account of the linkages between markets. general equilibrium analysis linkages between markets. (p. 61): analysis which takes account of the pauper labor argument (p. 67): The (incorrect) view that a country loses by importing from another country that has low wages, presumably because the imports cause wages at home to drop. The view ignores that low wages are due to low productivity. Chapter 4 specific factor (p. 81): a factor that can only be used in the production of particular goods; a specific factor is not mobile between sectors. production function (p. 82): a function that tells us the quantity of a good that can be produced given any input of capital and labor. diminishing returns (p. 83): when each successive increment of labor will add less to production than the last, because adding a worker means that each worker has less capital to work with. marginal product of labor adding one more person-hour. (p. 83): the addition to output generated by budget constraint (p. 94): the equation that shows that the amount the economy can afford to import is limited, or constrained, by the amount it exports. Chapter 5 abundant factor (p. 121): the resource of which a country has a relatively large supply. For instance, Argentina is land abundant compared to Belgium because the ratio of land to labor is larger in Argentina than in Belgium. scarce factor (p. 121): the resource of which a country has a relatively small supply. For instance, Argentina is labor scarce compared to Belgium because the ratio of labor to land is smaller in Argentina than in Belgium. 2

3 factor proportions theory (or Heckscher-Ohlin theory) (p. 110): the theory that international trade is largely driven by differences in countries relative endowments of resources. factor intensity (p. 110): how much of a production factor is used in the production of a good. More precisely, when production of two goods (say, food and cloth) requires two production factors (say, land and labor), food is landintensive when for a given relative factor price the production of a unit of food uses more land than the production of a unit of cloth. skill-biased technological change (p. 130): when technological change raises the relative demand for skilled workers, thus generating an increase in wage inequality. equalization of factor prices (p. 134): the hypothesis that when two countries trade, the relative prices of goods converge, which in turn causes the relative prices of factors (capital and labor) to converge. Chapter 6 standard trade model (p. 142): a model of trade built on relative supply (derived from the production possibility frontier) and relative demand. World equilibrium occurs at the intersection of world relative supply and world relative demand. terms of trade of its imports. isovalue line (p. 142): the price of a country s exports divided by the price (p. 143): a line along which the value of output is constant. indifference curve (p. 144): a curve that traces a set of combinations of consumption of one good (say, cloth) and another good (say, food) that leave the individual equally wel off. biased growth (p. 149): occurs when the production possibility frontier shifts out much more in one direction than in the other. export-biased growth (p. 151): growth that disproportionately expands a country s production possibilities in the direction of the good it exports. import-biased growth (p. 151): growth that disproportionately expands a country s production possibilities in the direction of the good it imports. import tariff (p. 154): a tax levied on imports. export subsidy (pp. 154, 233): a payment (by the government) to a firm or individual that ships a good abroad. 3

4 Chapter 7 external economies of scale (p. 169): when the cost per unit diminishes with the size of the industry (not with the size of the individual firm); may result from sharing specialized suppliers, labor market pooling, or knowledge spillovers. internal economies of scale (p. 169): when the cost per unit diminishes with the size of the individual firm (not necessarily with the size of the industry). knowledge spillovers (p. 172): when companies acquire technology by learning from competitors, reverse engineering, or through the informal exchange of information, rather than through their own research and development. learning curve (p. 179): a relationship that shows how the cost per unit falls with cumulative output. dynamic increasing returns (p. 179): when costs per unit fall with cumulative production over time (as shown by the learning curve), rather than with the current rate of production. infant industry argument (pp ): an argument for temporary protection of industries to enable them to gain experience. Chapter 8 intraindustry trade (p. 199): intra means within; when two countries trade similar goods, that is, goods produced in the same industry. E.g., Germany exports BMWs to France and France exports Renault cars to Germany. interindustry trade : inter means between; when two countries trade goods produced in different industries. E.g., France exports Airbus airplanes to Thailand and Thailand exports T-shirts to France. inter-industry trade : literally: trade between industries; when two countries trade goods from different product categories (e.g., airplanes and teeshirts). dumping (p. 208): when a firm sets an export price (net of trade costs) that is lower than its domestic price. direct foreign investment (p. 210): when a domestic firm buys more than 10 percent of a foreign firm or builds a new production facility abroad. horizontal direct foreign investment (p. 213): investment in an affiliate that replicates the production process (that the parent firms undertakes in its domestic facilities) elsewhere in the world. 4

5 vertical direct foreign investment (p. 213): when the production chain is broken up, and parts of the production processes are transferred to the affiliate location. location motive for multinationals (p. 215): a firm s motive to locate production of a good in a different country. Determined by production costs, transport costs, or other trade costs. internalization motive (p. 215): when for a firm to own an affiliate in a foreign location and operate as a single multinational firm is more profitable than to license or outsource. Chapter 9 nontariff barriers (p. 223): barriers to international trade, other than import tariffs, such as import quotas and export restraints. import quota (p. 223): a limitation on the quantity of imports. export restraint (p. 223): a limitation on the quantity of exports usually imposed by the exporting country at the importing country s request. effective rate of protection (p. 227): the percentage by which a domestic industry s value added increases as a result of being protected from import competition. quota rent (p. 236): the profits received by the holders of import licences. local content requirement (p. 239): a regulation that requires that some specific fraction of a final good be produced domestically. Chapter 10 rent seeking (p. 252): when individuals and companies incur substantial costs in effect, wasting some of the economy s productive resources in an effort to get import licences. problem of collective action (p. 262): when it is in the interest of the group as a whole to press for favorable policies, but it is not in any individual s interest to do so. World Trade Organization (p. 267): an international multilateral organization that tries to liberalize trade and acts as a forum for governments to negotiate trade agreements. Is a place for member countries to settle trade disputes and operates a system of trade rules. 5

6 binding (p. 267): in the World Trade Organization system, when a tariff rate is bound, the country imposing the tariff agrees not to raise the rate in the future. free trade area (p. 276): group of countries in which each country s goods can be shipped to the other without tariffs, but in which countries set tariffs against the outside world independently. customs union (p. 276): group of countries in which each country s goods can be shipped to the other without tariffs (free trade area), and in which countries set common tariffs against the outside world. trade creation trade. (p. 277): when the creation of a customs union leads to new trade diversion (p. 277): when trade within a custums union simply replaces trade with countries outside the union. Chapter 11 import-substituting industrialization (p. 289): the strategy of encouraging domestic industry by limiting imports of manufactured goods. Chapter 12 positive externalities (p. 302): benefits that accrue to parties other than the firms that produce them. excess returns (p. 269): profits above what equally risky investments elsewhere in the economy can earn. beggar-thy-neighbor policy (p. 307): a policy that increases a country s welfare at other countries expense. environmental Kuznets curve (p. 316): an inverted-u relationship between per-capita income and environmental damage. pollution haven (p. 318): country with less strict environmental controls, that attracts economic activity from countries with stricter environmental controls. References Krugman, P. R., Obstfeld, M., and Melitz, M. J. (2015). International Economics: Theory and Policy. Pearson Education, Harlow, 10th edition. 6