Definitions and Diagrams

Tariff – a duty (tax) that is placed upon import to protect domestic industries from foreign competition and to raise revenue for the government.

Subsidy – an amount of money paid by the government to a firm, per unit of output, to encourage output and to give the firms an advantage over foreign competitors.

Dumping – the selling of a good in another country at a price below its unit cost of production.

Free trade – international trade that takes place without any barriers such as tariffs, quotas, or subsidies.

A customs union – an agreement made between countries, where the countries agree to trade freely among themselves, and they also agree to adopt common external barriers against any country attempting to import into the customs union, for example, the Switzerland-Liechtenstein customs union.

Trade creation – when the entry of a country into a trading bloc leads to the production of a good moving from a high cost producer to a low cost producer. if, for example, a country joins the EU, its car producers are no longer subject to the EU common external tariff and it can export more cars to EU member countries.

Trade diversion – when the entry of a country into a customs union leads to the production of a good moving from a low cost producer to a high cost producer. When the United Kingdom, for example, joined the EU it had to impose a common external tariff on butter from the low cost producer New Zealand, and start to import butter from high cost EU producers.

The World Trade Organization (WTO) – 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.

The balance of payments accounts measure the international trade performance of an economy and show how well it is managing to match imports and exports of goods and services and the flows of investment in and out of the country. The current account records imports and exports of goods (sometimes known as the ‘balance of trade’ or ‘visible trade’) and imports and exports of services (sometimes known as ‘invisible trade’).

Capital account deficit – where the revenue from the export of goods and services and income flows is greater than the expenditure on the import of goods and services and income flows over a given time period.

Current account deficit – 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.

Exchange rate – the price of one currency expressed in terms of another.

Fixed exchange rate – an exchange rate system where one currency is fixed in value against another. It involves the government working to keep the parity via intervention on the currency markets. These give certainty but can cost vast sums of foreign exchange from national reserves.

Floating exchange rate – an exchange rate which accepts that market forces will determine rates based on how they view a country’s trade performance and its economic and political stability. These systems cost less to maintain but can result in vast swings and changes in currency values. This can seriously affect trade performance and confidence.

Managed exchange rate – where the rate is floating but between upper and lower limits that the domestic government keeps it to. It brings more stability but at less cost to the national reserves.

Depreciation – a fall in the value of one currency in terms of another currency in a floating exchange rate system.

Appreciation – an increase in the value of one currency in terms of another currency in a floating exchange rate system.

Devaluation – a decrease in the value of a currency in a fixed exchange system.

Revaluation – an increase in the value of one currency in a fixed exchange system.

Deteriorating terms of trade – where the average price of exports falls relative to the average price of imports.

Elasticity of demand for exports – a measure of the responsiveness of the quantity demanded of exports when there is a change in the relative price of exports.

Elasticity of demand for imports – a measure of the responsiveness of the quantity demanded of imports when there is a change in the relative price of imports.

Comparative Advantage Diagram

China has an absolute advantage in the production of both shoes and cloth. It can produce more of both products than India can with the same factor inputs. Nevertheless, India has a comparative advantage in producing shoes, since they only give up 2.5 meters of cloth for each pair, whereas China gives up 4 meters of cloth. Thus China should specialize in cloth and India in shoes.

Free Trade Diagram

When Free Trade happens, the corn is then traded at a world price which is the Sworld new curve.

Subsidy Diagram

Putting a subsidy on certain goods, the price for consumers remains the same but imports fall and domestic production increases, a way to manipulate imports and exports in a way.

Tariff Diagram

Putting a tariff upon imported goods will increase the price, adding on a tariff upon that price. A tariff is a tax imposed on imports and is a way to protect a nation’s trade market. This consequently allows a country to grow.

J-curve

The J curve basically is the shape of a curve that represents an economic growth after a fall. The Marshall-Lerner condition does not happen in the short run but rather in the medium to the long run. The export elasticity of demand then is low in the short run and will be higher in the long run.

A floating currency Diagram

This diagram shows how a value of a currency is determined by the demand. The supply on the other hand, is determined by the foreign exchange market.

Appreciation of a currency Diagram

Appreciation is an increase in value of a currency in terms of another currency. This ultimately happens in a floating exchange rate system.

Depreciation of a currency Diagram

Depreciation of a currency is the fall in value of a currency in terms of another currency. This ultimately happens in a floating exchange rate system.

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One Response to Definitions and Diagrams

  1. Benjamin says:

    Love the website! It has been so much of a help for me in understanding economics but could i ask how draw those diagrams (on microsoft word?) ? They look really neat and precise. Thanks!

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