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principle of absolute advantage in a two-nation, two-product world, inter- national 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

principle of comparative advantage ability to produce a good or service at a lower opportunity cost than others can produce it

producer surplus

the revenue pro-

ducers receive over and above the

minimum amount required them to supply the good

to induce

product life cycle theory


purchasing-power-parity theory


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


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

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



relief provided by the

escape clause to U.S. firms and workers who are substantially injured from surges in imports that are fairly traded

scientific tariff

a tariff that eliminates

foreign cost advantages over domestic



goods undergo a pre-

Section 301

section of the Trade Act

dictable 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

production controls

artificial cur-

tailments in the production commodity

of a

production gains increases in pro- duction 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

protection-biased sector


consists of import-competing compa-

nies, the labor unions representing

workers in that industry, and the sup- pliers to the companies in the industry


real exchange rate

the nominal


rate adjusted for changes in


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

Reciprocal Trade Agreements Act an act passed in Congress in 1934 which set the stage for a wave of trade liberalization through negotiating authority and generalized reductions

redistributive effect

with a tariff, the

transfer of consumer surplus, in mon- etary 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


of 1974 that gives the U.S. trade rep- resentative (USTR) authority, subject to

the approval of the president, and means to respond to unfair trading practices by foreign nations

seigniorage money

profit from issuing

selective quota

an import quota

allocated to specific countries

short position

the position specula-

tors 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

Smoot-Hawley Act

act passed in

1930 under which U.S. average tariffs

were raised to 53 percent imports

on protected

protective effect

a tariffs 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

member nations agree to impose lower barriers to trade within the group than

to trade with nonmember nations


an official change in a

c u r r e n c y s p a r v a l u e , w h i c h c a u s e s t h e c u r r e n c y s e x c h a n g e v a l u e t o a p p r e c i a t e

social regulation


attempts to correct a variety of unde- sirable side effects in an economy that

relate to health, safety, and the environment

special drawing right (SDR)

an arti-

insulate import-competing from foreign competition


revenue effect


the gov-

ernments collections of tariff revenue;

ficial currency unit based on a basket of

four currencies established by the IMF

Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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