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A rich country specializes in manufacturing niches and gains productivity through groups of firms clustered together, some producing the same product and others connected by vertical linkages.

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Agglomeration economies

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All aspects of a nation's economy are linked to the economies of its trading partners.

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Economic interdependence

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The process of greater interdependence among countries and their citizens

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Globalization

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When each nation specializes in the production of that good in which it has a relative advantage, the total output of each good increases; thus, all countries can realize welfare gains.

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Law of comparative advantage

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The ratio of a nation's exports and imports as a percentage of its gross domestic product (GDP)

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Openness

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A case of national self-sufficiency or absence of trade.

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Autarky

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Why nations export and import certain products.

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Basis for trade

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Measures the relation between the prices a nation gets for its exports and the prices it pays for its imports

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Commodity terms of trade

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A situation in which a country produces only one good.

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Complete specialization

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A constant rate of sacrifice of one good for another as a nation slides along its production possibilities schedule.

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Constant opportunity costs

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Post-trade consumption points outside a nation's production possibilities schedule.

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Consumption gains

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The effect of trade on the country's growth rate and thus on the volume of additional resources made available to, or utilized by, the trading country.

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Dynamic gains from international trade

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Cost conditions that make lengthy industry exit a rational response by companies

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Exit barriers

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A system of open markets between countries in which nations concentrate their production on goods they can make most cheaply, with all the consequent benefits of the division of labor.

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Free trade

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Gains trading partners simultaneously enjoy due to specialization and the division of labor.

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Gains from international trade

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The international network created amongst different companies producing, handling and/or distributing a specific product.

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Global supply chains

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When one trading nation is significantly larger than the other, the larger nation attains fewer gains from trade while the smaller nation attains most of the gains from trade.

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Importance of being unimportant

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When each additional unit of one good produced requires the sacrifice of increasing amounts of the other good.

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Increasing opportunity costs

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The cost or price of a good depends exclusively upon the amount of labor required to produce it.

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Labor theory of value

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The slope of the production possibilities schedule that shows the amount of one product a nation must sacrifice to get one additional unit of the other product.

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Marginal rate of transformation (MRT)

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An advocate or practitioner of mercantilism; a national economic system in which a nation could regulate its domestic and international affairs so as to promote its own interests through a strong foreign trade sector.

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Mercantilists

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The terms-of-trade limit at which a country will cease to export a good

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No-trade boundary

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Defined by the domestic cost ratios of trading nations.

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Outer limits for the equilibrium terms of trade

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When certain aspects of a product's manufacture are performed in more than one country.

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Outsourcing

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When a country specializes only partially in the production of the good in which it has a comparative advantage.

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Partial specialization

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David Hume's theory that a favorable trade balance was possible only in the short-term, and that over time, it would automatically be eliminated via changes in product prices.

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Price-specie-flow doctrine

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In a two-nation, two-product world, international specialization 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.

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Principle of absolute advantage

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Ability to produce a good or service at a lower opportunity cost than others can produce it.

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Principle of comparative advantage

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Increases in production resulting from specialization in the product of comparative advantage.

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Production gains

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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.

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Production possibilities schedule

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The area that is bounded by the cost ratios of the two trading countries.

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Region of mutually beneficial trade

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The relative prices at which two products are traded in the marketplace.

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Terms of trade

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Relative demand conditions determine what the actual terms of trade will be within the outer limits of the terms of trade.

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Theory of reciprocal demand

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

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Trade triangle

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

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Trading possibilities line

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A country's ratio of capital inputs to labor inputs.

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Capital-labor ratio

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A changing pattern in comparative advantage; governments can establish policies to promote opportunities for changes in comparative advantage over time.

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Dynamic comparative advantage

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When increasing all inputs by the same proportion results in a greater proportion of total output.

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Economies of scale

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Cost reductions for a firm that occur as the output of the industry increases.

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External economies of scale

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Asserts that a country exports those goods that use its abundant factor more intensively.

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Factor-endowment theory

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Free trade's tendency to cause cheap factors of production to become more expensive, and the expensive factors of production to become cheaper.

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Factor-price equalization

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Differences in relative factor endowments among nations that underlie the basis for trade.

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Heckscher-Ohlin theory

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Countries will specialize in products for which there is large domestic demand.

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Home market effect

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Government policy that is actively involved in creating comparative advantage.

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Industrial policy

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When each nation specializes in a particular industry in which it enjoys a comparative advantage.

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Inter-industry specialization

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The exchange between nations of products of different industries.

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Inter-industry trade

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Reductions in the average total cost of producing a product as a firm increases the size of its plant in the long run.

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Internal economies of scale

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The focus on the production of particular products or groups of products within a given industry.

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Intra-industry specialization

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Two-way trade in a similar commodity.

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Intra-industry trade

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The phenomenon of exports being less capital intensive than import-competing goods.

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Leontief paradox

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An extension of the Stolper—Samuelson theorem, that suggests that the change in the price of a resource is greater than the change in the price of the good that uses the resources relatively intensively in its production process.

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Magnification effect

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

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Product life cycle theory

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Factors of production that are unable to move into or out of an industry.

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Specific factor

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Considers the income distribution effects of trade when factor inputs are immobile among industries in the short-term.

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Specific-factors theory

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An extension of the theory of factor-price equalization, which states that the export of the product that embodies large amounts of the relatively cheap, abundant resource makes this resource more scarce in the domestic market.

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Stolper-Samuelson theorem

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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.

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Theory of overlapping demands

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The costs of moving goods from one nation to another.

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Transportation costs

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A physical restriction on the quantity of goods that can be imported during a specific time period.

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Absolute quota

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A duty levied against commodities a home nation believes are being dumped into its markets from abroad.

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Antidumping duty

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When a home nation's government, through explicit laws, openly discriminates against foreign suppliers in its purchasing decisions.

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Buy national policies

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Fuel economy standards imposed by the U.S. government on automobile manufacturers.

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Corporate average fuel economy (CAFE) standards

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When a foreign company sells a product in the U.S. market at a price below average total cost.

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Cost-based definition of dumping

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Requirements that stipulate the minimum percentage of a product's total value that must be produced domestically if the product is to qualify for zero tariff rates.

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Domestic content requirements

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A subsidy that is sometimes granted to producers of import-competing goods.

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Domestic production subsidy

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When foreign buyers are charged lower prices than domestic buyers for an identical product after allowing for transportation costs and tariff duties.

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Dumping

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Limitations on export sales administered by one or more exporting nations or industries.

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Export quotas

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A subsidy paid to exporters so they can sell goods abroad at the lower world price but still receive the higher support price.

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Export subsidy

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A technique permitting a specified number of goods to be imported each year, but does not specify where the product is shipped from or who is permitted to import.

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Global quota

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Used to administer an import quota; a license specifying the volume of imports allowed.

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Import license

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A system in which licenses are required to import at the within-quota tariff.

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License on demand allocation

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The amount the domestic price of a firm's product exceeds its foreign price, or the amount the foreign price of a firm's product is less than the cost of producing it.

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Margin of dumping

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Policies other than tariffs that restrict international trade.

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Nontariff trade barriers (NTBs)

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When a producer consistently sells products abroad at lower prices than at home.

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Persistent dumping

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When a producer temporarily reduces the prices charged abroad to drive foreign competitors out of business.

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Predatory dumping

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When a foreign company sells a product in the U.S. market at a price below that for which the same product sells in the home market.

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Price-based definition of dumping

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An import quota allocated to specific countries.

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Selective quota

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

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Social regulation

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When a firm disposes of excess inventories on foreign markets by selling abroad at lower prices than at home.

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Sporadic dumping

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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.

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Subsidies

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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).

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Tariff-rate quota

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A tariff expressed as a fixed percentage of the value of the imported product.

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Ad valorem tariff

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A tariff that is a combination of a specific tariff and an ad valorem tariff.

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Compound tariff

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The difference between the amount that buyers would be willing and able to pay for a good and the actual amount they do pay.

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Consumer surplus

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A trade restriction's loss of welfare that occurs because of increased prices and lower consumption.

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Consumption effect

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The process of determining the value of an imported product.

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Customs valuation

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The net loss of economic benefits to a domestic economy because of the protective and consumption effect of a trade barrier.

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Deadweight loss

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The amount of tariff revenue shifted from domestic consumers to the tariff-levying government.

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Domestic revenue effect

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Measures the total increase in domestic production that a tariff makes possible, compared to free trade.

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Effective tariff rate

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Special zones that enlarge the benefits of a bonded warehouse by eliminating the restrictive aspects of customs surveillance and by offering more suitable manufacturing facilities; FTZs are intended to stimulate international trade, attract industry, and create jobs by providing an area that gives users tariff and tax breaks.

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Foreign-trade zone (FTZ)

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When a tariff is applied to a product's value as it leaves the exporting country.

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Free-on-board (FOB) valuation

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If each nation produces what it does best and permits trade, over the long-term each party will enjoy lower prices and higher levels of output, income, and consumption than could be achieved in isolation.

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Free trade argument

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Generally comprises exporting companies, their workers, and their suppliers; it also consists of consumers, including wholesalers and retail merchants of imported goods.

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Free trade-biased sector

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A tariff that temporarily shields newly developing industries from foreign competition.

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Infant-industry argument

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An importing nation that is large enough so that changes in the quantity of its imports, by means of tariff policy, influence the world price of the product.

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Large nation

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A condition in which domestic and foreign producers can compete on equal terms.

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Level playing field

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The tariff rate published in a country's tariff schedule.

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Nominal tariff rate

question

A tariff rate at which the positive difference between the gain of improving terms of trade and the loss of declining import volume is maximized.

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Optimum tariff

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When certain aspects of a product's manufacture are performed in more than one country.

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Outsourcing

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The revenue producers receive over and above the minimum amount required to induce them to supply the good.

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Producer surplus

question

Generally consists of import-competing companies, the labor unions representing workers in that industry, and the suppliers to the companies in the industry.

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Protection-biased sector

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

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Protective effect

question

A tariff designed to insulate import-competing producers from foreign competition.

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Protective tariff

question

With a tariff, the transfer of consumer surplus in monetary terms to the domestic producers of the import-competing product.

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Redistributive effect

question

Represents the government's collections of tariff revenue; found by multiplying the number of imports times the tariff.

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Revenue effect

question

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

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Revenue tariff

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A tariff that eliminates foreign cost advantages over domestic firms.

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Scientific tariff

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

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Small nation

question

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

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Specific tariff

question

A tax levied on a product when it crosses national boundaries.

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Tariff

question

The legal utilization of the tariff system to one's own advantage in order to reduce the amount of tariff that is payable by means that are within the law.

answer

Tariff avoidance

question

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.

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Tariff escalation

question

When individuals or firms evade tariffs by illegal means such as smuggling imported goods into a country.

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Tariff evasion

question

The tariff revenue extracted from foreign producers in the form of a lower supply price.

answer

Terms-of-trade effect

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